Commodities: Understanding the war in Ukraine

Probably the most significant event of 2022 so far on commodity markets has been the invasion of Ukraine by Russia in February 2022. Both Russia and Ukraine are significant producers and exporters of natural resources. As such, the invasion of Ukraine by Russia has had an immediate impact on the supply of some commodities. However, there is also likely to be a long-lasting impact from this invasion as the world seeks to move away from a reliance on Russian production, which will inevitably lead to uncertainty and geopolitical friction. Having been through the initial volatility, we look to review how this event is likely to play out over time.

Russian Natural Resources production in a global context

On a headline basis, Russia is a globally significant producer of palladium and platinum, thermal and metallurgical coal, base metals, and steel, as shown in Chart 1. The region is also a large primary producer of agricultural products, and has a high concentration of heavy manufacturing, as well as some niche industries like uranium enrichment.

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Commodity price responses

Given the scale of Russian commodity production within a global context, we have seen some significant increases in prices across the complex, as illustrated in Chart 2. The most significant moves were initially in thermal coal and nickel, which are somewhat specific cases, however the commodity complex has rallied more widely given lost supply, and the deeper implications of this unanticipated supply shock. The question now becomes, of these huge moves, which will become structural, and which will be temporary?

What are the short and long-term ramifications of the Russia / Ukraine situation?

We believe some of the short and long-term impacts are likely to be profound. Initially, commodity production from the region will be stranded, with sanctions preventing most western countries from purchasing Russian commodities. Given natural resources are a large proportion of Russian exports, they represent an obvious target for sanctions. However, sanctions are a ‘doubleedged sword’, and can be blunt instruments with respect to the potential for negative spill-over impacts on other countries. This is especially relevant now given Russia’s dominance in some energy supply markets, and the world’s growing need for key commodities for which Russia is a major supplier.

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