Russia Sanctions To Have Limited Impact On Commodity Prices

BMI View: There will be limited upside pressure on most commodity prices as a result of sanctions on Russia. Most significantly, although slightly higher gas prices for Europe are likely, energy prices will remain contained. The main impact on commodity markets of ongoing sanctions will be to expedite the rate at which Russia shifts its growth strategy towards the east.

The EU and the US have ratcheted up sanctions against Russia and we expect further such measures in the coming months ( see ' Western Sanctions: Still Room For Further Tightening', July 30). The EU agreed on July 29 to bar Russian state-owned banks from raising debt and equity in European markets, restrict European exports of equipment for the modernisation of the Russian oil industry, and equipment for military use. Shortly afterwards, the US expanded its own list of targeted sanctions to include three more banks - VTB Bank, Bank of Moscow and Russian Agricultural Bank - and a state-owned shipbuilding company.

Despite our expectation that Russia will retaliate to this escalation of sanctions, we do not foresee major disruption to commodity flows from Russia and thus do not expect commodity prices to head significantly higher as a  result of the ongoing crisis. We expect Russia to retaliate by targeting specific Western companies and restricting their operations in Russia. Crucially, although slightly higher gas prices for European customers are likely, a severe curtailment to supply and significantly higher prices is not our core view.

Central To The Commodities Global Supply Chain
Russia - Share & Rank Of Global Exports By Commodity (2012 unless otherwise stated)

BMI View: There will be limited upside pressure on most commodity prices as a result of sanctions on Russia. Most significantly, although slightly higher gas prices for Europe are likely, energy prices will remain contained. The main impact on commodity markets of ongoing sanctions will be to expedite the rate at which Russia shifts its growth strategy towards the east.

The EU and the US have ratcheted up sanctions against Russia and we expect further such measures in the coming months ( see ' Western Sanctions: Still Room For Further Tightening', July 30). The EU agreed on July 29 to bar Russian state-owned banks from raising debt and equity in European markets, restrict European exports of equipment for the modernisation of the Russian oil industry, and equipment for military use. Shortly afterwards, the US expanded its own list of targeted sanctions to include three more banks - VTB Bank, Bank of Moscow and Russian Agricultural Bank - and a state-owned shipbuilding company.

Central To The Commodities Global Supply Chain
Russia - Share & Rank Of Global Exports By Commodity (2012 unless otherwise stated)

Despite our expectation that Russia will retaliate to this escalation of sanctions, we do not foresee major disruption to commodity flows from Russia and thus do not expect commodity prices to head significantly higher as a  result of the ongoing crisis. We expect Russia to retaliate by targeting specific Western companies and restricting their operations in Russia. Crucially, although slightly higher gas prices for European customers are likely, a severe curtailment to supply and significantly higher prices is not our core view.

Germany Heavily Reliant On Russian Gas
Russia - Largest Gas Exports Markets in 2012 (excluding LNG), bcm

More broadly upward price pressures will mainly be restricted to a multi-year horizon, as investment in Russian energy, mineral and agricultural production should suffer from weakened financial ties with the West. However even over a multi-year time period, upward price pressure should be contained as export growth should persist for major commodities. Key reasons for this include:

  • The prevalence of Russian companies in driving production growth rather than foreign firms (eg: minerals and grains)

  • The likelihood that Chinese capital will step into the breach and help keep projects afloat (eg: natural gas)

Energy Markets To Remain Well Supplied
Select Energy Contract Prices, Rebased

The main impact of ongoing sanctions on commodity markets will be to expedite the rate at which Russia shifts its growth strategy towards the east. This is a trend we have been highlighting across our resource industry research, even before the Ukraine crisis escalated in early 2014.

Energy: No Major Disruption To Russian Supply

  • Aggressive rhetoric from Russia regarding retaliation to Western sanctions could boost European gas prices moderately given Russia's leverage as a supplier to the continent.

  • However, we do not expect Russia to significantly disrupt oil or gas flows to Europe and thus expect prices to remain contained.

  • Russia's gas sector is omitted from the EU sanctions list, in line with our view that the EU will shy away from provoking retaliatory measures from Russia in this sector due to its high gas dependence on Russia.

  • From Russia's point of view, we expect the Kremlin to be cognisant that the drying up of gas export revenue from Europe would be a hammer-blow that the already slowing Russian economy can ill-afford ( see 'Ukraine Crisis Darkening Russia's Growth Outlook', May 20).

  • Slack in both the global oil and European gas markets in recent months suggest that these markets would be able to absorb slight disruption to Russian supply without significantly higher prices. Front-month Brent Crude prices are currently trading near the lowest level in ten months. For gas, both UK and German gas prices are currently down around 40% since the start of 2014.

  • Sanctions will have more of an impact on long-term energy production and we have downgraded our multi-year forecasts for gas production ( see 'New Sanctions Show More Teeth', July 31).

PGM And Nickel Prices Will Be Sensitive

Although we are not bullish towards platinum, palladium and nickel as a result of tighter sanctions on Russia, we highlight these three metals as particularly vulnerable to higher prices should tensions between the West and Russia escalate beyond our core view. Although we do not expect exports of these metals to be disrupted, the mere threat of such an outcome could boost prices significantly given that all three markets are currently tight. First, these metals are relatively small markets where Russia already dominates global refined exports. Second, reliance on Russian supply of these metals has increased in recent months as all three markets are already suffering from market tightness resulting in disruption to supply from another major producers.

  • In the case of platinum and palladium, mine supply from South Africa has collapsed in 2014 due to incessant strike action and will remain erratic in the coming quarters ( see 'Platinum: Troubled Growth Outlook, July 22).

  • For nickel, Indonesia's ban on nickel ore exports that has been in place since the start of 2014 has left the global market more reliant than usual on refined supply from Russia. Russia was the largest exporter of refined nickel in 2013, accounting for 25.7% f the total.

More Vulnerable To Russian Supply Disruption
Select Metal Prices, Rebased

Other Markets To Remain Well Supplied

  • Markets including aluminium, coal, iron ore and steel will remain well supplied and we thus even in the unlikely event of disruption to Russian exports, we would expect little upward pressure on prices for these commodities.

  • Wheat is the agricultural market for which disruption to Russian exports would have the most serious global implications, as the country accounted for 11.3% of total exports in 2013. However, as the top customers for Russian wheat exports are in the MENA region, we do not expect either the EU and US or Russia to intentionally obstruct shipments.

Wheat To Remain Unfazed By Sanctions On Russia
Front-Month CBOT Wheat, USc/bushel (weekly chart)
Russia - Wheat And Meslin Exports By Destination, '000 tonnes
  2009 2010 2011 2012 2013
Total 16,821 11,848 15,186 16,089 13,796
Turkey 2,188 1,453 2,098 2,704 2,466
Egypt 4,868 4,841 4,802 5,232 2,173
Yemen 440 401 610 747 798
Iran 568 344 47 1,028 685
Azerbaijan 683 125 340 279 581
South Africa 0 0 143 105 500
Georgia 488 362 293 432 498
Kenya 162 259 711 219 425
Israel 511 438 513 553 415
Libya 738 385 253 575 376
Source: Trademap

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