Ukraine war: When political risk makes commodities markets better

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Like many, Gary Sharkey has been following the latest developments in Russia’s invasion of Ukraine.But his interests are not limited to individuals: As purchasing director at Hovis, one of the UK’s largest bakers, Sharkey is responsible for sourcing everything from grains for bread to steel for machinery.
Russia and Ukraine are both important grain exporters, with nearly one-third of world wheat trade between them.For Hovis, the surge in wheat prices caused by the invasion and subsequent sanctions on Russia had important cost implications for its business.
“Ukraine and Russia – the flow of grain from the Black Sea is very important for world markets,” Sharkey said, as exports from both countries have effectively stopped.
Not just grains.Sharkey also pointed to rising aluminum prices.Prices for the lightweight metal used in everything from cars to beer and bread tins are on track to hit a record high of more than $3,475 a tonne — partly reflecting the fact that Russia is the second-largest exporter.
“Everything’s up. There’s a political risk premium on many products,” the 55-year-old executive said, noting that wheat prices have risen 51% over the past 12 years and wholesale gas prices in Europe have risen nearly 600%.months.
The Ukrainian invasion has cast a shadow over the commodities industry, as it has also made it impossible to ignore the geopolitical fault lines that run through so many key raw material markets.
Political risks are mounting.The conflict itself and sanctions on Russia are wreaking havoc on many markets, especially wheat.Rising energy costs have important knock-on effects on other commodity markets, including the cost of fertilizers used by farmers.
On top of that, commodity traders and purchasing managers are increasingly concerned about the ways in which many raw materials could potentially be used as foreign policy weapons—especially if the development of a new Cold War separates Russia, and possibly China, from the United States.The west.
For much of the past three decades, the commodities industry has been one of the most high-profile examples of globalization, creating enormous wealth for trading companies that connect buyers and sellers of raw materials.
A percentage of all neon exports come from Russia and Ukraine.Neon lights are a by-product of steel manufacturing and are a key raw material for chip manufacturing.When Russia entered eastern Ukraine in 2014, the price of neon lights soared 600%, causing disruption to the semiconductor industry
While many individual projects in areas such as mining have always been wrapped in politics, the market itself is built around the desire to open up global supply.Purchasing executives such as Hovis’ Sharkey worry about price, not to mention being able to actually source the raw materials they need.
A shift in perception in the commodities industry has been taking shape for a decade.As tensions between the U.S. and China intensify, Beijing’s grip on the supply of rare earths—metals used in many aspects of manufacturing—raises fears that supplies of the raw material could become a political weapon.
But over the past two years, two separate events have brought more focus.The Covid-19 pandemic has highlighted the dangers of relying on a small number of countries or companies, leading to severe supply chain disruptions.Now, from grains to energy to metals, Russia’s invasion of Ukraine is a reminder of how some countries can have a sizable impact on the supply of raw materials due to their huge market shares in important commodities.
Russia is not only a major supplier of natural gas to Europe, but also dominates the market for many other important commodities, including oil, wheat, aluminum and palladium.
“Commodities have been weaponized for a long time…it’s always been a question of when countries pull the trigger,” said Frank Fannon, a former assistant secretary of state for energy resources.
The short-term response of some companies and governments to the war in Ukraine has been to increase inventories of vital raw materials.In the long run, this has forced the industry to consider alternative supply chains to circumvent a possible economic and financial conflict between Russia and the West.
“The world is clearly paying more attention to [geopolitical] issues than it was 10 to 15 years ago,” said Jean-Francois Lambert, a former banker and commodities adviser who advises financial institutions and trading firms. Lambert) said.”Then it’s about globalization. It’s just about efficient supply chains. Now people are worrying, do we have supply, do we have access to it?”
The shock to the market by producers who control the majority of the production share of certain commodities is not new.The oil shock of the 1970s, when the OPEC oil embargo sent crude prices soaring, led to stagflation in oil importers around the world.
