The war in Ukraine will go into its eighth month next week and commodity prices are coming off their record-breaking highs as the market adjusts to the new realities. As bne IntelliNews reported in the week after the war started, commodity prices spiked across the board as Russian tanks rolled into Ukraine. But since then, traders of Russian raw materials have taken the new extreme sanctions regime on board and found new raw material-hungry markets and customers.

The first to recover were wheat prices that soared to ten-year highs in the first months of the war, as the Russian naval blockade threatened to cause a global food crisis, but within a day of Russia and Ukraine cutting the Istanbul grain deal on July 22 they dropped back to below pre-war levels on the back of the prospect of a good harvest in Russia and some 40mn tonnes of grain – half left over from the last marketing year and half expected in this harvest – also reaching the market.

Most of the other commodities have seen similar returns to lower levels, but several remain at elevated levels compared to their pre-war prices. The most recent price to fall is that of gas, which has dropped from stratospheric levels after Gazprom cut off supplies to Europe via Nord Stream 1 pipeline indefinitely at the start of September. However, with the EU gas storage tanks 84% full as of September 13 (chart), fears that Europe will run out of gas this winter are diminishing and panic-driven demand for gas is fading.

Wheat

Russia is on course for a bumper harvest. Russian farmers have already harvested around 125mn tonnes of grain as of the start of September, the Russian Ministry of Agriculture wrote on its Telegram channel. It was reported earlier that the Ministry of Agriculture expects the Russian grain harvest in 2022 to reach 130mn tonnes, slightly off the all-time high of 135mn tonnes set in 2018. (chart)

Ukraine would have had a bumper harvest too, but the war has reduced the anticipated harvest by half this year. Nevertheless, Ukraine will still produce some 50mn tonnes of grain and intends to export around 40mn, which is down form the 48mn tonnes it exported last year. (chart)

The combination of the grain production from the two countries means that the market is currently well supplied with grain. Exports from the Black Sea ports were up by half (53%) in August on July as more and more ships arrived to deliver grain to harbours around the world. A total of 2.6mn tonnes were exported in August, down from the peak volumes of round 5mn tonnes a month usual for this time of the year, but still substantial amounts.

Chicago wheat futures were trading at the $8.4 per bushel mark as of September 13, easing slightly from the two-month high of $8.5 hit on September 9 on expectations of stronger supply, and well down from the peak this year of $12.74 set on May 17 at the height of the food crisis fears. (chart)

World supply forecasts have been revised higher by 3.6mn to 1.1bn bushels, as increases in production from Russia and Ukraine offset the decline beginning in stocks elsewhere.

Also, the results from the recent winter harvest in Russia point to record highs for both areas harvested and yields, according to the Russian Ministry of Agriculture, Trading Economics reports.

Still, concerns of disruptions from Russia and Ukraine, the world’s major exporters, remain after President Putin criticised the UN-brokered deal with Ukraine to establish a safe corridor for grain trade through the Black Sea last week, hinting that Russia may disrupt the flow of grain out of Ukraine again.

TTF gas

Much more dramatic has been the fall in gas futures traded on the Dutch TTF market, the primary wholesale spot market for buying gas in Europe.

Natural gas futures price fell for the third session in a row on September 13 to below €190 per megawatt hour ($2,059 per thousand cubic metres). (chart)

Gas prices have been on a wild ride in the last two months as Russian President Vladimir Putin played geopolitical poker with the rest of Europe and its gas supplies. Prices rose to a peak of €338.9/MWh ($3,657/1,000 cubic metres) on August 26 after Gazprom announced a “temporary” shut down of NS1 for more maintenance, stoking fears that Russia would cut Europe off completely from deliveries and provoke an energy crisis this winter.

However, since then European governments have released a raft of action plans and promises tens of billions of euros in relief and support packages to deal with the crisis, which has reassured traders.

