How Russia-Ukraine war could impact demand and prices for key commodities

Swiss investment banking and financial services firm Credit Suisse foresees commodity prices to spike in the near term, especially those of base metals, coal and gas, due to the ongoing war between Russia and Ukraine.

Zinc prices for immediate delivery rose 1%, while copper spot fell 0.9% last week. Iron ore prices jumped 3.7% and metallurgical coal (met or coking coal) surged 2.9%. 

The biggest spike of them all was seen in thermal coal, with spot rates surging 35.8% to $247 per tonne.

Credit Suisse said coal for Newcastle delivery at $248 per tonne illustrates the tightness in the market and that there is no capacity to replace Russian coal if the Kremlin were to cut energy exports to Europe.

“We doubt that Europe would willingly decide to stop gas or coal imports from Russia, and doubt Russia would decide to cut off its major exports. The gas situation is well known, but coal has received less attention,” Carsten Riek, Credit Suisse’s head of steel and mining research in Europe, wrote in a note to clients.

Europe relies heavily on Russia for its energy needs, and it may have to secure large quantities of gas if it wants to avoid soaring prices and crippling energy bills next winter.

Russia exported 177 million tonnes of coal last year. The European Union imported 44 million tonnes, or 24.85% of Russia's coal exports. In addition, Russia provides nearly 40% of the EU's natural gas and 25% of its crude oil.

“If Russian energy exports to Europe were cut by either side, there would be large power cuts to Europe, a sharp slowing in industrial production, and the threat of a global recession. We believe this is unlikely, as it would be detrimental to both sides, but with tensions high and few good solutions, it can’t be ruled out,” Riek said.

Credit Suisse also said that a conflict escalation may push prices of base metal prices higher in the short term, with prices of nickel and aluminium climbing already.

The immediate concern would be that any cut to Russia’s exports would cause shortages. However, if commodity exports are unaffected, then prices should subsequently slide as the greater risk would be to demand through a potential recession, Credit Suisse said.

“Prices of affected commodities are climbing on supply fears. The Russia-Ukraine situation is difficult to read. But we believe it is unlikely either side would cut commodity exports,” said Riek.

“From the Russian side, such a decision would damage foreign earnings and business profits. From the western side, we believe the economic damage would be greater to Europe than Russia,” Riek added.