Commodities market likely to surge if Russia-Ukraine standoff intensifies

Chennai, January 24

The global commodities market will have to brace up for a sharp spike in the prices of commodities – energy, metal and agricultural – in case the Russian-Ukraine standoff escalates, particularly if the US and other developed countries were to impose sanctions on Moscow. 

“...in a scenario where the West reacts strongly with sanctions that target key Russian industries, this (sanctions) could have a far-reaching impact on the commodities complex. It would affect more than the commodity flows that go through or originate from Ukraine,” said Dutch multinational financial services firm ING’s economic and financial arm Think. 

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Major gainers

Crude oil has been one of the major gainers of not just the Russia-Ukraine standoff but also a host of other geopolitical risks such as delays in Libyan presidential elections, attacks of the Houthi rebels on the United Arab Emirates (UAE) and Kazakhstan lowering output at its flagship Tengiz field following the tensions between Russia and the West. 

The energy commodity has increased by over 14 per cent since the beginning of this year. On Monday, benchmark Brent crude oil was higher at $88.49 a barrel, while Western Texas Intermediate crude oil was up at $85.69. 

Fitch Solutions Country Risk and Industry Research (FSCRIR), a research agency, said apart from the build-up of Russian troops on the border with Ukraine, the sentiment is generally buoyant in the crude oil market, as concerns around the emergence of the Omicron variant have eased. 

ING Think head of commodities strategy Warren Patterson said the escalation of the Russian-Ukraine conflict could “potentially” lead to tightening in the energy, metal and agricultural markets, providing a further boost to “an asset class which already has an abundance of positive sentiment in it”.

A service member of the Ukrainian armed forces walks at combat positions near the line of separation from Russian-backed rebels near Horlivka in the Donetsk region, Ukraine, January 22, 2022.

Impact on corn, wheat

If the West fails to act against Russia for any aggression on Ukraine, the impact would be limited. But depending on Moscow’s scale of invasion, it could impact the production and export of Ukrainian agricultural commodities, including corn and wheat. 

On the other hand, financial sanctions could make it difficult for the trade as it would affect payments, the Dutch multinational banking services arm said. Fitch Solutions said an elevated political risk premium has been one factor that has helped crude oil prices rally. 

The concerns have been further stoked by the failure of oil cartel OPEC+ to meet its target 4,00,000 barrels-a-day production increase, though FSCRIR said the concerns were overblown as countries in the Gulf had spare capacity to offset any underperformance by any of OPEC+ members. 

Europe vulnerable

ING Think said natural gas supply to Europe looked vulnerable to developments over sanctions as balance in the region is already tight. Any reduction in the flow of Russian gas, which makes up 40-50 per cent of European imports, to the region will leave the European market in a tizzy. 

Also, the US has made its intentions clear that it will target Russia’s Nord Stream 2 pipeline which is complete and awaiting regulatory approval in case Ukraine is harmed. 

Crude oil and refined products shipments from Russia, the second-largest producer of oil, will also be at risk in the event of any sanctions and lead to a deficit in the global market with Europe again bearing the brunt, Patterson said.

FSCRIR said though crude oil demand will likely see a 4.3 per cent growth, supply could rise six per cent year-on-year.

Impact on aluminium

Sanctions against Russia will also impact metals, especially aluminium. ING Think pointed out how the 2018 US sanctions against top Russian producer, Rusal, affected the market. Russia is the second-largest aluminium producer after China and any sanction will result in European premiums surging.

European aluminium smelters could also take a hit if Russian gas flows are stopped, Patterson said, pointing out that Moscow also produces a sizeable volume of nickel, copper, palladium and platinum. Russian wheat exports could also be hit as also shipments from Ukraine in the event of any action by Moscow against it.

According to the Trading Economics website, crude oil has gained 1.5 per cent, copper one per cent, platinum six per cent, soyabean – a competitor to sunflower oil and palm oil 3.5 per cent, wheat 6.5 per cent, corn over 3.5 per cent, aluminium 2.5 per cent, and palladium 12.5 per cent. 

Effect on India 

Any sanctions against Russia could be beneficial as well as harmful to India. On the positive side, India’s wheat and corn shipments to nearby destinations such as the Gulf, South Asia and South-East Asia will increase. 

Indian exporters can reach the destinations quickly, shipping charges will be lower compared with far-off destinations in the Americas and buyers can get small volumes to tide over any emergency. 

On the negative side, India may have to pay more for imports of edible oil since Ukraine is a major producer of sunflower oil. Any impact on sunflower oil exports from Kyiv will result in prices of soyabean oil rising at a time when palm oil prices are already ruling at record highs.

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