Since then, trade has become more globalized and markets are interconnected.But as companies and governments seek to cut supply chain costs, they have inadvertently become more dependent on certain producers of everything from grain to computer chips, leaving them vulnerable to sudden disruptions in the flow of products.
Russia uses natural gas to export to Europe, bringing to life the prospect of natural resources being used as weapons.Russia accounts for about 40 percent of EU gas consumption.However, Russian exports to northwest Europe fell by 20% to 25% in the fourth quarter of last year, according to the International Energy Agency, after state-backed gas company Gazprom adopted a strategy of only meeting long-term contracts.Commitment and do not provide additional supply on the spot market.
One percent of the world’s natural gas is produced in Russia.The invasion of Ukraine is a reminder of how some countries exert considerable influence over the supply of raw materials such as natural gas
In January, the head of the International Energy Agency, Fatih Birol, blamed rising gas prices on Russia’s withholding of gas from Europe.”We believe there are strong tensions in the European gas market due to Russia’s behavior,” he said.
Even as Germany halted the approval process for Nord Stream 2 last week, a tweet by former Russian president and vice-president Dmitry Medvedev was seen by some as a veiled threat to the region’s reliance on Russian gas.”Welcome to the Brave New World, where Europeans will soon pay 2,000 euros per 1,000 cubic meters of gas!” Medvedev said.
“As long as supply is concentrated, there are unavoidable risks,” said Randolph Bell, global energy director at the Atlantic Council, a U.S. international relations think tank. “It is clear that [Russia] is using natural gas as a political tool.”
For analysts, the unprecedented sanctions on Russia’s central bank — which have led to a slump in the ruble and accompanied European politicians’ declarations of “economic war” — have only increased the risk that Russia will withhold certain supplies of goods.
If that happens, Russia’s dominance in certain metals and noble gases could have implications across multiple supply chains.When aluminum company Rusal was blacklisted by financial institutions following U.S. sanctions in 2018, prices soared by a third, wreaking havoc on the auto industry.
One percent of the world’s palladium is produced in Russia.Automakers use this chemical element to remove toxic emissions from exhaust
The country is also a major producer of palladium, which is used by carmakers to remove toxic emissions from exhaust, as well as platinum, copper and nickel for electric vehicle batteries.Russia and Ukraine are also major suppliers of neon, an odorless gas that is a byproduct of steelmaking and a key raw material for chipmaking.
According to the American research firm Techcet, the neon lights are sourced and refined by several specialized Ukrainian companies.When Russia invaded eastern Ukraine in 2014, the price of neon lights soared 600 percent almost overnight, wreaking havoc on the semiconductor industry.
“We expect geopolitical tensions and risk premia across all underlying commodities to persist for a long time after Russia’s invasion of Ukraine. Russia has a profound impact on global commodity markets, and the unfolding conflict has a huge impact, Especially with price increases,” said JPMorgan analyst Natasha Kaneva.
Perhaps one of the most worrying effects of the Ukrainian war is on grain and food prices.The conflict comes at a time when food prices are already high, the result of poor harvests around the world.
Ukraine still has large stocks available for export compared to last year’s harvest, and disruptions to exports could have “dire consequences for food insecurity in already fragile countries that depend on Ukrainian food,” said Caitlin Welsh, director of the Center’s Global Food Security Program. Say.American think tank Strategy and International Studies.
Of the 14 countries where Ukrainian wheat is an essential import, almost half already suffer from severe food insecurity, including Lebanon and Yemen, according to CSIS.But the impact is not limited to these countries.She said the Russian invasion had caused energy prices to soar and risked “driving food insecurity higher.”
Even before Moscow attacked Ukraine, geopolitical tensions from Europe had permeated the global food market.Prices of major fertilizers rose sharply last year after the European Union imposed sanctions on human rights abuses after the European Union announced export curbs on top potash producer Belarus, as well as China and Russia, also big fertilizer exporters, to safeguard domestic supplies.
