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Russia-Ukraine conflict: What it means for the commodity market?

Posted in Finance Articles, Total Reads: 2766 , Published on March 26, 2014

With ongoing tension between Ukraine and Russia continues to worsen, not only will it affect residents of two countries, but of other countries as well as commodities prices are on an upswing following the news of Crimea voting to join Russia. Russia is one of the major exporters of commodities like natural gas, potash, and palladium whereas Ukraine leads in export of agricultural commodities. This article attempts to explain how the various commodities are getting effected with conflict between the two nations not reaching any settlement.

Gold: Analysts are of the opinion that geopolitical tensions affect gold prices which seems to be justified at the moment as gold has gained 15% this year, after Crimea voted to leave Ukraine and become part of Russia again and is currently trading near its highest level in over 6 months with gold futures climbing to as high as $1,379. According to data from US Commodity Futures Trading Commission, long positions in gold have increased by 4 percent to 123,007 futures and options for the week ended March 11, 2014.

Gold is considered to be the safe haven asset and with political unrest continuing in Ukraine and likelihood of sanctions being imposed by US and Europe, investors are speculating gold price to touch $1500 in coming weeks.

Wheat and Corn: Reports from Department of Agriculture of US says that Ukraine will be the third largest corn exporter and fifth largest exporter of wheat in the current fiscal year.

Also, forecast suggest that Ukraine is expected to export 18.5 million tons of corn and 10 million tons of wheat which accounts for 16% and 5% of the global trade respectively.

Russia’s deadlock with West over Ukraine and threat of sanctions by the US seems to have brought good news for Indian wheat traders. Due to the conflict, global wheat prices have risen by 3% $ 290-300 per tons in less than a week’s time. Indian traders see it as a good opportunity to cash it on and want government to allow more wheat export from its stock.

With problems escalating, these two countries have a potential to put prices of corn and wheat to new highs. Since most of the Ukranian grain is exported through center of dispute, Crimea there is a possibility of military conflicts disrupting the shipments. If situation worsens further, and exports are cut off, we can witness price rising in near future.

Natural Gas: Russia is one of the largest exporters of oil and natural gas, with a significant portion of its supply piped through Ukraine. If supply is disrupted, or if fear of disruption persists, global energy prices could climb, leading to higher oil and gas prices in the United States and European countries.

Gas prices in Europe have been spiked earlier also in 2006 and 2009 when Russia stopped supplying gas to Ukraine because of price disputes.

Russia has signaled another gas war by threatening Kiev, capital of Ukraine which doubled its gas import from Russia to 45 million cubic meters as of 1st March 2014, for Kiev failed to pay for its outstanding gas debts. It had cut gas prices for Ukraine to one third after former President Victor Yanukovich rejected a trade pact with European Union to form closer ties with Russia last year.

Although Europe has become less dependent on gas imports via Ukraine with opening of new pipeline, Nordstream from Russia to Germany in 2011, but if conflict still persists sanctions are likely to be imposed on Russia including sanctions on gas imports which may give rise to shortage in gas supply and thus rise in price of natural gas in European countries.

Palladium and Potash: Potash is a commodity that has failed to come into spotlight, despite of the fact that Russia is among the few countries that produce it. It is mainly used in fertilizers and scarcity of which means low yield of crops. Also Russia is the largest producer of palladium which is widely used in making catalytic converters that help reduce harmful vehicle emissions. Prices of palladium and potash have reached their highest level in nearly a year over the concern of sanctions being imposed due to conflict between the two nations.

Conclusion: Though the immediate effect of the conflict seems to be minimal on prices of these commodities, but if problem continues for long, sanctions might get imposed which in turn will disrupt the supply of these commodities and hence will lead to surge in prices.

The article has been authored by Saurabh Tripathi, Department of Management   BITS PILANI


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