As the conflict in Ukraine continues, Refinitiv analyses the impact on the broad range of commodities that have been affected by both the war itself and the imposition of sanctions on Russia.
- Inevitably, performance of many commodities has been overshadowed by the impact of the Russia-Ukraine war.
- As the war passes its 100th day, our supply chain and commodities research team has looked at its impact on a range of materials.
- We review the inflationary impact on oil, gas, LNG, coal, as well as soft commodities, including sunflower oil and wheat.
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Agricultural commodities
Since the Russian invasion started on 24 February, there has been a blockage of Ukrainian grains/oilseeds exports via Black Sea ports, including 3-4 million tons of wheat, 2.5-3.0 million tons (mmt) of sunflower oil and over 10 mmt of corn for 2021/22 delivery.
As a result, global grains/oilseeds supplies have tightened, and prices have skyrocketed. Middle East and African countries, as key importers of Ukrainian grains, have been directly affected.
Though the Ukrainian government and traders are seeking to export agricultural products via railway and Romanian ports across the country’s western border, transport capacity of railways and the high costs determine that export volume to the west will be limited.
Besides the war blocking Ukrainian exports, it has largely damaged Ukrainian winter and spring crops, which will come to the market in July (wheat) and October (corn and sunflower oil), reducing global crop production and supplies for the upcoming season.
Around one-third of Ukrainian agricultural land has been destroyed or is unavailable due to physical inaccessibility, mining, and/or field contamination, according to Ukraine’s Minister of Agrarian Policy and Food (MAPF).
Eastern, northern, and southern oblasts have been most affected. Crop production in the west has also encountered great difficulties, including shortages of manpower, machinery and basic supplies (e.g., seeds, fuel, fertilisers and crop protection products).
As a result, Ukraine wheat production may decline by ~10 mmt from last year to 23.4 mmt.
War has also disrupted Ukraine spring plantings.
Around 75 percent of spring acreage potential is deemed reachable, according to MAPF. A review of war impacts on spring plantings and socio-economic data indicates that Ukraine corn acreage this season will decline by 42 percent to 3.2 million hectares.
Corn production may decline by 55 percent to 19.1 mmt.
As one of the key grain exporters, Ukraine exports approximately 18 million tons of wheat and 25 million tons of corn every year.
The war and resulting production losses will significantly reduce Ukrainian wheat and corn supplies to the global market in 2022/23.
Even if Ukrainian Black Sea ports reopen, substantial production losses this season would lower Ukrainian grain supplies to relatively low levels, particularly corn.
Libin Zhow, Agriculture Research Manager, and Anna Drewnik, Agriculture Research Specialist, Supply Chain and Commodities Research
Coal
Coal markets have been significantly impacted by the escalation of conflict in Ukraine.
In the second half of May, the front month futures price of Europe-delivered API2 coal traded on NYMEX was over US$330 per tonne, an increase of more than 75 percent since mid-February.
Similar increases have been seen in other major benchmark prices.
Front month prices for FOB Newcastle (Australia) 6000 kcal/kg NAR have traded at more than US$400 per tonne recently, up over 70 percent since mid-February.
Seaborne metallurgical coal prices have also increased, with the FOB Australia TSI hard coking coal index trading at over US$500/t in late May, an increase of around 20 percent from mid-February when prices were already at all-time highs, in large part due to existing severe supply shortages.
These dramatic price increases in seaborne coal prices have been driven by factors on both supply and demand sides of the market.
On the demand side, the EU’s ban on imports of Russian coal will come into effect on 10 August, while Japan has indicated it will seek to phase down imports of Russian coal.
These announcements followed earlier sanctions, which had impacted coal markets in various ways including by complicating access to finance and insurance for shipments of Russian coal.
With many importers now either unable or unwilling to import coal from Russia owing to sanctions or due to voluntary changes to their coal supply mix, an increasingly large pool of importers is now looking to secure coal from other origins.
Russia has historically been a major supplier of coal to export markets, representing 18 percent and 13 percent share of the world’s exports of thermal and metallurgical coal respectively in 2021.
The effective removal of Russian supply from the market for many importers has considerably tightened the available supply of coal. Against this backdrop, a severe shortage of non-Russian supply has supported the steep gains in prices to these current extremely high levels.
Meanwhile, for those importers that are still able and willing to import coal from Russia, prices are now significantly lower than comparable supply from other origins.