Last week, European Commission President Ursula von der Leyen proposed a five-point plan to address the EU's worsening energy crisis, and national governments across the Continent have done likewise. One of the main planks of the plan is to cut gas consumption by 15% to conserve gas for the winter, first floated on July 21 by von der Leyen. The Bruegel think-tank has argued that would be sufficient for Europe to scrape through the winter with the gas reserves it has already built up.

The new EC plan reiterates actions to reduce consumption as well as introduces new elements like price caps. However, the proposal to fix a maximum price for gas remains controversial and the debate on the details is ongoing.

Nevertheless, even €190/MWh remains a very high price and more than double the €80-€90/MWh that TTF gas was trading at prior to the current showdown with Russia. That is 190% higher than the cost of gas a year ago.

 

Oil

Oil prices for the benchmark Brent blend have also come off their post-invasion high of $123.58 set on March 8, just over a week after the war started. In the confusion following the imposition of the “massive package” of sanctions oil prices remain very volatile. Russian oil exports were not explicitly sanctioned, but extensive self-sanctioning by traders meant stocks were building up in Russia and reduced the supplies on the open market.

However, starting on June 9 as Russia began to reorientate its exports from Europe to Asia, as bne IntelliNews described in a look at sanction leaks via tankers, the prices began to fall steadily from the most recent peak of $120 to around $95 now. (chart) However, like gas, oil prices remains 29.2% higher than they were a year earlier.

Prices may spike again in December after the G7 finance ministers announced that an oil price cap scheme will be introduced on December 5 that will attempt to cut the Kremlin off from its oil export revenues. Putin responded that Russia will simply stop exporting oil to any country that attempts to implement the scheme.

Opinion remains divided on what will happen. Some, like the economists at Institute of International Finance (IIF), believe the scheme will work, but due to the looming deep global recession enough oil demand will be destroyed that prices will fall sharply.

Others, like Russian investment bank BCS GM, argue that Russian oil companies are more flexible than most believe and will be able to scale back production enough so they can cut the rest of the world off and prices will soar to as much as $380 per barrel, according to JP Morgan.

One of the main arguments of the advocators of the oil price cap plan is that Russian companies cannot halt production without permanently wrecking their production capacity and so will be forced to sell at whatever prices the cap is set at.

 

The dynamics of Russia’s benchmark Ural blend of oil have been more volatile than those of Brent as the Kremlin has been forced to sell it at a discount thanks to the sanctions, mostly to India and China, which have taken up most of the slack created by the fall in demand from Europe.

In the first months of the war the typical $2 discount on Urals to the Brent blend blew out to $35, but as volumes shipped to Asia increased over the summer that discount contracted steadily and as bne IntelliNews reported, that discount fell to $6 in August after oil prices fell below $100. That discount might increase again once the oil price cap scheme is introduced as the Kremlin struggles to keep the non-aligned markets for its oil open. Indian officials said they are currently in talks with Russia about imports and prices, but have not made any decisions yet.

Ural’s prices, like Brent prices, peaked in the week following the invasion to $111 but fell very steeply to a low of $68 on April 26 before the market began to adjust. The price of Urals was pulled up to just over $100 over the summer, but since June 14 it has fallen again steadily, following Brent down. Currently Urals is trading at $75.4 as of September 13 – a $20 average discount under Brent prices. (chart) Nevertheless y/y the price of Urals remains up by just under 5%.

 

Coal

This is one of the few commodities where prices have not fallen recently. The cost of coal remains 145% more expensive at $436 per tonne as of September 13 than it was a year ago – slightly down from its recent all-time record high of $460. While the mark-up on TTF gas is higher, unlike gas, coal prices have shown no sell-off at all in recent months. (chart)

Russian coal exports to Asia have fallen to the lowest in four months in August, says Kpler. Russia’s coal seaborne exports to Asia plunged c17% m/m to c10mt in August. Among key destinations, exports to China decreased c15% m/m to 5mt in August, while supplies to India were up c19% to 1.8mt. Japan and South Korea lowered Russian coal imports by more than half to 1.5mt in total.

