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How Would A Russian Incursion Impact Commodities?

  • The ongoing standoff between Russia and Ukraine has raised the possibility of new sanctions on trade with major Russian metals producers.
  • Experts and analyst firms predicted a sharp hike in the price of global commodities, including energy and metal if the Russian-Ukraine standoff escalates.
  • ING Think Head of Commodities Strategy Warren Patterson said the escalation of the conflict could “potentially” lead to tightening in the energy, metal and agricultural markets.

Metals experts and analysts from around the world have reacted to the on-going Russia-Ukraine tension by saying any escalation would have a negative impact on global metals markets.

The continued geopolitical worries have raised the possibility of new sanctions on trade with major Russian metals producers. This could further squeeze the tight aluminum, copper and nickel supply markets.

Base metals in various bourses have already rallied as supply constraints continue to tighten markets. According to a report by Bloomberg Quint, LME cash copper, for the first time in three months, broke through the US$ 10,000/MT ceiling mid-Jan before slipping back. In the week ending Jan. 20, it was at US$ 9,925/mt. Aluminum, too, trades above $3,000/MT. Incidentally, Russia sits on about 10% of the world’s copper reserves. It also serves as a major producer of aluminum.

Energy and metals prices to increase

Experts and analyst firms predicted a sharp hike in the price of global commodities, including energy and metal if the Russian-Ukraine standoff escalates. In addition, it could also lead to the imposition of even more sanctions on Russia.

Domestically, Russia battles massive inflation. The Russian ruble has slid over 10% since the end of October. Inflation stands at 8.4%, double the Central Bank’s official four percent target. Therefore, the confrontation with Ukraine, if it happens, will likely compound Russia’s economic problems even more.

Conflict does not help global aluminum supply position

From a global metals perspective, especially the aluminum sector, Alcoa Corp, the US’ largest aluminum producer, has warned that any aggression could impact supply out of Russia. The Bloomberg Quint report quoted Chief Executive Roy Harvey as saying the conflict would lead to a rise in energy prices, which in turn, could negatively impact the aluminum industry because of the high energy consumption required. According to the US Geological Survey, Russia accounted for about 3.6 MMT of aluminum production in 2020. Russia tied with India as the second-largest producer in the world.

Like Alcoa’s CEO, other analysts, too, believe that any further sanctions on Russia will adversely impact its energy sector. This in turn, would push metals prices higher. Energy-intensive smelters have already complained of high electricity prices. The latter has even led to zinc capacity reductions.

The ING Think research team has said in a new report that the geopolitical tensions with Russia “may end up having important implications for the eurozone if the gas supply starts to be used as a means of retaliation against sanctions.”

It would adversely affect more than the commodity flows that go through or originate from Ukraine, according to this Hindu Business Line report.

Markets to further tighten

ING Think Head of Commodities Strategy Warren Patterson said the escalation of the conflict could “potentially” lead to tightening in the energy, metal and agricultural markets.

All in all, except for some positivity in crude oil supply, analysts have painted a bleak scenario over the fallout of any further escalation in the standoff between the two neighbors.

By AG Metal Miner

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  • Mamdouh Salameh on January 30 2022 said:
    I will limit myself to crude oil which is the most important strategic commodity in the world and which is normally affected by geopolitical developments. However, I hasten to add that geopolitical tension is usually short-lived and transient.

    Were a Russian incursion into Ukraine to take place, its impact on oil and energy prices will be dependent on the scale of the incursion and the severity of US and EU sanctions against Russia.

    While US sanctions against Russia and Nord Stream 2 are guaranteed, sanctions by the EU are a different matter altogether. This differentiation is important.

    Germany in particular will object to EU sanctions on Russia’s energy supplies particularly against Nord Stream 2 because of fear that Russia will retaliate by cutting all gas and oil supplies to the EU. Germany will be the biggest loser since its dependence on Russian oil and gas supplies exceeds 60%. Moreover, if Nord Stream 2 is sanctioned, it financially will sink the hundreds of German companies who invested in its construction.

    The EU will impose sanctions against Russia but not on Russian gas supplies. The reason is that the entire LNG exports of the United States, Qatar and Australia could hardly match Russia’s 200 billion cubic metres (bcm) of annual gas supplies to the EU. Moreover, Russia isn’t dependent on the EU market to sell its gas. On 18 January, Russian gas exports to China broke all previous records. That is why the EU will neither impose sanctions on Russian gas supplies nor on Nord Stream 2. It might instead delay further the certification of Nord Stream 2.

    Therefore, the impact of a Russian incursion into Ukraine on oil and gas prices won’t be much bigger than now particularly if the incursion is limited. However, things could take a very risky turn if the incursion develops into a possible confrontation between Russian and American forces. Then we don’t have to worry about prices but about a nuclear annihilation.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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