Ukraine conflict: Potential long-lasting impacts on global commodity markets
As the Russia-Ukraine conflict continues there is now a well-entrenched ‘conflict premium’ in place as uncertainty overshadows both global growth and international trade.
The price of energy, as well as steel, cement and aluminium producers are all likely to rise significantly as a result of the Russian invasion of Ukraine. With nearly all price increases in commodity classes where Russia has a significant market share factoring in a ‘conflict premium’. This will put pressure on consuming economies who will have to become more willing to pay premium prices for commodities sourced from alternative markets. This will reverberate into construction, automotive and general goods and services at all levels.
Prior to the conflict, Commodity Insights had been analysing various supply shocks, however it is clearly evident in our modelled price data, that the magnitude of a ‘conflict premium’ is significantly more than recent supply or demand shocks (as shown in the chart below). This is consistent with our recent findings of a US$200-250/t conflict premium in metallurgical coal and a US$125/t conflict premium in thermal coal markets.
Gas markets
Moreover, as LNG exports to Europe continue to increase, this will tighten stocks further and place increased pressure on LNG prices, which were already at extremely high levels into northeast Asia (US$34/MMBtu) and Europe (US$38/MMBtu) at the time of writing. At these sky-high prices it is almost impossible for importers to manage their contract risk. Accordingly, many buyers are seeking to sign mid to long term contracts, indexed to oil or Henry Hub, given that spot Asian prices are forecast to stay well above oil-indexed levels throughout 2022.
Commodity Insights has analysed the impact of various market supply and demand shocks on Asian LNG prices over the past five years, and found that clearly the Ukraine/Russia conflict has had the largest impact on price (US$20/MMBtu), presumably driven by Russia’s significant supply share in this market.
The latest price increases for LNG are likely to incentivise new LNG investment (both import terminals and exporting facilities) however in our view, there is insufficient new supply capacity coming until 2025. This will result in further market tightness as regardless of the outcome of the Ukraine/Russian conflict the long-term willingness of European economies to procure Russian energy will take on a completely new perspective.