(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Clyde Russell
Feb 23 - One year after Russia invaded Ukraine and sent
commodities into turmoil, it's clear that the main takeaway is
that markets are remarkably resilient and adapt quickly to
changing circumstances.
While the attack on Feb. 24 last year initially sent prices
for commodities such as crude oil, liquefied natural gas (LNG)
and coal sky-rocketing, they have all returned to, or fallen
below, the pre-invasion levels.
The commodity trading world has effectively and in a short
period of time managed to re-route Russian exports of crude oil,
refined products and coal, as well as adapt to the loss of much
of Russia's pipeline natural gas.
Global crude oil benchmark Brent futures ended at
$80.50 a barrel on Wednesday, below the $96.84 from Feb. 23 last
year, while spot LNG for delivery to north Asia ended
last week at $16 per million British thermal units, down from
$24.40 in the week before the invasion, which Moscow calls a
"special military operation."
Spot iron ore , as assessed by commodity
price reporting agency Argus, finished at $130.45 a tonne on
Wednesday, down from $137.30 on Feb. 23 last year.
Benchmark Australian thermal coal at Newcastle Port closed last week at $195.13 a tonne, down from
the $249.25 the week prior to the attack on Ukraine. The daily
spot price assessed by globalCoal is even weaker, ending at
$169.91 a tonne on Wednesday.
London-traded copper closed at $9,137 a tonne on
Wednesday, down from the $9,866 from Feb. 23 last year.
All of these commodities saw prices surge after the
invasion, with thermal coal and spot LNG hitting record highs as
fears of an energy crisis caused by the threatened loss of
Russian supplies swept the global markets.
But these fears were never fully realised, largely because
Russian commodities were re-routed to new buyers and some
consuming nations cut consumption of commodities such as natural
gas.
Europe, the continent that was most reliant on Russian
energy commodities, has also managed to largely end its reliance
on piped natural gas by switching to LNG, as well as finding
alternatives to Russian crude, fuels and coal.
There are ongoing consequences of the initial spike in
commodity prices, with retail fuel and electricity costs in many
countries still well above pre-invasion levels. High energy
prices are also a factor in the current bout of inflation and
the associated tightening of monetary policy.
CHINA BACK DRIVING
But the bigger question for commodity markets is whether the
process of re-routing Russia's exports away from Europe and
other Western countries and mainly to Asia is now complete, and
therefore fully priced in.
Certainly, the short-term prices of major commodities have
largely returned to being driven by what could be described as
traditional factors, such as the outlook for China's economy,
especially with the world's largest buyer of natural resources
aiming to accelerate growth this year.
Optimism over China's economy has been the main driver of a
rally in iron ore, which has jumped 65% since hitting its 2022
low of $79 a tonne on Oct. 31.
Iron ore tends to be one of the first commodities to respond
to optimism over China's outlook. Mills stock up on the raw
material as they boost output of steel ahead of the anticipated
demand from the construction and infrastructure sectors.
China is also one of the main beneficiaries of the war in
Ukraine from a commodity perspective, gaining access to heavily
discounted supplies of Russian crude oil and coal, while
maintaining the ability to refine the oil into fuels and export
them to Asian markets that have been short of diesel as Europe
seeks to replace what it used to buy from Russia.
It could be argued that an ongoing stalemate in the war in
Ukraine, where neither side can defeat the other but both are
unwilling to seek peace, is the current best outcome for China.
Such a situation maintains China's access to cheap Russian
commodities, increases Moscow's dependence on Beijing, while
keeping Western countries focused on the war and its costs to
their economies and political unity.
India is another beneficiary from cheap Russian crude and
coal, while countries in the Middle East are starting to import
Russian refined products, most likely to use domestically, which
in turn allows them to export their locally produced fuels and
pocket the difference between cheap Russian supplies and the
higher global prices.
Other countries that have benefited from the war in Ukraine
include commodity exporters such as Australia, but with prices
largely below pre-invasion levels, it's likely the boost will
start to fade over the coming year.
It's also worth noting that in the months after the invasion
much commentary was devoted to how Russia was benefiting from
the higher commodity prices and how the Western sanctions on
Moscow's exports were failing.
That dynamic has now shifted and while Russia is still able
to export more or less the same volumes it did prior to the war
in Ukraine, it's now having to offer substantial discounts and
it's likely that 2023 will see revenue from energy exports drop
substantially.
It could be argued that this is the exact intention of the
Western sanctions, to cut Russia's revenue while still ensuring
global commodity markets are well supplied.
The opinions expressed here are those of the author, a columnist
for Reuters.
(Editing by Stephen Coates)
Messaging: clyde.russell.thomsonreuters.com@reuters.net))
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