War Cries Boost Commodities

Western Sanctions on Russia, including those that cut off many Russian banks from interbank payments system SWIFT, could have important ripple effects in industries which depend on the supply of raw materials, particularly industrial commodities.

• Crude: Russia exports 6.5 million barrels of oil a day.
• Natural Gas: Russia accounts for 17% of natural gas production.
• Metals: Russia and Europe account for nearly 10% of the global primary aluminum supply. Russia is also the second largest steel exporter with ~13% share.
• Wheat: Russia and Ukraine account for 29% of all wheat exports.
• Fertilizers: Russia accounts for 15% of global trade in nitrogenous fertilizers and 17% of global potash fertilizer exports.
• Sunflower Oil: Russia and Ukraine account for 75% of sunflower oil exports.

The economic sanctions have disrupted Russian trade with the global economy, which is pushing prices higher, especially for energy. Crude has jumped over 18% to a multi-year high since the invasion of Ukraine. Commodity prices are on fire. Aluminum has hit lifetime highs. Gold, too, was found climbing towards 52-week high due to flight to safety. It is quite evident that investors are turning to commodities to hedge their portfolios amid the uncertainty.

What’s in store for India?

The tussle between both the countries will have a direct bearing on our economy as India imports oil from Russia and sunflower oil from Ukraine. Therefore, import-dependent India may suffer due to the spike in crude oil. Crude-downstream industries such as chemicals, petrochemicals, and paint will be affected adversely.

However, government-owned oil producers like ONGC and Oil India stand to benefit. Global commodity based sectors like steel, aluminum, coal, and oil & gas will remain strong while major consumers of these commodities like cement, auto, and FMCG may remain under pressure due to rising input costs. As soon as OMCs resort to price hikes, it will fuel inflation and raw material costs for corporations, thus affecting margins.

However, if we look at the bigger picture, India is likely to benefit from the Ukraine-Russia crisis:

(i) The EU is the biggest market for India’s exports. Disruption in Russian supplies into the EU for both finished steel and raw materials like steel scrap can lead to higher steel prices and potentially higher export revenues for Indian steel mills.

(ii) Shortages of metal and oil will persist, due to long-duration sanctions on Russia, thus paving the way for Indian exports.

(iii) India's standing amidst the emerging markets of the world, has improved as Russia and China disappoint investors with their unilateral actions. FIIs, hopefully, may return to our home ground.