Friday, March 07, 2014 2:39:25 PM
Why Ukraine and Russia matter to commodity markets
Commentary: Conflict may have impact on natgas, palladium, potash
Mar. 7, 2014
By Myra P. Saefong, MarketWatch
The Ukraine-Russia conflict may influence much more than natural gas. Above: a section of the trans-Siberian Pipeline, Russia's main natural-gas export pipeline, in Ukraine.
SAN FRANCISCO (MarketWatch) — Oil, gold and wheat prices are in the limelight after Russia’s invasion of Ukraine’s Crimea region, but the conflict may have significant consequences for other commodities too — including natural gas, palladium and potash.
“Concerns over economic sanctions against Russia will put short-term pressure on [commodities] supplies,” said Jeffrey Sica, president and chief investment offer of Sica Wealth Management. “There is certain to be a significant element of the stockpiling of commodities in anticipation of escalation in the conflict.”
Once the situation in Ukraine heated up with Russia’s invasion of Ukraine’s Crimea region on Feb. 27, concern was evident in oil, gold and wheat markets.
On Monday, oil prices CLJ4 +0.99% surged to a five-month high and wheat WK4 +1.12% rallied by almost 5% to the highest level of the year on the potential for global supply disruptions, while gold prices GCJ4 -0.93% jumped to their highest in four months as investors fled to safety.
But the situation between Ukraine and Russia has a much wider reach in the commodities world.
Remember that Russia is the world’s largest producer of palladium and, together with Canada and Belarus is estimated to account for a little over two-thirds of global capacity for potash, a chemical compound used primarily in fertilizer. Ukraine, meanwhile, is the world’s fifth-largest exporter of wheat and third-biggest exporter of corn.
“Ukraine is known as the breadbasket of Eastern Europe and is one of the largest exporters of grain in the world, of which wheat exports would be the largest agricultural commodity impacted by an escalating conflict between Kiev and Moscow,” said Edmund Moy, strategist with gold-backed IRA provider Morgan Gold, who spent time in Ukraine and lectured at Kiev University.
Russia also supplies around a third of Europe’s natural gas, with more than half of that flowing through Ukraine.
“The real issue is natural gas,” said Matt Lasov, global head of advisory and analytics at Frontier Strategy Group. “Any sanctions led by Europe or the United States or further conflict with Ukraine’s government could cause Russia to squeeze Ukrainian gas flow in response, putting prices sharply higher.”
Ukraine itself is home to large shale natural-gas deposits that the U.S. Energy Information Administration says may allow it to diversify its supply need away from Russia, though commercial exploitation is years away.
Sanctions
Already, the U.S. has put limited sanctions in place, though they’re not a big concern yet.
U.S. President Barack Obama signed an executive order that authorizes sanctions on individuals who threaten the sovereignty of Ukraine, the White House announced on Thursday. The State Department has also put in place visa restrictions on a number of officials tied to what the U.S. calls the invasion of Crimea by Russia.
“These sanctions don’t make a difference,” said Martina Bozadzhieva, head of research for Europe, Middle East and Africa for Frontier Strategy Group. “They are the softest possible sanctions the U.S. could have imposed and effectively only hurt a small group of Russian individuals.”
That could soon change.
“If the situation were to escalate or if Russia hunkers down for the long haul and various sanctions by the U.S. and [United Nations] were imposed, then various key commodities can be expected to be impacted,” said Kevin Kerr, editor of CommodityConfidential.com.
“Clearly, any sanctions could upset the pricing matrix for oil and natural gas, as well as wheat and corn exports, especially if there is a real disruption,” he said, adding that potash, and key agricultural stocks like Deere & Co. DE +0.53% , could be impacted significantly as well.
“There would really be no winners if sanctions were forced to be imposed,” said Kerr.
Palladium and potash
Potash is among the commodities that have failed to come into the spotlight, despite the fact that Russia’s among the few countries that produce it.
Potassium chloride, also known as potash, at a processing plant at the OAO Uralkali mine in Berezniki, Russia.
A potential shortage of potash supplies is of “great concern since the lack of fertilizer is limiting the increase in crop output needed to accommodate the demand,” said Sica Wealth Management’s Sica.
