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How the invasion of Ukraine sent commodity prices soaring

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On March 7, commodity prices hit a new high. That day, oil exceeded $140 per barrel, wheat €400 per ton, electricity €700 per MWh, nickel $100,000 per ton. It was eleven days after Russia launched an attempted military invasion of Ukraine and panic was at its peak in the markets.

Three months later, while prices remain high, the Cyclops 2022 (1) details the mechanics that derailed the markets and analyzes the long-term consequences of this runaway.

War, a devastating shock

This “cobblestone” of more than 700 pages details, every year, the situation of the commodity markets. By taking an interest in rare metals, wood, coffee, but above all oil, minerals and agri-food products, its coordinator, Philippe Chalmin, professor at the University of Dauphine, writes contemporary economic history. The new edition, which appears this Wednesday, June 8, gives pride of place to the devastating shock created by the war in Ukraine.

This war came at a time when the global economy was already overheating, rebounding from the pandemic. The war put a stop to Ukrainian exports: wheat, sunflower oil, corn. It generated, because of the sanctions, a tension on the oil and gas markets, main products exported by Russia, as well as on the prices of palladium, titanium, aluminum or nickel. Russia is indeed a major supplier of these metals.

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The price of gas multiplied by 15

On the European wholesale market, in March 2022, the price of gas reached “15 times the level which it was at the start of 2021”, reports the author of the dedicated chapter. He explains that gas is the only raw material “for which Europe is truly dependent on Russia”. Russian gas represents 40% of supplies and can hardly be replaced, unlike oil.

In his introductory chapter, Philippe Chalmin remarks that “moreover, this European dependence has increased, paradoxically, with the energy transition strategy”, which requires more gas to compensate for the decline in coal and the increase in electricity needs.

It remains possible to reduce our imports by increasing the production of biogas, saving energy and focusing on electricity from renewable sources. But according to the projections of the International Energy Agency, this cannot be enough, in the short term, to do without Russian gas, while Germany in particular has put itself in a situation of dependence which today weakens Europe.

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wheat blackmail

Commodities are also a political weapon. The other product for which we can make this observation is Ukrainian wheat. Russia, which is blocking exports through the Black Sea ports, is exercising a form of blackmail towards African countries. She wants to favor “friendly” countries, those who have not condemned her intervention at the UN. These are promised priority for receiving Russian wheat.

The absence of Ukrainian exports will put a certain number of countries in difficulty this year: Egypt, Lebanon, Yemen, Indonesia, Bangladesh, Pakistan. But the consequences are most likely to be felt in 2023, because Ukrainian farmers have not been able to sow as much this year and, moreover, they are large producers of fertilizers. However, for lack of fertilizer, world production is expected to be lower next year. The Ukrainian conflict, although localized, therefore has disruptive effects that go far beyond that.

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