How Russia-Ukraine fight is affecting commodity prices


A man pumps fuel into his vehicle at a petrol station in Montebello, California. PHOTO | POOL

On Thursday 24th February, Russia invaded Ukraine leading to over 1.7 million Ukrainians fleeing their homes in search of safety. To date, the war has made business almost impossible in Ukraine thereby affecting major supply chains.

In response, the Western world slapped a series of economic sanctions against Russia that have eliminated most business activity between them. The most affected are commodities that are largely produced by Russia and Ukraine and exported to the rest of the world.

As a result of increased risk of an all-out war between Russia and the West, investors have turned to risk-off mode and are reducing their exposure by hedging their positions in safe-haven assets such as gold and the Japanese Yen.

This has significantly raised the demand for gold and consequently its price. In the last 10 days, gold has rallied over eight percent and may continue to soar.

The world’s major economies are currently experiencing a period of multi-year highs in inflation levels. This stretches from Russia to the US and the Eurozone. The current war between Russia and Ukraine is causing supply shortages in economies whose demand is growing because of easing Covid-19 restrictions.

This is leading to expectations of higher inflation rates in the near future thereby creating the need to dump depreciating currencies and buy gold, which is considered a better store of value.

The biggest impact of the Russia-Ukraine war has been experienced in oil markets. By the time the war started, oil prices were already very high and global leaders were pushing for interventions to lower energy prices. In the last two weeks, Brent oil prices have rallied from $93 per barrel to $130, a 39 percent rally. All other oil markets have rallied similarly.

Russia supplies 40 percent of Europe’s gas and there are no sanctions on this yet. Russia is also the world’s second exporter of oil and related products. It is estimated that it exports seven million barrels of oil per day, that’s seven percent of the global supply.

Investors have been pricing in the chance that Russia could turn off this supply to the western countries to fight off mounting sanctions from Europe or that Europe would reject Russia’s supply as another sanction against Russia.

Russia has already announced that it is ready to cut off Europe’s supply and redirect it to Asian countries at a $20-25 discount per barrel.

The expectation that Russia’s crude oil and gas supply to Europe could be terminated anytime has led to massive speculative demand for oil futures and oil stocks as prices are expected to skyrocket resulting from the supply hitch.

On Tuesday, President Biden announced that the US will ban imports of Russian oil as a major escalation against its invasion of Ukraine. This implies the US doing away with eight percent of its national supply.

The UK had also announced on Tuesday that it was phasing out oil supply from Russia by the end of 2022. The European Union is also looking at plans to cut off its reliance on Russian gas supply by two thirds this year.

The supply side pressure is expected to raise oil prices to $300 according to a recent interview with a top Kremlin official.

On Tuesday, the London Metal Exchange had to halt nickel trading after prices doubled to over $100,000 per tonne.

Speculation that Russia’s supply of nickel could be terminated through current sanctions has led to the massive demand for nickel which caused a short squeeze by some of the world’s top producers. Nickel is a key raw material for making stainless steel and car batteries.

Ukraine is the world’s fourth-largest corn exporter. Its main agricultural exports include wheat, corn oil, sunflower seed, and soybeans. The world’s top grain exporters are the USA, Brazil, Russia, and Ukraine.

Russia and Ukraine account for approximately 29 per cent of global wheat exports, 19 percent of global corn supplies, and 80 percent of global sunflower oil exports.

With the current war, it is expected that this supply will be significantly affected and that the Black Sea trade routes will remain significantly disrupted. Food prices are trading at multi-year highs and the current Russia-Ukraine war could lead to even higher food prices worldwide.

Russia is among the leading producers of urea and diammonium phosphate (DAP) fertilisers. Natural gas prices are skyrocketing, and they are a major input in fertiliser manufacturing.

This could lead to higher fertiliser prices soon. Market players are already speculating about a fertiliser shortage and DAP futures have already rallied over 13 percent in the past two weeks. In addition, urea fertilizer futures have rallied over 30 percent in the same period.

Ukraine produces an estimated 70 percent of global neon gas exports. This gas is a critical input in the manufacturing of semiconductor chips.

Considering that the world was going through a semiconductor shortage in the last two years, disruption of neon supply could affect the manufacturing of electronics and cars thereby raising their costs significantly.

In Kenya, I expect food prices to rise significantly while imports suffer from delayed delivery times. For manufactured products, Kenya may experience imported inflation which could put further pressure on the shilling against the US dollar.

Rufas Kamau, Research & Markets Analyst, Scope Markets Kenya