The weekend insurrection by Russia’s Wagner mercenary group and subsequent ‘failed coup’ has become a hot talking point and brought the 16-month long war in Ukraine into sharp focus. Whereas the Biden administration says it’s too early to determine how the latest developments will change the course of the war, many analysts believe it has weakened Putin’s regime and might even accelerate the end of Europe’s bloodiest conflict since WWII.
A return to peace would almost certainly alter the global commodities markets considering that Russia touches on virtually every important commodity on the market today including oil, gas, gold, copper, cobalt, tungsten, palladium, aluminum, vanadium, nickel, platinum, uranium, wheat and lean hogs.
The epic commodity bull run that took off three years ago and saw commodity prices hit multi-decade highs has finally collapsed. From oil, gas and wheat to lithium, copper and iron ore, prices of the world’s leading commodities have pulled back sharply across the board.
The Bloomberg Commodities Index (BCOM), the most widely used benchmark for the commodities market tracked by 23 exchange-traded contracts on physical commodities and more than $100 billion in assets, has declined 12% in the year-to-date and shows no signs of reversing course. The index hit a 9-year peak in May 2022 with commodity prices more than doubling in the space of two years. However, BCOM has since then declined nearly 25%, effectively ushering in a commodity bear market.
“The drop in commodity prices seems to reflect the stuttering rebound of China, a looming US recession and supply side destruction in Europe.It’s indeed possible that inflation could turn into temporary disinflation,” Carsten Brzeski, global head of macro at ING, has told Bloomberg.
Here’s how to play the commodities markets as the war in Ukraine takes an unexpected turn.
Sell: Gold, Nickel, Cobalt, Platinum, Palladium, Aluminum
Gold prices are currency trading near record highs thanks to the yellow metal’s status as a safe haven in times of geopolitical instability. Russia is the world’s sixth-largest exporter of cold, accounting for 4.4% of global supply. An end to the war is likely to usher in risk-on sentiment in the markets, which could lead to a gold selloff.
Of the critical minerals, Russia is the second-largest exporter of cobalt, a key ingredient of rechargeable batteries and second-largest exporter of vanadium. It also exports ~12% of the world’s Platinum and is the fourth-largest exporter of tungsten. Then there’s Palladium–used in car catalytic converters and semiconductors. Russia produced 40% of palladium globally in 2021, good for 2.6 million troy ounces. The supply of these commodities has mostly remained steady throughout the war and is unlikely to change when the war comes to an end.
Russia is also responsible for ~10% of the world’s nickel supply. Nickel prices have crashed in the current year, falling 21% in the year-to-date to $23,300 per tonne thanks to a massive supply glut as Indonesian production continues to outpace global demand. According to the International Nickel Study Group (INSG), the nickel market will face a supply-demand surplus of 239,000 tonnes, the largest in at least a decade and more than double last year's excess of 105,000 tonnes. That revised figure is also way higher than the group’s last forecast in October when it expected the surplus to clock in at 171,000 tonnes in 2023.
Finally, Russia is the world’s second-largest exporter of aluminum, having exported $7.42 billion of the metal in 2021 alone. Currently, more than 220 tonnes, or 53%, of the aluminum currently in LME warehouses, originated from Russia, with companies taking delivery of contracted supply but refusing to use it and instead storing it. The end of the war will likely mean that this stockpile will be used up first, potentially crimping near-term demand.
Buy: Copper, Uranium
Russia accounts for 3.5% of global copper production. BNEF has predicted that by 2030, diverse EV and battery commodities such as copper, manganese, iron, phosphorus, and graphite--all of which are needed in clean energy technologies and are required to expand electricity grids--will see sharp spikes in demand. The world is facing a crisis of supply in copper, with not enough mines being built to satisfy future demand.
Russia’s state-owned Rosatom currently accounts for 35% of global uranium enrichment. The West remains heavily reliant on Russian uranium: the U.S. imported about 14 percent of its uranium and 28 percent of all enrichment services from Russia in 2021 while the figures for the European Union were 20 percent and 26 percent for imports and enrichment services, respectively.
Uranium is defying the commodities selloff, and is one of a handful of commodities whose prices have continued rallying in the current year. Uranium prices have nearly doubled over the past three years, and it’s a unique setup that doesn’t necessarily rise and fall in tandem with other commodities. After languishing in a bear market for a decade, uranium has staged an impressive comeback as Russia’s war on Ukraine exacerbated the global energy crisis and sent Europe scrambling to replace Russian oil and gas. Last year, the European Commision labeled nuclear and natural gas ‘green’, much to the chagrin of climate activists.