In the final months of 2021, a severe shortage of fertilizers has plagued rural India – a country that relies on overseas purchases for about 40 percent of its key crop nutrients – leading to protests and clashes with police in central and northern parts of the country.Ganesh Nanote, a farmer in Maharashtra, India, whose crops range from cotton to cereals, is locked in a scramble for key plant nutrients ahead of the winter crop season.
“DAP [diammonium phosphate] and potash are in short supply,” he said, adding that his chickpea, banana and onion crops suffered, although he managed to get alternative nutrients at higher prices.”Fertilizer price hikes lead to losses.”
Analysts expect phosphate prices to remain high until China lifts its export ban by mid-year, while tensions over Belarus are unlikely to subside anytime soon.”It’s hard to see [potash] premiums come down,” said Chris Lawson, fertilizer director at consultancy CRU.
Some analysts believe that Russia’s growing influence in the former Soviet Union could eventually create a situation in which Moscow has a strong hold on the global grain market — especially if it gains the upper hand in Ukraine.Belarus is now closely aligned with Russia, while Moscow recently sent troops to support the government of another major wheat producer, Kazakhstan.”We could start to see food as a weapon in some kind of strategic game again,” said David Labod, a senior fellow at the International Food Policy Institute, an agricultural policy think tank.
Aware of growing concerns about the concentration of commodity supplies, some governments and companies are taking steps to try to mitigate the impact by building up inventories.“People are building more buffer stocks now than they were 10 or 15 years ago. We’ve seen this from the Covid era. Everyone realizes that an efficient supply chain works in perfect times for the world, in normal times period,” Lambert said.
Egypt, for example, has stockpiled wheat and the government says it has enough of the staple food from imports and an expected local harvest by November.The supply minister said recently that tensions between Russia and Ukraine have led to “a state of uncertainty in the market” and that Egypt has diversified its wheat purchases and is discussing hedging purchases with investment banks.
If storage is a short-term response to a crisis, the long-term response could repeat the past decade for rare earths, minerals used in high-tech products ranging from wind turbines to electric cars.
China controls about four-fifths of global output and reduced limited exports in 2010, sending prices soaring and its willingness to capitalize on its dominance highlighted.”The problem with China is the concentration of supply chain power they have. They have shown [willingness] to use that concentration of power to achieve geopolitical power,” said Bell of the Atlantic Council.
To reduce their reliance on Chinese rare earths, the United States, Japan and Australia have spent the past decade planning ways to develop new supplies.Last week, President Joe Biden announced that the administration would invest $35 million in MP Materials, currently the only U.S. rare earth mining and processing company based in California.
The U.S. Department of Defense has supported several projects, including the large Lynas project in Kalgoorlie, Western Australia.The state is home to several other new mines, one of which is backed by the Australian government.
In a potential plan for the Yangibana project in Western Australia, developed by Hastings Technology Metals, workers are building paved roads around Gascoyne Junction, an isolated rocky hill about 25km west of Mount Augustus. , which is twice the size of the more famous mountain Uluru, formerly known as Ayers Rock.
The first workers at the site were digging roads and digging large boulders, which made their job even more difficult.”They’re complaining that they’re attacking the foothills of Mount Augustus,” said Hastings chief financial officer Matthew Allen. The company has secured a $140 million Australian government-backed financing loan to develop the Yangibana mine, as part of its new key project.Mineral Strategy.
Hastings expects that, once fully operational in two years, Yangibana will meet 8% of global demand for neodymium and praseodymium, two of the 17 rare earth minerals and the most in-demand minerals.The coming online of other Australian mines over the next few years could push the figure to a third of global supply, according to industry analysts.
One percent of the world’s rare earths are produced in China.These are minerals used in high-tech products from wind turbines to electric cars.The U.S. and other countries are trying to develop alternative supplies
In the UK, Hovis’ Sharkey said he was relying on his long-standing connections to secure supplies.”Make sure you’re at the top of the list, that’s where good supplier relationships over the years stand out,” he said.“Compared to a few years ago, you are now working with different levels of suppliers to ensure continuity of supply across our business.”


Post time: Jun-29-2022