ChainMail | War In Ukraine

A chain of uncertainty for commodities

ChainMail | War In Ukraine

Russia’s invasion of Ukraine, beyond the toll in lost lives and bombed cities, is raising the price of goods and adding more snarls to supply chains already hobbled by COVID. China’s latest outbreak doesn’t help. 

“What people expected to be a recovery year is going to be another year of crazy hiccups in supply chains,” Johannes Schlingmeier, CEO of xChange, a shipping container leasing company, told The Washington Post

The biggest economic impact of the war so far is the surge in energy prices, reflecting the threat of sanctions, shortages, and boycotts. Russia is the world’s third-largest oil producer and the largest exporter of oil and oil products. Russia is also a major supplier of natural gas to Europe. The U.S. has banned Russian oil, but this was mainly a symbolic gesture because it imports just a small amount. Yet gasoline prices have shot up nationally because oil is traded globally and the risk of supply disruptions is real.  

Oil prices are certain to stay elevated, and volatile, as long as the invasion continues. The International Energy Agency, formed in the wake of the 1973 oil crisis to help monitor energy supplies, sees a “looming emergency for global energy security.” It wants to see businesses and consumers cut back on energy consumption now through steps such as reducing highway speed limits and encouraging businesses to improve the efficiency of freight trucks and the delivery of goods.   

Oil expert Daniel Yergin, writing in The Economist, said governments need to anticipate shortages and sky-high prices caused either by boycotts of Russian oil or a gambit by Vladimir Putin to punish the West by withholding supplies.    

“Whichever it is,” Yergin wrote, governments “should be working much more closely with oil and gas companies to understand the changing logistics.” He warned that even as Russian oil may find its way to market via countries like India and China buying at a discount, rerouting oil deliveries is a messy task. “The complex system that moves about 100 million barrels a day around the world is not easily rebalanced and will be snarled by new frictions.” 

Beyond oil and natural gas, Russia is a major producer and exporter of commodities including coal, fertilizer, wheat, steel, nickel, aluminum, palladium, and platinum. As with oil, Russian commodity exports haven’t been shut down, but supply uncertainties are causing price spikes. 

The nickel market already is in full-blown chaos. This has serious ramifications for electric vehicle production because nickel is a key component of electric vehicle batteries. After the invasion, buyers began avoiding Russian nickel purchases. Prices doubled in a day on the London Metal Exchange (LME) after a Chinese company was caught on the wrong side of trades after betting on a price decline. The company was forced to buy nickel to cover its trades, and a feeding frenzy ensued with investors expecting the price to continue surging. The LME had to suspend trading.  

“It marked the first major market failure since Russia’s invasion of Ukraine jolted global markets, showing how the removal of one of the world’s largest exporters of resources from the financial system in the space of weeks is having ripple effects across the world,” Bloomberg reported

Anticipate more upheaval all along the global supply chain. COVID continues. War rages. The path ahead for commodities is likely chaotic and expensive.

Read the complete Issue 6 of ChainMail here.

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