Trade dislocations owing to sanctions, high power prices and disruption to production facilities in the conflict zone are three major threats to the metals and mining industry as a result of escalating conflict between Russia and Ukraine.
Energy research and consultant Wood Mackenzie VP Robin Griffin in a February press release stated, “the impacts of any sanctions will depend on the exact nature of constraints put on Russian commodities and companies”.
He added that, Russian trade had typically stood up well during past sanctions, but previous policies had been targeted, often focused on individuals and specific companies. Whereas a Europewide or United Nations-led global approach would be a unique challenge.
At the time, he stated that the most likely outcome of a strict European Union (EU) sanctions regime would be that affected Russian-sourced commodities would be redirected and a trade shift would see European demand backfilled. But he stressed that such a shift would be “messy”, as there are often more constraints than expected owing to quality differences.
An analysis of Russia’s supply share of global metals and mining markets suggests bulk commodities would be most at risk.
It is involved in more than 15% of the seaborne metallurgical and thermal coal trades. Importantly, Russia supplies Europe with almost all of its low sulphur-content pulverised coal injection (PCI) coal, and 60% of its high-energy thermal coal.
A blanket EU ban on Russian coal imports – unlikely though it may be – would mean a large hole in EU coal supply.
Meanwhile, replacement for low sulphur PCI would be near impossible in the short term. Australia – the only other major supplier of PCI coals – has seen spot PCI supplies dry up almost completely since mid-2021.
For base metals, Russian supply is not insignificant, but the sanctions are most likely to cause changes in regional, rather than global pricing. Under most circumstances China is likely to be able to take some of the material redirected from Europe. For instance, 75% of Russia’s 300 000 t/y to 400 000 t/y of lead concentrates go to China, with much of the remainder ending up in Kazakhstan.
Another major threat, as a result of escalating the conflict, is the potential for higher power and energy prices, particularly affecting supply of energy-intensive products. The relationship between gas and power prices is already playing out in EU markets, and any further price rises would push electricity prices higher as well.
He stated that the ultimate impact on commodities markets would depend on the geographic spread of the conflict, and the breadth of retaliatory sanctions. Trade bans – if strictly implemented – would eventually see Russian products diverted to other markets.
“As we have seen, the rebalancing can be messy and typically comes with a price impact. There is little doubt that any conflict would add to the growing inefficiency of commodity supply,” he concluded.