Commodity market scenario according to Ukraine crisis

 Commodity market scenario according to Ukraine crisis

Due to the limited capital supply, if there is a conflict in Ukraine, the global price of fuel and raw materials will massively increase.

The Ukraine crisis has not shown any signs of abating. Russia has not made any move to withdraw its forces from the area near the border with Ukraine, while the US and its NATO allies have continuously increased pressure and issued threats of "unprecedented heaviest" sanctions. see" aimed at Moscow.

“If Russians were to cross the Ukrainian border, the market would panic,” said Helima Croft, head of commodity strategy at RBC Capital Markets. In the event of a military conflict, the greatest impact will first be reflected on the European gas market. However, the effect could be far more widespread than that.

Russia is of great importance to the global market for raw materials. It is the largest natural gas exporter and the second largest oil exporter in the world. They also supply nearly one-tenth of aluminum and copper globally, and produce 43 percent of palladium, a key component of car catalytic converters. Russia is also the largest wheat exporter.

In a worst-case scenario, the flow of these vital raw materials would be cut off as tensions escalate. Russian exports, or the payment infrastructure needed to facilitate them, will be affected by Western sanctions. In addition, Russia itself may also decide to stop exporting certain items - especially gas - in order to put pressure on its rivals.

Harvesting wheat in a field near the village of Suvorovskaya in Stavropol Region, Russia on July 17, 2021. Photo: Reuters

Wheat is harvested in a field near the village of Suvorovskaya in Stavropol, Russia July 2021. Photo: Reuters

Recently, concerns about the risk of disruption have pushed commodity prices higher. On January 26, the price of Brent oil rose above $90 per barrel - the highest level in seven years. Standard European natural gas prices stand at 90 euros per megawatt hour, compared with around 70 euros at the start of the year. Copper prices are also hovering at multi-year highs.

The global commodity market is already tight, so it is now very sensitive to the risks of military conflict. During the 2007-2009 global financial crisis, both global industrial production and commodity prices plunged.

But now, the pandemic causes manufacturing output and raw material prices to increase together. Unexpected surge in demand and supply chain disruptions drove commodity prices up 20% last year, according to the Bloomberg Commodities Index. The prices of dozens of ingredients in this index, from cobalt to coal, are even higher.

Oil demand is also returning to pre-pandemic levels, even as supply grows slowly. Many members of the Organization of the Petroleum Exporting Countries and its allies (OPEC+) are struggling to increase output, because of investment shortages and oil-related complications.

American shale oil companies are subject to capital regulations, focusing on investor returns rather than pouring more money into mining. As a result, global oil production capacity is falling to low levels. Redundancy capacity with many other metals is also limited.

If a clash breaks out, oil prices could rise to $120 per barrel, according to Natasha Kaneva, head of commodity strategy at JPMorgan Chase. Ross Strachan, head of analysis at consulting firm CRU, thinks aluminum prices could also rise to all-time highs.

The world has seen the impact of geopolitical tensions on commodity prices. In 2018, aluminum prices skyrocketed when the US imposed sanctions on Rusal - Russia's largest aluminum producer.

In total, Russia and Ukraine export about 29% of the world's wheat. Much of Ukraine's farming takes place in areas vulnerable to hostilities. Carlos Mera, head of commodity markets at Rabobank (Netherlands), said that if the market lacks this supply, prices can easily double. That will cause a competition to secure supplies, especially between the major importing countries in North Africa and the Middle East.