Russia was a major exporter of coal to Europe, accounting for a whopping 46.7% of all supplies worth $5bn in 2021. Coal exports to Europe were banned as part of the fifth package of sanctions in April – the first Russian energy product to be sanctioned – and that ban came into effect on August 10. According to reports, the ban has been very effective, which in turn has supported prices as EU countries scramble to find alternative supplies.

The lessons from coal are two-fold. The first is that it is possible to ban a Russian fuel completely. Coal, like oil, is almost all shipped to Europe and it was a ban on ships carrying Russian coal that was the mechanism used to enforce the sanctions.

The second lesson is that banning a fuel will push the price up. High prices are due to an increased demand for non-Russian coal and constant supply disruptions when sourcing coal from elsewhere. In addition, transport costs are significantly increased as coal from as far away as Australia has to cross the globe to reach European markets.

The International Energy Agency (IEA) sees coal consumption in Europe rising by 7% in 2022 on top of last year's 14% surge, Trading Economics reports, with the continent now turning to seaborne coal from South Africa, Indonesia and Australia.

Demand for coal in India, the world's second-biggest coal importer behind China, is expected to climb almost 10% in 2022 as the country's economy expands and electricity use increases, but India is willing to buy Russian coal, despite the long sea voyage to get it there.

The difficulties in selling coal will reduce Russian production by 18% this year, while that of Ukraine is expected to fall by half. And even the Russian exports of coal to Asia have been declining in recent months, reports the India Times, as the shipping sanctions were applied.

Russia's seaborne exports of all grades of coal to Asia dropped to their lowest in four months in August from 12.16mn tonnes in June to 10.15mn tonnes in August, according to commodities consultant Kpler. Exports to China were down from 5.87mn tonnes to 5mn tonnes in the same period, while exports to India were up from 1.5mn tonnes to 1.8mn tonnes in the same period. However, Russia’s overall exports of coal to China were also up in the period if you include coal transported by train, but Russia’s rail capacity to China is already maxed out.

India used to import only 300,000-700,000 tonnes of coal from Russia, but since the war started in Ukraine, it has more than doubled its imports from this source. The rise in Indian imports of oil has been even more dramatic.

Previously Japan was the biggest Asian buyer of Russian coal, but exports there have declined dramatically to 408,049 tonnes in August and will cease completely before the end of this year.

In Europe demand for coal soared as it boosted imports by more than any other region in the world over the first eight months of this year, reports Reuters, bringing in more than 15mn tonnes, a 35.5% y/y increase, according to Kpler.

Germany has been the biggest buyer as it abandons its plans to shut down all its coal-fired plants. Due to the ban on Russian coal, which previously made up three quarters of all its seaborne imports of coal, Germany was forced to source it from the other side of the planet, including Colombia and South Africa, significantly adding to costs.

 

Fertilisers

Urea ammonium nitrate, a key component in fertilisers, is another commodity that remains very expensive. Russia is Europe’s biggest fertiliser producer of many types, and prices were already high before the war started as tensions mounted at around $600 per tonne. (chart)

Like nearly everything else, prices soared after the war started, but settled back to around $600 per tonne, where they remain today. But that level is already three times higher than in most of 2021, when Russia was enjoying something of a boom and relations with the West were still cordial when the cost was circa $200.

Even before the war started, Russia was restructuring exports of fertilisers to ensure there was sufficient supply to meet domestic needs, and while urea has not been sanctioned, Russia has been limiting supplies, which has been a contributor to food inflation.

 

Metals

The situation amongst the metals has also returned to normal after spiking across the board during the first weeks of the war. Trading in nickel, produced by Russian metallurgical giant Nornickel, had to be shut down for a week on the London Metal Exchange (LME) after prices went through the roof and all trades made during the spike where prices hit $100,000 per tonne were cancelled by the exchange as it tried to reset the market.

Russian metals are deeply embedded in global markets and metals have been conspicuously absent from the expanding Western sanctions lists. In many metals Russia is already one of the dominant suppliers or has significant market power. It supplies a tenth of the world’s aluminium and copper, and a fifth of battery-grade nickel. Its dominance in precious metals such as palladium, key in the automotive and electronics industries, is even greater. The US and European aviation sectors are going to struggle without access to Russian titanium.

