War might plunge the world into a grain supply crisis
Commodity markets around the world have been rocked by the war in Ukraine, and it’s not just a consequence of Western sanctions once morest Russia, which now include gas and oil.
Commodity prices also soared due to supply disruptions caused by the Russian invasion, which blocked the flow of grains and metals from the region.
Both Russia and Ukraine play a strategic role in international commodity markets. Both are major exporters of commodities such as wheat and grains, oil, natural gas, coal, gold and other precious metals.
The war has affected both domestic production and crucial distribution chains to the rest of the world, driving up prices. The situation has been described as “catastrophic” by many countries, especially the poorest.
Experts warn of the consequences of what they call “extreme volatility” in markets following Russia’s invasion of Ukraine. There are also concerns regarding the impact on economic activity in countries still recovering from the covid-19 pandemic.
Below are the main export products from Ukraine and Russia whose distribution was affected by the war.
Russia’s economy is largely dependent on the export of oil and gas. The country is the world’s third largest oil exporter (following the European Union and Saudi Arabia) and one of the main gas exporters.
Before the invasion of Ukraine, Russia supplied 1 barrel of oil out of 10 consumed in the world. But today, with the war and the announcement by the United States, Canada and the United Kingdom to ban imports of Russian energy products, the international oil market is facing its greatest turbulence in years. 1970.
The international oil market has already been affected, but the situation might worsen
Experts say prices are likely to continue to rise as long as the war lasts, as there are few alternatives to replace Russian exports of around 5 million barrels per day.
OPEC (Organization of the Petroleum Exporting Countries), of which Russia is not a member, has indicated that it will not be easy to find such alternatives, as stated by the organization’s secretary general, Mohammad Barkindo.
“There is no capability in the world” that can replace Russian production, Barkindo says. He adds that “we have no control over current events, geopolitics, and it dictates the pace of the market.”
Even countries that import few Russian energy products will feel the impact, as prices for fuel sales to wholesalers are likely to rise.
Russia and Ukraine, the “breadbasket of Europe”, account for 29% of world wheat exports
Both Russia and Ukraine are major food exporters. The two countries, known as the “breadbasket of Europe”, account for 29% of global wheat exports and 19% of corn exports, according to data from JP Morgan bank. Wheat prices in some futures markets have reached 14-year highs.
Ukraine is the world’s largest producer of sunflower oil, and Russia ranks second, according to S&P Global Platts. Together, they represent 60% of world production.
Wheat and sunflower oil are important raw materials used in many food products. If harvesting or processing is damaged, or exports are interrupted, importing nations must find ways to replace this supply.
Analysts warn that the war’s impact on grain production might double international wheat prices. This might seriously affect several countries that depend on grain imports from the Black Sea region.
Turkey and Egypt receive nearly 70% of their wheat imports from Russia and Ukraine, which is also China’s main corn supplier.
World Food Program director David Beasley told the BBC that rising prices due to the conflict in Ukraine might have a catastrophic impact on poorer nations.
“In Lebanon, regarding 50% of their grain comes from Ukraine. Yemen, Syria, Tunisia, etc. depend on Ukraine as a grain supplier,” he said. “Russia and Ukraine will go from being a breadbasket to literally having to share the bread. It’s just an incredible reversal of reality.”
Russia is one of the world’s leading suppliers of metals used in everything from aluminum cans to copper cables and automotive components.
The country is the world’s fourth largest exporter of aluminum and one of the world’s top five producers of steel, nickel, palladium and copper. Ukraine is also a major supplier and holds a large share of palladium and platinum exports.
This means that due to Russia’s invasion of Ukraine, we may see an increase in the prices of cans and copper cables.
“We’ve seen that aluminum and nickel are up 30% year-to-date, and that will ultimately be passed on to consumers when they buy their aluminum beverage cans or when they do renovations in their house and will need copper for their cabling. All these prices enter into the general inflationary pressure,” Matthew Chamberlain, director of the London Metal Exchange (UK), told the BBC.
Russia remains the third largest gold producer in the world, following Australia and China. According to data from the World Council, in 2021 the country supplied the world with 350 tons of the precious metal.
In early March, gold hit its highest price since August 2020, trading at over US$2,000 per ounce (one ounce is approximately 28 grams).
This is due to capital inflows from investors looking for a safe haven in times of market uncertainty. But the price of other metals soared on fears of a supply disruption from Russia and Ukraine.
In early March, nickel – used in lithium-iron batteries – soared 76%, and palladium – used in catalytic converters in automobiles to reduce emissions – reached unprecedented levels, according to the Archyde.com news agency.
Any disruption in palladium supply, analysts say, might create serious problems for automakers.
“Russia accounts for 38% of global palladium production. As supply reductions cannot be compensated by other regions, the market risks falling into a considerable supply shortfall,” according to Daniel Briesemann, strategist of Commerzbank, to Business Insider.
The war in Ukraine might aggravate the difficulties of the semiconductor market
Ukraine is a major supplier of purified noble gases such as crypton and neon, the latter of which is essential for the manufacture of semiconductors.
According to data from consultancy firm TrendForce, Ukraine accounts for nearly 70% of global exports of purified neon gas, used for lasers that etch patterns in semiconductors.
Over 90% of the neon used by the US chip industry comes from Ukraine. Any change in its supply might exacerbate microchip shortages, which were already a significant problem in 2021.
“As Russia provides over 40% of the world’s palladium supply and Ukraine produces 70% of the world’s neon supply, we can expect global chip shortages to worsen if the conflict persists,” writes Tim Uy in a recent Moody’s Analytics report.
“During the 2014-15 war in Ukraine, neon prices increased several times, indicating the seriousness for the semiconductor industry. Semiconductor companies account for 70% of total neon demand, because neon is an integral part of the lithography process for making chips.”