“We will see increased investments in alternative energy and I think that nuclear is one of the best forms of green energy with no emissions, and currently nuclear accounts for just 10 percent of the world’s energy production,” Neena Mishra, director of ETF research with Zacks Investment Research in Chicago, has told Globe and Mail.
Countries feeling the heat from the energy crisis most keenly have been restarting mothballed nuclear plants and/or extending the life of existing ones. For instance, France has promised to restart all its nuclear reactors to avoid a power crunch during winter while Germany is seriously considering doing a u-turn on its nuclear phaseout. Germany decided to stop using atomic energy in 2011, with the last remaining plants set to be closed in the current year.
Japan has announced a major U-turn in its energy policy after the Asian nation adopted a new policy promoting greater use of nuclear energy, effectively ending an 11-year prohibition and phase-out that was triggered by the Fukushima disaster. Under the new policy, Japan will maximize the use of existing nuclear reactors by restarting as many as possible, prolong the operating life of old reactors beyond their 60-year limit and also develop next-generation reactors to replace them.
Meanwhile, China has revealed ambitious plans to build 150 nuclear reactors at a staggering cost of $440B over the next 15 years as the country looks to become carbon neutral by 2060.
That many reactors is more than what the entire planet has built in the past 35 years, representing a third of the current global fleet of 440 reactors. China is the biggest emitter of greenhouse gasses, but says its nuclear program will play a critical role in replacing its 2,990-coal fired generators alongside wind and solar energy. Indeed, Beijing says its nuclear plans could prevent about 1.5 billion tons in annual carbon emissions, more than the annual emissions of the U.K., Germany, France and Spain combined.
And, of course, it’s not just about carbon emissions. It never is. For China, nuclear energy is about cost efficiency.
About 70% of the cost of Chinese reactors are covered by loans from state-backed banks, meaning dramatically lower costs. In fact, Francois Morin, China director at the World Nuclear Association, says China can generate nuclear power at just $42 per megawatt-hour thanks to the low 1.4% interest rate on loans for infrastructure projects, making it far cheaper than coal and natural gas in many places.
Another bullish catalyst for uranium: strong market fundamentals. Annual consumption currently exceeds production while stockpiles of excess uranium that have been tiding users over have been depleted.
Playing The Uranium Rally
Macquarie Bank is long-term bullish on uranium, and has lifted its price forecast for yellowcake by 17 percent to $US55/lb for financial year 2024 and by 21 percent to $US60/lb for the following year based on increased contracting activity, a renewed focus on energy security and a forecast supply deficit for the nuclear fuel.
Macquarie likes Paladin Energy (OTCQX: PALAF) and Boss Energy (OTCQX: BQSSF) because they have all the necessary permits and they are operating in key uranium venues (Australia) with clear paths to a very optimistic market. Both companies develop, explore for, and operate uranium mines in Australia.
There are limited options for ETF investors to play the expected nuclear renaissance due to uranium’s prolonged out-of-favor status since the 2011 Fukushima disaster in Japan as well as its niche role in the commodity sphere.
Investors have two U.S. ETF options: the Global X Uranium ETF (NYSEARCA: URA) and the Sprott Uranium Miners ETF (OTCPK: URNM). URA has $1.76B in assets under management (AUM) with an expense ratio of 0.69% while URNM has $1B in assets and an expense ratio of 0.85%.
The Horizons Global Uranium ETF (TSX: HURA) is an exchange-traded fund launched and managed by Horizons ETFs Management (Canada) Inc. The fund mainly invests in stocks of uranium miners, with Cameco Corp. (NYSE: CCJ), Yellow Cake Plc. (OTCQX: YLLXF) and National Atomic Co. Kazatomprom accounting for more than 61% of its holdings.
A major distinction between the two U.S. ETFs from HURA are their holdings in physical uranium through Sprott Physical Uranium Trust units. The Sprott units comprise 8.7 percent of URA’s portfolio.
Investors could also check out Sprott’s Physical Uranium Trust (OTCPK: SRUUF), which trades on the Toronto Stock Exchange in both U.S. and Canadian dollars. The fund, which started trading just over a year ago, is the largest and only publicly listed physical uranium fund currently operating. SRUUF has $3-billion in assets and a 0.96% expense ratio.
By Alex Kimani for Oilprice.com
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