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The Impact of Ukraine’s War on Commodity Markets

The Impact of Ukraine’s War on Commodity Markets

  • Wilson Tomás • Research Analyst at Banco Big Mozambique

The year 2022 started with global markets in turmoil, following the increasing number of Covid-19 cases by the Omicron variant, and a paradigm shift, with rising inflation reaching values not seen for several decades. This inflation had been supported by an upturn in demand as economies reopened, disruptions in supply chains, and an upward trajectory in commodity prices as a result of gaps created between demand and supply.

With the slowdown in Covid-19 cases since the beginning of February almost everywhere in the world, a reduction in volatility in the financial markets was expected. However, the onset of the military conflict in Ukraine has reduced the prospects for economic growth and further exacerbated the phenomenon of rising inflation.

Russia, which in 2021 was the world’s largest exporter of natural gas, the second largest producer of oil and the third largest producer of wheat, has been subject to tough sanctions by the international community following the military invasion of Ukraine. The sanctions imposed on Russia and the conflict in Ukraine have affected the exports of these countries, thus reducing the availability of these commodities in the global markets, resulting in a rise in prices for these commodities.

Assuming this economic principle, soon after the first news about the invasion and the resulting sanctions, the markets reacted, within a short period of time, with a significant rise in the prices of oil and other commodities, anticipating a drop in supply levels.

Brent crude oil reached 2008 highs of close to USD/barrel 130 (up +29%), while the price of natural gas also maintained an upward trend, rising to USD/mmBTU 6.32 (+38%) in early April. As an alternative energy source to natural gas, the use of coal increased, particularly in Europe, which caused the price to skyrocket to USD/T 438.35 (+130%).

On the other hand, the price of wheat also increased significantly, reaching USD/Bushel 1425.25 (+63%). Except for the price of natural gas, which peaked in April, the peaks in the prices of the remaining commodities were observed in early March.
Despite an initial shock in late February and early March, the prices of several commodities, with the exception of natural gas, have been falling in recent weeks due to a number of factors.

In particular, China, which is one of the world’s leading consumers of commodities, has been suffering from the proliferation of new cases of Covid-19, implementing restrictive lockdowns in the regions that have seen the largest increases in cases.

Mozambique has been no exception, and despite being a market with administratively defined prices for various goods, the rise in oil prices in international markets has become unaffordable.

On the other hand, world stocks of wheat have been steadily increasing as a result of an above estimated harvest by Australia, while the price of coal has been reducing following a significant increase in production, which occurred after the price rise. The attempts to negotiate an end to the war between Russia and Ukraine, though unsuccessful, have helped calm the markets. With these events, despite the reduction in prices that has been observed, these still remain well above pre-war levels.

In relation to natural gas, the panorama has been different and, despite the international community’s calls for an embargo on Russian gas, this has proven to be a complex situation due to the high level of dependence of European countries on Russian gas.

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The costs and logistics for a full transition are significant, and although several world producers have shown intentions to increase exports to Europe in the coming years, replacing gas imports would represent just over 30% of the world LNG market.

This geopolitical circusntance, which has resulted in a generalized rise in commodities, has proved to be an even more serious situation for countries importing these goods.

Mozambique was no exception. Even as a market with administratively defined prices of various goods, the rise in oil prices in international markets became unaffordable, leading to increases in the prices of all fuels about three weeks after the invasion of Ukraine, something that will naturally affect locally the prices of other goods and services.

On the other hand, despite the immediate impact on prices and a potential rise in inflation in the short term, the rise in commodity prices may benefit the country in terms of exports, bearing in mind the weight of exports of goods such as coal, aluminum and gas, whose prices have remained high.

Mozambique was no exception and, despite being a market with administratively defined prices of various goods, the rise in oil prices in international markets has become unaffordable.

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