“I amF Russian tanks Across the border, markets will stagnate. ” RBC Capital Markets, an investment bank and former analyst with the US Central Intelligence Agency. If Russia invades Ukraine, the biggest impact will first be felt on the European gas market. But Mrs. Croft is not alone in saying that the shock waves will spread more widely.
Russia’s huge importance for the commodity market is likely to be disrupted (see Chart 1). It is the world’s largest exporter of natural gas and the second largest exporter of oil. It supplies about one-tenth of the world’s aluminum and copper and makes up a range of other metals, including 43% of the world’s palladium, a catalyst converter. It is the largest exporter of wheat.
The worst case scenario is that the flow of this important raw material stops as the tension increases. This could happen because Russian exports, or the payment infrastructure for their convenience, are affected by Western sanctions. Alternatively, Russia itself may decide to cut off some exports – especially gas – in an attempt to intimidate its opponents.
Prices have risen for fear of being disrupted. On January 26, Brent crude reached 90 90 a barrel, a seven-year high; The European benchmark for natural gas was about € 90 ($ 101) per megawatt hour, compared to € 70 at the beginning of the year. Copper prices are flirting with its many-year high.
The tightness of commodity markets makes prices very sensitive to negotiations of war. During the global financial crisis of 2007-09, global industrial production and commodity prices plummeted at the same time, Macquarie, another banknote, noted. In contrast, the epidemic is accompanied by an increase in both production output and raw material prices. The broader Bloomberg Commodity Index rose 20% in 2021 due to unexpectedly strong demand and supply-chain disruptions. Prices of a dozen of its ingredients, from cobalt and coffee to cotton and coal, have risen further.
Oil demand is roaring to pre-epidemic levels, and even supply is slowly increasing. Many members of the Organization of Petroleum Exporting Countries and its allies (including Russia) are struggling to meet their quotas for increased production due to investment and covid-related complications. American shell companies have invented the discipline of capital, favoring investors’ returns on drilling. As a result, global surplus production is declining indefinitely. The extra capacity of many metals is also limited.
If war breaks out, oil prices could rise to $ 120 a barrel, says Natasha Kaneva, head of JPMorgan Chase, a bank’s commodity strategy. Ross Strachan’s CRUAccording to a consultancy, the price of aluminum could rise to an all-time high The effect of geopolitical tensions on prices is not exactly heartwarming. In 2018, when the United States imposed sanctions on Rusal, Russia’s largest aluminum producer, the price of the metal was turbo-charged.
Russia and Ukraine together export about 29% of the world’s wheat, and a large portion of Ukrainian cultivation takes place in the regions most exposed to aggression. Carlos Mera of Rabobank, a Dutch firm, said withdrawing such volumes from the market would have an “extraordinary” effect, as demand for wheat is very resilient. Prices could easily double, he thinks. This will trigger a struggle to secure supplies, especially among large importers in North Africa and the Middle East.
Some countries, such as China and Iran, could bypass Western sanctions and buy Russian metals and grain at a discounted rate. It can provide relief by meeting certain needs in principle. But China and Iran together imported 17 million tons of wheat last year, far less than the 59 million tons exported by Russia and Ukraine. Grain stocks in the US and Europe are declining and bad weather in South America threatens to make the market more hungry, said Jordi Wilkes, a broker at Sukden Financial. In addition, Russia is a major producer of urea and potash, an important ingredient for fertilizers. An export ban would further raise the price of grain.
As long as tensions remain high, the main role of energy in the economy means that inflation will spread to other markets, even if sanctions are not finally in place. Expensive energy has already shut down some aluminum smelters in Europe. Rising gas prices could shut down more reactors. It could also hit continental fertilizer production – for which gas is used as both raw material and fuel – hindering the next growing season.
If the tensions are completely resolved, the markets can be imagined to be cold. Europe endured a surge in natural gas prices last year, but a warmer winter means “a lot of frustration has been removed from the market, although we are still at a high level of prices”, says Saad Rahim of Trefigura, a trading firm. But the tightness of supply means that prices will be just a little lower. Mrs. Kaneva thinks that the risks of oil are disproportionate. If peace prevails, oil prices will fall to just 84 84 a barrel. But when the war started, “everything went awry.” 3
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This article is published in the print edition of Finance and Economics under the heading “Material Moves”