How Russia’s War in Ukraine Is Choking the World’s Supply of Natural Resources
Russia is a commodities powerhouse, producing and exporting huge amounts of materials the world uses to build cars, transport people and goods, make bread and keep the lights on.
Its invasion of Ukraine is constraining those crucial supplies—or threatening to—as it becomes increasingly isolated from the global economy, driving up prices in the process.
Russia earns more than $1 billion a day exporting its oil and gas, much of which goes to Europe. Its aluminum and nickel end up in drinks cans, cars and electric batteries, while its palladium is needed to curb vehicle emissions. It’s also a giant wheat exporter and a key low-cost shipper of every kind of crop fertilizer.
Here’s a look at some of Russia’s key commodities exports, who relies on them and what choking those supplies means:
ENERGY
Crude
The U.S., U.K. and Canada have banned imports of Russian oil, and many companies are self-sanctioning, partly for fear of reputational damage.
Germany, Poland and Hungary are among those most exposed to any loss of Russian oil as they have refineries dependent on deliveries via pipeline from the nation, and may find it hard to seek alternatives.
All oil producers would benefit from higher prices, but consumers from motorists to airlines face rising fuel bills. Key questions include whether European refiners will cut processing rates as they struggle to find alternative crudes and how much Russian supply is diverted to Asia from Europe.
Refined products
The European market is most exposed to the loss of Russian diesel and was already tight before the invasion, while Russian fuel oil—used as a feedstock for further processing—has been particularly important to U.S. refineries.
A European diesel shortage benefits refiners in the Middle East and Asia and traders have snapped up ships to haul barrels to Europe to fill the gap. Heavy crude producers would also be winners from a Russian supply shock, and it’s been suggested the U.S. may turn to Venezuela—whose oil is currently subject to sanctions. Revival of the 2015 Iran nuclear deal could boost flows from the Persian Gulf country.
Natural Gas
Moscow threatened to cut supply on a key pipeline to Europe in response to sanctions. To reduce the risks to its energy security, the European Union plans to curb the region’s import needs from Russia by two-thirds this year.
Today, countries like Germany are particularly dependent on Russian gas. That could be an opportunity for liquefied natural gas exporters like the U.S. and Qatar, who move the fuel on ships.
Higher gas prices not only push up household energy bills, but drive broader inflation by boosting production costs of goods. Some nations like Germany and Italy are considering prolonging the usage of coal plants—potentially hindering green goals in the short term.
Coal
Europe is Russia’s top buyer of thermal coal, used in power stations largely in central and eastern Europe. Colombian, South African and U.S. suppliers are already getting more demand, and Europe could even source as far away as Australia and Indonesia.
Like gas, higher coal prices mean bigger energy bills for households and heavy users such as the steel industry. Coal looks set to be attractive for a while as the cost of burning it is lower than gas.
FOOD
Wheat
Both Russia and Ukraine are crucial to global wheat flows, and analysts have cut sales outlooks with Ukrainian ports shut and some vessels avoiding the region. African and Asian importers are among the biggest buyers of typically cheap Black Sea wheat and while they can look elsewhere, it may cost more to source supplies from farther afield.
Seeking alternative supply could be good news for sales from the European Union, Australia and North America. Shipments from India, which isn’t traditionally a major exporter, are swelling as higher global prices make its grain more competitive.
Costlier wheat and the risk of shortages will further raise bread costs at a time when food has never been so expensive, exacerbating a global hunger crisis. Food is unlikely to come under sanctions, though there’s a possibility some buyers could try to reduce their dependence on Russian grain.
Sunflowers
The war is also roiling global supplies of sunflower oil, as the closure of Ukrainian ports cuts off flows from a country that accounts for roughly a half of all exports of the key cooking oil. Russia itself is the second-biggest shipper of the oil. That’s already fueled warnings that European grocery stores could soon run out of supplies and helping to keep vegetable oil prices near record highs.
Fertilizers
The fertilizer market was already constrained before the war due to plant shutdowns, higher trade tariffs and sanctions on Belarus, and now it’s on the brink of chaos. Russia, which accounts for almost a fifth of combined exports of the three main nutrient types, has urged its producers to halt shipments.
That would make it much harder for countries from agricultural giants Brazil and the U.S. to South Africa and India to source fertilizers crucial to growing all types of crops. Grocery prices could climb even higher if food output falls or farmers pass on the extra costs.
Producers such as CF Industries Holdings Inc. in the U.S., Canada’s Nutrien Ltd. and Norway’s Yara International ASA could benefit if they fill a gap in Russian supply. With spring arriving, the upcoming U.S. corn planting season will give the first real glimpse at how high fertilizer prices will play out for farmers.
METALS
Nickel
The market was thrown into chaos in early March when worries about Russian supply and short-covering sent prices rocketing, forcing the London Metal Exchange to take the extraordinary step of suspending nickel trading.
Russia is a key supplier of a type of nickel used to make steel and electric-vehicle batteries. Elon Musk has said it’s the battery metal that concerns him the most and that he’s looking to cut usage in Tesla Inc. batteries.
Aluminum
The world was already running low before disruption at Russian ports exacerbated shortages. That’s straining manufacturers in the aerospace, auto and construction sectors—particularly in Europe—and analysts say Russian supplies are crucial to avoid a bigger scarcity. It has created an opportunity for traders to make money shipping aluminum to Europe from places like China.
Higher costs could feed into consumer goods like packaging, cars and mobile phones. The worry is that the pressures, including from higher energy prices, will prove too great and lead to reduced aluminum demand.
Palladium and Platinum
It’s too early to say if supply has been impacted in Russia, which exports most of its output of the metals that are mainly used in catalytic converters.
Any disruption would come just as auto demand is poised to improve and would leave North American and European buyers most exposed. It could benefit rival miners in South Africa, Zimbabwe and North America—especially for palladium.
The metals account for a small part of car costs and so showroom prices are unlikely to change much unless prices spike a lot and stay there.
But with Russia more key for palladium, there’s a chance buyers could switch toward platinum, which has many similar applications. Jewelry and other industrial sectors could feel the pinch, but are smaller consumers.
Steel
Russia’s steelmakers are facing difficulty exporting to Europe as buyers turn away, and the European Union is contemplating banning certain products.
Turkey and Poland are likely to be most affected by disrupted flows. European producers like ArcelorMittal SA and Thyssenkrupp AG are benefiting from higher prices as Russian supply dwindles, though that’s partly offset by high energy costs.
The construction sector is hardest hit by high prices, though consumers may not be too affected as steel makes up a small share of the cost of making everything from household appliances to cars.
A key risk is that even with record prices, some European mills may be forced to shut due to a lack of Russian feedstock and higher energy costs.