Monthly customs data indicates that China increased its imports of Russian metallurgical coal in the month of April, with buying interest likely supported by considerable price discounts relative to comparable coal from other sources. That may provide welcome cost relief to China’s blast furnace steel industry for whom metallurgical coal is a major input in the steelmaking process.
Toby Hassall, Lead Analyst, Coal Market Research, Refinitiv Commodities Research
Power
European spot power prices spiked with the gas surge in early March, letting the German Day Ahead climb above 500 EUR/MWh.
For the German Day Ahead, on days with weak wind production there is full exposure to the marginal costs of gas in almost all hours. This is also the case in the current lower demand season, because several coal plants are currently under maintenance.
Since the beginning of the war in Ukraine, one open question regarding the German generation mix has been if decommissioned coal and nuclear plants will be allowed back into operation in order to reduce the dependence on Russian gas supply.
There is a clear no to a German nuclear phaseout suspension, as the technical feasibility has been ruled out.
The return of coal and lignite plants and suspension of further decommissioning is still under discussion. For now, there is a large capacity of 8.5 GW that is planned to act as reserve capacity (for the case of strong supply shortages only).
Our scenario calculations show that a return of coal capacity would lead to just moderate savings of gas-to-power: for hours with low wind and solar generation, flexible supply from gas plants is still indispensable.
The forward contracts from Q3 onwards are following the marginal costs of gas-fired production very closely. This reflects the expectation that gas plants will be price-setting going forward.
Compared with our fundamental forecast, we see the power market pricing in a significant risk premium on the forward curve. We believe that this is pricing in the risk of gas supply shortening, but it also reflects the ongoing worries about the French nuclear availability.
Nathalie Gerl, Senior Analyst, Supply Chain and Commodities Research
Oil
European refiners are facing two key problems because of sanctions against Russian oil: a) tight feedstock supplies and b) stretched diesel availabilities. As a result, they must find alternatives to Russian crude oil, such as Urals, as well as diesel-rich crude grades.
Despite the European Union’s slow progress in imposing a ban on Russian oil imports, Refinitiv Oil Research has already recorded a decline in Russian seaborne shipments.
Russian crude and condensate shipments to Northwest Europe (NEW) fell by than 42 percent in April to 530,000 bpd, compared to Q1 2022 levels. In contrast, Russian crude exports to the Mediterranean climbed by roughly 58 percent from Q1 to around 800,000 bpd.
The best alternative to Russian oil could be crude oil from the Middle East but Gulf governments do not want to jeopardise their relationships with Asian refiners, as the East has accounted for the majority of recent oil demand growth.
Russian oil imports to India increased to 732,000 barrels per day (bpd) in April 2022, up from an average of 32,000 bpd in 2021. Only 220,000 bpd were exported from Russia’s western ports to China.
Due to Brent’s significant premium over Dubai, an Asian refiner importing Russian oil must cope with pricey Brent-related crudes. They must also pay a hefty risk premium and insurance for oil coming from the Baltic or Black Seas.
Nonetheless, a Russian Urals to Brent discount of more than $30/bbl proved too enticing.
Increased Russian supplies to Asia should not bode well for Middle Eastern crudes, which are essentially of the same quality. Iran and Iraq are already reporting difficulties with sales to the East.
As a result, some of the shifted barrels can end up in Europe. However, Europe is less interested in medium-sour crude supplies because converting these barrels into low-sulphur diesel necessitates the purchase of expensive natural gas for hydrocrackers.
Processing middle distillate-rich crudes like Azeri BTC, which is shipped via the Turkish port of Ceyhan, is the best alternative for Europe. Its premium to Brent has risen to an all-time high of $8/bbl.
Independence from Russian oil comes at a price.
Esan Ul-Haq, Lead Analyst, Oil Research and Forecasts, Supply Chain and Commodities Research
Gas
The Russian invasion of Ukraine has had a significant impact on European gas markets, with price and volatility at scarcely believable levels.
Russian actions will also lead to sweeping changes as European buyers wean themselves off imported Russian molecules, and a major reconfiguration of the European gas market and how it is to be supplied will be required.
Russia is responsible for around 35 percent of gas delivered to Europe, with Germany and Italy the two major EU countries most reliant on Russian gas.
Russian flows via Ukraine actually rose at the onset of the invasion as the wholesale spot market rallied as risk intensified, making Gazprom’s FM index pricing structure more attractive to its European buyers who nominated more gas as per contractual agreements.
