Russia-Ukraine crisis: Commodities expected to become more expensive amid rising tensions

The Russia-Ukraine conflict would be a significant risk-off event that would send tremors across a variety of markets, prompting equities to collapse and commodity prices to surge even higher, according to various media reports. If Russia advances into Ukraine, the United States has vowed to apply sanctions. Despite Russia's claims that it has no plans to attack Ukraine, it may continue to hoard commodity assets, driving up prices.

Russia's President Vladimir Putin ordered the deployment of soldiers to two separatist territories in eastern Ukraine on Monday, February 21. Putin ordered Russian peacekeepers to be dispatched to Ukraine's two separatist areas, the self-proclaimed Donetsk People's Republic and the Lugansk People's Republic, in a televised address. The conflict in Russia and Ukraine had an impact on global commodity prices. Prices are projected to continue to rise: Here's a rundown:

If Russia attacks, MarketWatch quoted Garrett DeSimone, head of quantitative analysis at OptionMetrics, as stating that typical war responses will come into play, including moves into long-duration Treasuries and a jump in oil prices and European natural gas. Such advances, he warned, could be short-lived, as has been the case in the past.

Stocks & Bonds

MarketWatch quoted Steve Barrow, head of G-10 strategy at Standard Bank, as stating in a note that although the market saw bouts of volatility in 2014 when Russia annexed Ukraine's Crimean peninsula, it had little permanent influence on global markets. In the event of a full-scale invasion, however, investors cannot expect a calm response, he said. 

By the end of January, the European stock market had fallen 3.8% to its lowest level since October, after NATO announced that it was bolstering its eastern borders in anticipation of a Russian invasion of Ukraine. On January 24, the FTSE 100 index in London plunged 2.6% to a one-month low of 7,297, its worst drop in two months. The DAX index in Frankfurt plummeted 3.8%, while the CAC in France fell 4%, according to The Guardian.

In the event of an invasion, the dollar may strengthen in the United States. Meanwhile, the Russian ruble, which has lost 2.2% this year, has recovered 4.1% in the last five days, outperforming other emerging market currencies. Markets are currently unconcerned because another round of US-Russian discussions is expected to take place shortly, according to Marc Chandler, chief market strategist at Bannockburn Global Forex, as quoted by CNBC.

Aside from that, Russia exports a lot of aluminium, palladium, nickel, and fertilisers. Food prices could rise as crop yields fall if the country withholds potash supplies, resulting in greater inflation in an already inflationary market. With inflation reaching multi-decade highs and the Fed warning of an early start to interest rate hikes, January was a dismal month for bond markets. In January, US 10-year yields were hanging around 2%, while German 10-year yields climbed above zero per cent for the first time since 2019. Bonds are viewed as the safest assets during significant risk occurrences, so investors flock to them. Despite the potential of increased oil costs and inflation, investors may flock to bonds once more if the invasion occurs.

Oil

It's worth noting that Russia is an oil and gas powerhouse, pumping roughly nine million barrels of crude oil every day. Oil prices have already begun to rise as a result of constrained supply and geopolitical tensions. According to RBC's global commodities strategist Helima Croft, oil prices will rise above $100 a barrel if Russian tanks cross the border into Ukraine. Oil hit a seven-year high after Putin's new announcement.

Crude, which has already risen more than 20% this year due to strong demand, climbed even higher on Tuesday, with Brent approaching $100 for the first time since 2014. The increases were not tempered by hopes of an Iran nuclear deal, which may see Tehran resume global oil exports. The rise in oil prices is adding to global concerns about inflation, with the Federal Reserve under increasing pressure to tighten monetary policy to keep prices from spiralling out of control.

Natural Gas

Because Russia is a major producer of natural gas, the ongoing conflict could result in considerably higher natural gas prices. Russia supplies nearly a third of Europe's natural gas. Natural gas prices in Europe were $25 per million BTU on Wednesday, more than five times higher than in the United States. According to BP data, the country pumped 639 billion cubic metres of natural gas in 2021, accounting for over 17% of global output of 3.854 trillion cubic metres. 

The West thinks that Russia is taking advantage of the crisis by using natural gas as a tactic. The charges also suggest that Russia is delaying the certification of Nord Stream 2, a system of offshore natural gas pipes in Europe that runs from Russia to Germany under the Baltic Sea. Russia's gas reaches Europe not just through the Nord Stream I pipeline, but also through pipelines that pass through Ukraine. Energy flows would be interrupted if Ukraine and Russia were at odds, owing to increased fears about infrastructure damage.

Gold & Aluminium

Gold prices are already climbing globally as a result of the ongoing conflict, and gold touched a near nine-month high on February 22 after Putin's latest plan to deploy soldiers to two breakaway regions in eastern Ukraine. By 0332 GMT, spot gold XAU was up 0.2% to $1,909.60 per ounce, after reaching its highest level since June 1 at $1,913.89 per ounce. Gold futures in the United States GCv1 rose 0.6% to $1,911.50.

Because Russia provides for about 6% of global aluminium supply, the growing border tensions between Russia and Ukraine could result in soaring aluminium prices. The conflict could result in a supply shock in the already constrained aluminium market. Aluminium prices have climbed by nearly 15% in recent days, up to February 21. Prices are reaching multi-year highs, and there's a chance they might surge even higher. Aluminium prices may fall when the conflict ends, but they will increase again since the deficit will persist, according to Christopher LaFemini, a Jefferies analyst quoted by Oilprice.com.

Copper & Cobalt

According to US Geological Survey (USGS) data, Russia produced 920,000 tonnes of refined copper in 2021, accounting for about 3.5% of global output. According to Oilprice.com, the other two big producers are UMMC and Russian Copper Company. Russia's main export markets are Europe and Asia, and the protracted conflict is likely to have an impact on exports, resulting in increased worldwide pricing. Further, Cobalt prices may rise as a result of the Russia-Ukraine war. According to figures from the US Geological Survey, Russia produced 7,600 tonnes of cobalt last year, accounting for more than 4% of global production.

Wheat & Food Prices

Then there are food costs, which, according to a recent United Nations assessment, have risen to their highest level in more than a decade, owing partly to the pandemic's supply chain tangle. Russia is the world's largest wheat exporter, accounting for about a quarter of total worldwide exports with Ukraine. Some countries are significantly more reliant than others. This grain movement accounts for more than 70% of Egypt's and Turkey's total wheat imports. This will put even more pressure on Turkey, which is currently in the midst of an economic crisis and dealing with near-fifty percent inflation, as well as increasing food, fuel, and energy prices.

(With inputs from Agencies)

Image: Unsplash/AP