Ukraine crisis threatens upheaval of global commodities trading
by: BARRY FITZGERALD AND SUE NEALES
From: The Australian
March 08, 2014 12:00AM
THE heavy geopolitical overtones to the flash point on the Crimean peninsula in Ukraine has global commodity markets working overtime on the consequences the crisis could serve up to global energy, minerals and agriculture trade flows.
The initial assessment of the escalating tension by commodity markets was that most (price) concern would be shown in oil and gas markets because of Russia’s dominant supply position to Europe, and Ukraine’s strategically important status as a major thoroughfare for the delivery of that energy.
But the resultant spike in prices did not last, with the prospect of a gas revenue-dependent Russia turning off the gas – or its gas being turned back under some yet to eventuate embargo by western Europe, considered a remote possibility.
The threat of disruption nevertheless remains in what Deutsche Bank’s commodities desk described as a “new event risk for commodity markets”.
Europe relies on Russia for 30 per cent of its gas supply, of which 50 per cent has to make its way across Ukraine. The reliance is down from the 80 per cent level before the recent start-up of a new pipeline beneath the Baltic Sea, but remains sufficiently high for the potential for a loss of supply to be a cause of major concern in western Europe, most notably Germany.
A roll call of commodity price moves since Russia alarmed the Western world by stepping up its military presence in Crimea does show fear at work, but mainly in the soft commodities of wheat and corn, where prices have in the past week risen 9 per cent and 8 per cent, respectively. Australia, as the world’s fourth-biggest exporter of wheat, stands to benefit if the price rises are sustained.
According to ANZ’s commodities desk, Russia and Ukraine – long referred to as the bread basket of Europe – are forecast to export 26.5 million tonnes of wheat in the 2013-14 marketing season, accounting for 17 per cent of world supply. And in corn, Ukraine itself is a top five corn producer, meeting about 16 per cent of global supply.
While no disruptions to exports have been reported, it is the potential for the increased military build-up in Crimea and the Black Sea in general that has commodity traders pondering where next for wheat.
Rabobank International executive director Berry Marttin said this week he was increasingly uneasy about the military situation around the Black Sea.
Mr Marttin, in Australia as a keynote speaker at the annual Australian Bureau of Agricultural and Resource Economics and Sciences outlook conference, said it was a critical time of the year for Ukraine and the Crimean peninsula, where vast areas of wheat and other grains were due to be sown soon, now that winter was receding.
He said it was impossible to find out what impact the military crisis was having on ordinary farmers and agricultural supply chains. World grain markets are already starting to react upwards because of this uncertainty.
“Because it’s so close to the planting season, what will be critical will be whether fertilisers, seed, machinery and chemicals have been affected, because that could hold back the harvest and affect total crop yield,” Mr Marttin said.
The agricultural banking expert fears that if less crop is planted than usual or is sown without fertilisers, future grain shortages could cause global food prices to soar in six months, as they did in 2007-08 after several concurrent crop failures, leading to political and civil unrest worldwide, ultimately leading to the Arab Spring.
Australia’s nickel producers could be another beneficiary from the Crimean turmoil, thanks to the world leading production that comes from Russia’s mighty Norilsk.
Again, there is no disruption to nickel from Russia, but prices for the steelmaking raw material have firmed by 7.5 per cent in the last week, albeit with the ban on laterite nickel ores from Indonesia being the main factor.
BHP Billiton is a reluctant owner of its loss-making nickel business but is now at least enjoying higher prices.
Australia’s biggest miner is also the biggest energy producer, so would stand to benefit from the shift in energy supply patterns that would emerge from a complete breakdown in the Russian and western world relationship. But more likely is the rub-off effect for BHP from the Crimean crisis on demand for non-Russian potash.
Russia is the biggest producer of the crop fertiliser, followed closely by Canada. And in Canada, the market values of potash producers have been improving, due to the Crimean crisis and the prospect of a marketing war between Russia’s two biggest producers coming to an end.
BHP has plans to make its Jansen project in Canada its fifth “pillar” alongside iron ore, copper, coal and petroleum.
It is a strategy based on the rising demand for more fertiliser from the countries with the world’s biggest, second-biggest and fifth-biggest populations – China, India and Brazil. The thought that the long-term supply situation could be threatened by a prolonged crisis in Crimea would be a consideration in their long-term sourcing plans.
The benefits that could flow BHP’s way from a relaxation of the oil and gas export prohibition rules in the US should Russia implode is too far-fetched for commodity analysts to give any serious consideration.
BHP is a supplier of coking coal and manganese to Ukraine’s steel industry. Asked yesterday if the events of the last week in Crimea had prompted a shift in its commodity price expectations, the group’s marketing president, Mike Henry, said there had been no change.
Much more than a potential fillip for Australian wheat growers and miners from the Crimean crisis is at stake, according to the Australia-Russia Business Council. It has warned the Abbott government against joining any US and European-led trade sanctions against Russia over the crisis, saying more than $2 billion in bilateral trade was at stake.
“Trade sanctions will mean that real Australian jobs will be lost and significant Australian investments will be trashed,” the council told The Weekend Australian. “In the near term, this will penalise hardest of all Australia’s strong suits: the mining sector and a livestock and meat sector still reeling from the previous Australian government’s market closures,” it added.
The council acknowledged that trade sanctions can have a legitimate role to play in international affairs, in extreme circumstances.
“But any response to events in Ukraine and the Crimea must be carefully considered, given what is at stake,” the council said. “The recent events in Crimea are cause for genuine concern.”
It added that it was not passing comment on the “merits or otherwise of calls for autonomy by the ethnic Russian communities that dominate Ukraine’s far east”.
It said its comments on the crisis were framed in response to comments by Foreign Minister Julie Bishop. Earlier in the week, Ms Bishop said there had been talk about economic and political isolation of Russia over the crisis, and that US Secretary of State John Kerry had said there would be “very serious repercussions from the US and other countries, including sanctions to isolate Russia economically”.
The US has since followed up with travel bans and asset freezes on Russians, in response to the strengthening of Russia’s presence in Crimea, and European Union said it was ready to follow suit.
The Australia-Russia Business Council said many Australian jobs and fixed investments were tied up with Russian trade, particularly in the livestock and meat industry, with Russia now a $200 million annual export market. “This market has been a key stabilising influence in a livestock industry hit by the previous Australian government’s ban on Indonesian trade and the ravages of drought,” it said.
The partly Russian-owned Gladstone alumina refinery supplies Siberian aluminium smelters, worth billions over the years. Australia, in the meantime, meets its energy shortage by importing $700m in petroleum products annually from Russia.
The ARBC said that as Australia currently held the chair at the UN Security Council, it would no doubt be asked to “show a leadership role in the context of the Ukraine by many Security Council members, particularly those in western Europe who have their own significant bilateral interests at stake in this matter”.
“It is no doubt a difficult position for Australia to be in, but we expect cool Australian heads to be brought to the prospect of trade sanctions. Many Australian jobs now and in the future rest on this measured approach. Once lost under such circumstances, Russian trade will be extremely hard to rebuild; this at a time when its growth prospects are the highest in memory,” the council said.