Gold prices spiked in the early days of the war but have fallen back to $1,706 per oz as of September 13. (chart)

 

Russia is already a major producer of copper, but its share in the global copper trade still remains small. As bne IntelliNews featured in “copper is the new gold”, the Udokan Copper mine went online last year and is expected to become a major player in the business. Copper prices soared to a new all-time record of over $10,000 per tonne but have since dropped back to $8,025. (chart)

Russia is already a major supplier of copper to China, which imported 390,442 tonnes in 2021, accounting for 11.4% of the country’s total copper imports, according to customs data.

 

Iron ore prices also jumped to a decade long high at the start of the war, but have since fallen back to $104.50 per tonne and are down 16.4% y/y. (chart)

Top steel producer and iron ore consumer China has announced more stimulus measures to support its coronavirus (COVID-19) hit economy that has lifted prices in the last few weeks. Overall demand has fallen as multiple steel plants in Europe have been forced to shut down due to the exorbitant cost of energy. Steelmaking is one of the most energy-intensive industries in Western Europe.

 

After its extreme spike in March, nickel prices have recovered to $24, 537 per tonne, but are still up 24.2% y/y. (chart)

The owner of Nornickel, oligarch Vladimir Potanin, avoided sanctions for the longest time of all the leading oligarchs, but eventually was added to the UK list, but his company remains unsanctioned.

Russia supplies about 10% of the world's nickel and Russia's Nornickel is the world's biggest provider of battery-grade nickel at 15%-20% of global supply, according to JPMorgan. Nornickel is also a leading producer of PGMs (platinum group metals), which are crucial for the production of electric cars. The International Energy Agency (IEA) forecast earlier this year that nickel demand in electric vehicles (EVs) will grow by a factor of eight from 2020 to 2030.

Russia may be a major supplier of nickel, but the US imports most of its needs from Canada. China is Russia’s biggest buyer of nickel, which is also used to make stainless steel. China’s nickel imports from Russia were 44,693 tonnes in 2021, accounting for 20.3% of China’s total nickel imports, according to Chinese customs data.

Palladium was caught up in the nickel spike in March, but since then has been much less affected than nickel and its price of $2,134 is only 11% up y/y. The US imports 35% of its palladium, a critical element in catalytic converters, a component in gas-powered vehicles, from Russia, more than any other country.

Aluminium is another key metal produced by Russia. When oligarch Oleg Deripaska, the owner of Russia’s biggest aluminium producer Rusal, was sanctioned in 2018 aluminium prices spiked 40% the next day. Deripaksa has also been sanctioned but his companies have not.

Once burnt, twice shy; this time round the market does not seem to fear that the Office of Foreign Assets Control (OFAC) will interfere with the aluminium business again. Following a spike in March, prices for aluminium have dropped back to below their pre-war levels as supplies of the white metal continue to flow smoothly. The current price of $2,335 is 17.4% below the same day a year earlier. (chart)

 

Of all the metals Russia produces it probably has the most market power with titanium. Russia is the third-largest producer with a share of around 13% to 13.5% after China and Japan. Russia and Ukraine combined account for 16% of global output. Russia’s share in sponge production is 22% and 4% for Ukraine. Titanium is extremely important not just for commercial aircraft, but is also used for the production of defence equipment and as a result is of paramount importance for national security.

The price for titanium was $11 per kilo as of September 13 and the price remains up by half (54.3%) y/y. (chart)

Boeing remains the most exposed to Russia’s titanium, which accounts for approximately 15% of the Boeing 787 airframe by weight. In the Airbus A350XWB, it is about 14%, and is used in landing gear, pylons, attachments, door surrounds, frames and other parts. Boeing employed several thousand people in Russia, and is also a shareholder in Russia’s biggest titanium producer, VSMPO-AVISMA Corporation, but pulled out of Russia after the war started and is currently living on reserves while it tries to find a new supplier.