Many headlines have noted the huge impact of Russian and Ukrainian production on world export crop and fertilizer supply.
Russian gas and oil exports are high visibility issues for several countries.
But Russia is also a critical player in dozens of other commodities, all of which face shortages of Russian supply as Black Sea exports get disrupted by the raging war in Ukraine and as western sanctions strangle the growth and even production of many other Russian products.
The world is already short of many essential industrial commodities, which is one of the major causes of today’s surging global inflation, so these coming shortages don’t bode well for efforts to rein in inflation rates not seen in many places since the 1970s or early 1980s.
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Russia is a major producer of essential automotive and electronic commodities, including those important for electric vehicles, such as palladium, platinum and cobalt.
It is a major supplier of industrial metals such as titanium, nickel and copper. It is a significant exporter of steel.
Russia is the world’s third largest producer of gold, a commodity that is vital in multiple markets, from precious metals to jewelry, to electronic and industrial applications.
Russia is a superpower in energy exports to Europe, supplying 40 percent of the European Union’s needs and the majority of the fuel that runs the German economy.
The impact of sanctions and import bans in some countries won’t be easy to assess for a while. Most have just been imposed, some don’t apply immediately, and their effectiveness in crimping Russian exports is unknown. Commodities are employed in the manufacturing of products, so it can take much time for shortages today to show up in inventories at the end of the production and distribution chain. Some processors and manufacturers have stockpiles of essential commodities while others rely upon just-in-time deliveries.
Shipping through the Black Sea has become a doubtful proposition for much commercial traffic, not just because of actual combat in port cities, but also because many shippers and their insurance companies don’t want to operate in war zones. The length of the war is another major unknown when it comes to assessing the potential for Russian and Ukrainian commodities to reach the world market.
Some countries have shown no interest in blocking Russian products, such as China, which is a major customer of Russian commodities. If Russian products end up being discounted, numerous customers can be expected to step forward.
The commodity markets can also be substantially affected by currency fluctuations, which tend to be one of the most volatile areas of the world markets affected by strife.
During shocks like this war, investors tend to run for the U.S. dollar and invest in other safe haven currencies and economies. That tends to see futures-based and U.S. dollar-based prices of commodities fall relative to other currencies, but when the U.S. dollar prices are converted to other currencies the impact is not always significant.
For the Canadian dollar the situation is complicated by the huge role that oil and gas play in the Canadian economy. As oil prices surge to extreme levels, the Canadian dollar also tends to strengthen compared to non-energy economies. The surging price of crops also adds to this upward pressure on the loonie, as do the soaring prices for other Canadian commodities.
Anticipating the likely impact of the various effects of the war are giving analysts much to talk about, and central banks much to fret about.
“In the shorter run, disruptions to the energy and commodity supply will weigh on growth and push up inflation for longer,” said ING Economics.
“Particularly in Europe, the risks of stagflation have increased.”
Farm Credit Canada’s Sebastien Pouliot provided a Canada-specific outlook March 1.
“If the loonie stays weak, it will boost exports, help growth but also make imports pricier and cause additional inflationary pressures at a time when inflation is hitting levels not seen in a generation,” wrote Pouliot.
“This might force the Bank of Canada to take a more aggressive approach to curb inflation by raising interest rates more rapidly than otherwise. Another possible outcome is that the war and sanctions will cause global economic growth to slow down, weaken inflationary pressures and delay expected interest rate hikes from western central banks.
“It is too soon to predict which scenario will prevail.”
Until it becomes clear how the war, the sanctions, the market disruptions and world economic growth are affected by the Russian invasion of Ukraine, all commodity market and economic forecasts will be subject to much revision. The only certainty in today’s markets is that uncertainty will prevail for the foreseeable future.