TTF DA has, at the time of writing, traded at an average of €/108MWh since the invasion versus €21/MWh observed over the same period in 2021 winter with a high of €227/MWh. NBP DA is averaging 196p/th v 54p/th observed in 2021 with a high of 515p/th.
Front-month contracts traded at all-time highs, including an intraday trade of 800p/Th on NBP and €867/MWh on the TTF.
Prices have been whipsawing around since the invasion with 7 March marking the peak thus far.
Despite subsequent Russian threats to cut supply, EU threats to ban Russian molecules, Russia demanding to be paid for its gas exports in roubles and the ongoing risk to key transit infrastructure in Ukraine with one pipeline already in the hands of separatists, prices have eased back and are currently at of €100/MWh.
LNG cargoes are flocking to Europe (up to around 60 percent thus far v 2021) with European spot prices remaining at a premium to Asia. Norwegian and UK production is maxed out and helps offset the loss of Russian volumes and more importantly facilitates the refilling of European storage facilities that were heavily depleted at the start of the year.
Sanctions on one pipeline, force majeure on another, expired contracts and cuts to several countries have seen Russian flows down over 30 percent this year with the extant risk of further interruptions firmly on the table, notably the Nord Stream 1 pipeline.
While the war continues to provide a floor to prices with hefty supply risk still on the table, prompt contracts for the NBP and TTF are currently at levels observed prior to the invasion with markets that are a lot more sanguine.
Supply is continuing to be uninterrupted for both piped and imported LNG thus enabling storage to refill at record rates.
Russian Gas exports via the three main supply routes (Velke Kapusany/Nord Stream One + Yamal Europe)
Wayne Bryan, Director, European Gas Research
LNG
For the global LNG market, the Russian invasion of Ukraine represents a major inflexion point that will persist for years to come.
European leaders have agreed to spend hundreds of billions of euros to pivot away from Russian gas supplies and LNG is currently the only meaningful alternative. Now and in the short term, this has and will lead to a significant pull for LNG cargoes into Europe.
Record sendout has been seen in Northwest Europe, while landlocked buyers in Central and Eastern Europe are receiving significant volumes of regasified LNG, sometimes for the first time.
The EU hopes to ease the bottleneck around additional supplies by rapidly increasing import capacity. A number of government-backed contracts are being signed for floating LNG import facilities, known as FSRUs (floating storage and regasification units), which generally can be installed more quickly than onshore, permanent import terminals.
Before the end of this year, up to four new FSRUs are scheduled to start supplying the Netherlands, Germany, Finland and Estonia, with an additional five units readying to be deployed next year.
Northwest Europe no longer the ‘sink’ market
Previously, Northwest Europe was considered the ‘sink’ for uncommitted cargoes and the landed price for LNG to the region was largely priced below the Asian spot price. But as European LNG imports hit a record high through the first four months of 2022, buyers here have needed to pay a premium to Asia to divert cargoes into the region.
The resulting fierce competition for uncommitted cargoes has led to unprecedented demand destruction among several Asian countries. Moreover, so far this year, the U.S. has seen its exports to Northwest Europe swelling by 150 percent year-on-year.
The global LNG market is now structurally tight following the demand surge from European importers. And, according to Refinitiv’s forecast for LNG supply, additional volumes from new export facilities will be modest up to the middle of this decade, pointing to a persistently tight global LNG market.
Beyond 2025, we anticipate growth in global LNG supply to pick up with fresh volumes coming from North America and Qatar. Recently, Germany and LNG powerhouse Qatar inked a joint declaration to develop bilateral LNG trade relations to reduce Germany’s dependence on Russian gas imports.
On new LNG export projects, the U.S. appears to be moving into its next super-cycle of sanctioning new projects.
In recent months, U.S. LNG companies have reported a flood of commercial deals for LNG contracts. Moreover, a couple of U.S. projects have already started initial construction work ahead of FID (Final Investment Decision).
For Russia, the squeeze of EU sanctions targeting the country’s energy sector will have ramifications for Russian Novatek’s 19.8-Mtpa Arctic LNG 2 export project.
The first train, which is scheduled to come online in 2023, could still be launched according to plan, but the sanctions will likely complicate the completion of the remaining trains. Ongoing maintenance of new and existing trains will also be hit by the sanctions regime.
Anne Katrin Brevik, Director, LNG Research
