Russia’s war on Ukraine sparks commodities upheaval

Nearly three weeks into Russia’s invasion of Ukraine, many questions about the conflict are still being debated. Could the West have prevented the crisis? Will the unprecedented level of sanctions levelled against Russia – which Russian President Vladimir Putin has referred to as “economic war” — stop the bloodshed? Will the commodities price shock cause a global recession or a period of stagflation? And perhaps most uncertain, just how far is Putin willing to go to secure the former Soviet state? 

Russia’s willingness to target civilians has been chilling to watch. But Putin’s warning ahead of the invasion to other powers not to intervene, threatening: “… consequences you have never encountered in your history,” along with his placing Russian nuclear forces on alert days later, fuelled fears of a catastrophic escalation. 

While the invasion is not going as Putin had anticipated (Russian troops have experienced fierce resistance, significant losses, and even some embarrassing setbacks), it’s difficult to see how the conflict will be resolved. At presstime in mid-March, peace talks have been so far unsuccessful. Meanwhile, international sanctions have taken a huge toll on Russia’s economy. 

Even if a breakthrough in peace talks is achieved in the near-term, the conflict has already triggered what are likely to be long-lasting changes in commodity markets. Many of these shifts could be beneficial to North American producers. In addition to being the world’s third largest producer of oil, and second largest producer of natural gas, Russia is an important source of coal, refined uranium and palladium, fertilizer and grains. The conflict has caused commodity markets to blow up across the board. 

The most dramatic example has been nickel, which shot up 250% over two days in March due to the perfect storm of tight supply, supply disruption fears, and a massive short squeeze. (Russia supplies about 17% of the world’s Class 1 nickel, used mostly in stainless steel, but also in rising demand for electric vehicle batteries.) In response to the volatility, the London Metals Exchange suspended trading in the metal on Mar. 8, after “disorderly” trading became disconnected from the underlying physical market, creating “systemic risk” in the market. Trading resumed – briefly – on Mar. 16. 

With Western buyers snubbing Russian commodities and scrambling to replace that supply, analysts at BMO expect an eventual “redistribution” of Russia’s exports away from Europe and North America and toward China. Bloomberg Intelligence analysts came to a similar conclusion in a March research note: “Russia may have established a new commodity world order that tilts reliable supply toward North America.” 

Moreover, some analysts believe the conflict will also serve to accelerate decarbonization as well as a move to energy security for Europe. “[Russia’s actions] may inadvertently trigger a faster energy transition,” wrote Simon Flowers, chief analyst and chairman of Wood Mackenzie in a post on Feb. 24. “Threats to supplies and high prices resulting from the conflict could harden policy and action underway in the EU, UK and elsewhere to move away from fossil fuels.” 

Indeed, the European Union is looking at ways to reduce its dependence on Russian oil and gas — revenues from which are still fuelling Russia’s war treasury — in a hurry. In early March, the International Energy Agency (IEA) outlined a 10-point plan to reduce reliance on Russian natural gas by one third within a year. Last year, 45% of the EU’s natural gas imports were from Russia, with Russian oil accounting for about a quarter of its total supply. (The U.S. has banned Russian oil outright, although it is in a far better position to do so as the world’s top producer.) 

“Nobody is under any illusions anymore,” said IEA executive director Fatih Birol in a press release. “Russia’s use of its natural gas resources as an economic and political weapon show Europe needs to act quickly to be ready to face considerable uncertainty over Russian gas supplies next winter.” 

The IEA plan includes diversifying natural gas sources, keeping nuclear plants that had been scheduled to close online longer, an accelerated buildout of new wind and solar energy capacity, and a short-term windfall tax on oil and gas companies. The plan is consistent with the IEA’s decarbonization plan, but it does note that the EU could pivot away from Russian energy faster by using more thermal coal and oil in the near term. 

The European Commission went even further with a plan released on Mar. 8 to completely wean itself of Russian fossil fuels before 2030 – a very ambitious target given the EU’s current reliance on the energy giant. Like the IEA, however, it’s not abandoning its green energy aspirations. “We must become independent from Russian oil, coal and gas,” said Commission President Ursula von der Leyen in a release. “We simply cannot rely on a supplier who explicitly threatens us. We need to act now to mitigate the impact of rising energy prices, diversify our gas supply for next winter and accelerate the clean energy transition. The quicker we switch to renewables and hydrogen, combined with more energy efficiency, the quicker we will be truly independent and master our energy system.” 

On this side of the Atlantic, it’s worth noting that the realignment of commodity markets comes as efforts to develop a North American battery supply chain are starting to result in real investment in Canada. EV manufacturers have for some time been concerned with both security of supply of critical minerals and with ensuring their supply chains are not exposed to human rights risks or other ESG risks. 

In early March, BASF announced it would open a facility in Bécancour, Que., to produce and recycle cathode active materials (CAM) for the North American EV market in 2025. Several days later, GM and POSCO Chemical announced they would build a new US$400-million CAM facility, also in Bécancour. 

“GM and our supplier partners are creating a new, more secure and more sustainable ecosystem for EVs, built on a foundation of North American resources, technology and manufacturing expertise,” said Doug Parks, GM’s executive VP, Global Product Development, Purchasing and Supply Chain, adding that “Canada is playing an important role in our all-electric future.”