Prices of commodities, mainly energy, metals and agricultural, are likely to rule higher in the short-term as the Russia-Ukraine conflict is intensifying further and efforts to make both nations agree to a ceasefire are not yielding desired results, analysts say. 

“In the short-term, commodity prices will remain driven by news flow about the war and sanctions,” said Zurich-based private banker EFG International.

“Commodity prices remain under pressure, as the fighting in Ukraine continues to intensify. Our core view remains that the conflict will escalate into the second quarter, with Russian troops taking control of Kyiv over the coming months,” said Fitch Solutions Country Risk and Industry Research (FSCRIR), a Fitch unit.

‘Tough call’

“It is tough to say where prices of all commodities are headed,” said Warren Patterson, Head of commodities strategy at ING Think, an arm of Dutch multinational financial services firm, in a podcast. 

Over the past month, after Russian troops entered Ukraine, key commodity indices have gained between eight and 21 per cent. The Thomson Reuters CRB index comprising 21 commodities has increased by over 15 per cent to 328.48. 

The London Metal Exchange (LME) index has gained nearly nine per cent to 5,262.90. The S&P GSCI Index, a composite index of commodities sector returns, has gone up over 20 per cent to 3951.41.

Fitch Solutions said it expects Western sanctions on Russia to continue to broaden with Russia stepping up its aerial attacks on major Ukrainian cities, demanding the surrender of Mariupol. 

Energy to bear the brunt

“The deepening conflict in Ukraine will maintain heavy pressure on the commodities complex in the short-term, with energy bearing much of the brunt,” it said.

ING’s Patterson said it would be tough to find a replacement for Russia in the energy market as it is the second-largest supplier of crude oil and its products. “OPEC+ is also not willing to raise output since Russia is part of it,” he said.

ELF International said if the crisis does not escalate further and producers beyond Russia increase supply, crude oil prices will gradually return to $70 per barrel. 

Replacing Russian oil

Fitch Solutions said export disruptions have far exceeded its initial expectations and the trade had become much more “chaotic and costlier”. The research agency expects Russian oil production to contract by 983,000 barrels a day (b/d) this year from its initial projection of 692,000 b/d growth it had forecast previously.

The ING strategist said Brent crude oil will average $102 a barrel in the second quarter and $92 a barrel in the second half of this year. For the year, it will rule at an average of $96.

“It will be challenging to replace Russian oil as it makes up 25 per cent of Europe’s consumption,” he said.

On Friday, Brent crude oil was quoted at $119.15 a barrel after gaining 21 per cent in the past month.

Impact on metals

Patterson said the conflict could have a more prolonged impact on the metals market, particularly in nickel and aluminium. Russia is the second-largest supplier of aluminium in the global market and high energy prices in Europe could result in the shutting down of units. 

Fitch Solutions said metals prices are being impacted by conflict-related disruptions, widening sanctions and speculative activity in the market. 

“We expect these metals (nickel, palladium and aluminium), to outperform the basket, largely due to production and export disruptions stemming from the conflict,” it said.

“...price tensions are likely to persist for those commodities for which supply from Russia and Ukraine has historically dominated global markets, including refined uranium, palladium, nickel and titanium,” ELF International said. 

It said for some products such as aluminium and copper there is spare capacity in Chile, China, the EU, and the US and a moderation of prices is likely over time.

“For other products like nickel, titanium, and uranium, Russia and Ukraine historically supplied a large share of global output and it will be difficult to find alternative suppliers, creating the conditions for continued high prices,” the Zurich-based firm said.

Threat to food commodities

Patterson said the real threat to the world was with regard to food commodities such as wheat, soyabean and corn.

“Russia and Ukraine are key to every market. There is a real threat if the war continues into summer as there will be a question over the next crop. There could be a big shortfall,” he said. 

However, sanctions against Russia for food commodities could be eased since the Middle East and West Africa are dependent on it. But there is a risk of Russia banning exports, the ING strategist said.  

 “...the rising prices of crude and petroleum derivatives (e.g. ethanol, biofuels and polyester) have dragged up the price for various softs, notably sugar, palm oil and cotton. These price pressures are unlikely to abate in the near term and could increase, given the factors discussed above,” Fitch Solutions said.

Rising input costs

Agricultural commodity prices will remain elevated reflecting the increase in input costs like energy and fertilisers, said ELF International.

Fitch Solutions said it has become more difficult to export via the Black Sea, a key transit hub for dry bulk commodities. In addition, high freight rates, shipping and insurance costs are piling additional upward pressure. 

“There is also a reluctance among some companies to trade with Russia, due to issues of compliance with separate (but overlapping) sanctions on the financial sector,” the research agency said.

Patterson said Ukraine will struggle to export corn and next season’s spring sowing could be affected. Ukraine makes up 20 per cent of global corn shipments. 

Geopolitical crisis

ELF International said since agricultural commodities cannot be stored for long after the harvest, Russia, whose crops are not affected by the war, would rather sell them than see them wasted. It would favour countries that have not imposed sanctions.

On the other hand, countries such as Argentina, Australia, Brazil and the US, will help stabilise the market as well as the prices prices. Since prices were rising even before the Russian-Ukraine conflict, they would remain higher than in recent years, it said. 

In view of the geopolitical crisis, analysts also see gold prices ruling at elevated levels over the next few months.