As global economies were gearing up for a post pandemic recovery, the start of 2022 threw up some unexpected headwinds to the global outlook. A confluence of the Omicron variant, rising inflation, and variable pockets of economic growth saw several commodity markets reach record or decade-long highs. However, no market had priced in the unexpected Russian invasion of Ukraine and the subsequent fallout in key markets, the upheaval of commodity finance, and the growing geo-political tensions. Since Russia’s invasion, one of the biggest weights on equity prices is the abandonment of the integrated global economy, which depended on free trade, capital and labour mobility and decreased geo-political tension.
As deep global sanctions of unprecedented scale start to bite the Russian economy, markets are watching to see whether the Kremlin retaliates by restricting exports of key raw materials. In this scenario, prices will continue to trend upwards, especially in those cases where Russia is a significant producer. Metal output has already come under pressure because of rising energy prices, and this theme is set to continue as much of the developed world weens itself off Russian based energy and supply. Critical minerals such as nickel, used in EV batteries, or PGMs (platinum, palladium, rhodium), used in a variety of critical applications including catalytic convertors, certainly garner the attention over vanity commodities such as diamonds, however the impact has been wide-reaching including in potash, an irreplaceable component of fertiliser, which impacts food supply and inflation heavily. Politically, this will come into focus and we expect discourse to heat up around supply diversification and shortening supply chains.
Figure 1: 2022 Russian global market share of output / trade
Source: GTT, Wood Mackenzie, BP; CRU; US Department of the Treasury
Note: Iron ore = seaborne exports. Steel = exports. Base metals = production; Potash = exports; Diamonds = rough diamond production.
1. Potash light blue shaded area represents Belarus share
The effect on commodities
|Aluminium / Bauxite
|Rusal’s position as one of the world’s largest producers, has caused an already tight market to become even tighter. The market is pricing in the potential for further supply disruptions, should Russian aluminium face exclusion from the global market. Recent moves by the Australian government to ban the export of alumina to Russia will impact Russian production and cause prices to rise. Production cuts across European smelters over 2021 are set to continue, as smelters face energy price increases due to the
ongoing Russian energy “boycott.” With the current aluminium market in deficit, any potential disruptions will only further restrict supply, pushing up prices.
|Copper will continue to rise through 2022, as Chinese demand intensifies through the summer months, and the Chinese government tries to meet its 5% GDP growth target. Following the beginning of the conflict, prices elevated past the US$10,800/t mark, pointing to fears of shortages. With less than 5% of global output, Russia’s production will be unhindered, and will likely find a home in China over the course of the year. The market will keep an eye on any moves by the LME to ban new deliveries of Russian copper on the platform, which will potentially keep prices at the current levels, with copper supply already tight.
|The US and other Western governments have placed sanctions against Alrosa, which is the largest diamond mining company in the world, responsible for ca. 90% of Russia’s diamond mining capacity. However, Russian rough diamonds continue to find their way to the market, for example via India or Dubai, since their origin can be reclassified once cut and polished.
|Gold has behaved as predicted, moving upward during times of uncertainty. Coming close to its previous high of US$2,075/oz, geopolitical events have buttressed the gold price. Producing close to 10% of the world’s annual ounces, Russia’s exclusion from the London Bullion Market Association (LBMA) has no real effect on the inventory level globally. Although gold prices will continue to be moved by any escalation of the conflict, global inflation will likely be a bigger driver.
|Iron ore / Steel
|Iron ore prices have recovered since the onset of the Russian-Ukraine conflict. An anticipated uptick in Chinese demand, as blast furnaces fire up, following the end of lockdowns, has had a positive effect on pricing. Fears of Russian and Ukrainian supply shortages helped push prices up, as will further sanctions on Russian production. Longer term, the market will return to surplus as new mines come on stream.
|Events in Ukraine have had a benign effect on the price of lead. Russia’s minor role in global output has meant that there has been little impact on the price. Lead prices are set to remain stable over the course of 2022, as the market continues to supply enough metal to meet demand.
|Nickel is possibly the most affected metals market because of the war. LME nickel trading was halted in March following an over 100% price increase in less than 24-hours, reaching US$100,000/t. As an important ingredient for the energy transition, there remains a sense of anxiety as to whether Russian nickel will be subject to sanctions, adding further pressure to a market already in deficit. Prices will remain elevated to counterbalance the short-term supply constraints, as some nickel buyers steer clear of Russian produce.
|Potash prices have soared by 36% since the outbreak of the war since 19% of global potash exports are stemming from Russia (EuroChem and Uralkali) and another 22% from its close ally Belarus. The market faces a severe supply shortage due to western sanctions placed on exports from both countries we well as a shortage of vessels for export as international shippers avoid Russia due to the risk to US and EU trade. The limited ability of other producers to ramp up production and capacity constraints on other Russian export channels (e.g., rail to China) is expected to leave the market in a deep deficit until at least the end of this year.
|Norilsk Nickel’s mine production has yet to be hindered by the ongoing war in Ukraine. Should further sanctions be applied, palladium and platinum prices could rise. Both markets have faced a volatile few years, with prices recovering as auto production has re-started following the pandemic. China’s appetite for PGMs will continue to offset any short-term disruption to offtake-agreements.
|Following the Ukraine invasion, zinc prices breached the US$4,000/t mark. Prices are set to continue along an upward trajectory if power prices remain elevated and smelters continue to curtail production. Russia has no substantial direct production impact on the zinc market, however, the ongoing embargo of Russian energy has an inflationary effect on the cost of production at smelters across Europe and the world.
Commodity and financial asset price moves, since 24 February 2022 YTD (US$ terms, %)
Sources: Wood Mackenzie, Macquarie Strategy, S&P Global Market Intelligence, Reuters, ING Think, as at 24 March 2022
1. Brazil CFR