Of course there are some non-Russian potash suppliers that could benefit if trade sanctions were to hurt Russian potash exports.
Those may be Potash Corp. of Saskatchewan POT -1.90% , Mosaic Co. MOS -0.88% and Intrepid Potash Inc. IPI -0.31% , according to Robbert van Batenburg, director of market strategy for Newedge. Shares of Potash Corp. have climbed nearly 5% this week.
Russia is also the largest producer of palladium PAM4 +0.05% , according to Johnson Matthey .
“My guess is that prices would move sharply higher if exports were affected by sanctions,” said Tim Murray, general manager of precious metals marketing at Johnson Matthey.
The metal has a variety of uses for medicine and electronics among others. Much of it is used to make catalytic converters that help reduce harmful vehicle emissions.
For now, however, the more important issue in the near term for the metal is South Africa, as the Association of Mineworkers and Construction Union-led walkout at the three largest platinum producers is in its sixth week, Murray said. Palladium prices on Comex climbed to their highest level in nearly a year on Thursday, fueled by concerns over the strikes as well as the conflict between Russia and Ukraine.
Natural gas
When it comes to energy commodities, shale may end up being Ukraine’s secret weapon.
Russia’s Gazprom has warned Ukraine to pay its bill or risk having its natural-gas supply cut off, according to an AFP report Friday. Ukraine owes Gazprom $1.89 billion, the energy giant said.
“Russia has a track record [of] using gas as a political tool, squeezing Ukraine in 2006 and 2009 with ripple effects in Europe,” said Frontier Strategy Group’s Lasov.
But the energy market needs to take into account Ukraine’s shale natural-gas reserves, which the country is working to develop for domestic consumption and exports to Western Europe by 2020, according to the EIA.
Ukraine has the fourth-largest shale natural-gas reserves in Europe — estimated at about 1.2 trillion cubic meters, EIA data show.
“The biggest threat to Moscow, in our view, may well be 21st-century shale technology,” said strategists at Bank of America Merrill Lynch, in a note this week.
“With NATO military protection, European capital and American technology, Ukraine could potentially become a competitive gas supplier to EU markets,” they said. “After all, the pipeline infrastructure is already in place.” Read: Russian natural-gas supplies aren’t a worry yet for Europe.
http://www.marketwatch.com/story/why-ukraine-and-russia-matter-to-commodity-markets-2014-03-07?pagenumber=1
Commentary: Conflict may have impact on natgas, palladium, potash
Mar. 7, 2014
By Myra P. Saefong, MarketWatch
The Ukraine-Russia conflict may influence much more than natural gas. Above: a section of the trans-Siberian Pipeline, Russia's main natural-gas export pipeline, in Ukraine.
SAN FRANCISCO (MarketWatch) — Oil, gold and wheat prices are in the limelight after Russia’s invasion of Ukraine’s Crimea region, but the conflict may have significant consequences for other commodities too — including natural gas, palladium and potash.
“Concerns over economic sanctions against Russia will put short-term pressure on [commodities] supplies,” said Jeffrey Sica, president and chief investment offer of Sica Wealth Management. “There is certain to be a significant element of the stockpiling of commodities in anticipation of escalation in the conflict.”
Once the situation in Ukraine heated up with Russia’s invasion of Ukraine’s Crimea region on Feb. 27, concern was evident in oil, gold and wheat markets.
On Monday, oil prices CLJ4 +0.99% surged to a five-month high and wheat WK4 +1.12% rallied by almost 5% to the highest level of the year on the potential for global supply disruptions, while gold prices GCJ4 -0.93% jumped to their highest in four months as investors fled to safety.
But the situation between Ukraine and Russia has a much wider reach in the commodities world.
Remember that Russia is the world’s largest producer of palladium and, together with Canada and Belarus is estimated to account for a little over two-thirds of global capacity for potash, a chemical compound used primarily in fertilizer. Ukraine, meanwhile, is the world’s fifth-largest exporter of wheat and third-biggest exporter of corn.
“Ukraine is known as the breadbasket of Eastern Europe and is one of the largest exporters of grain in the world, of which wheat exports would be the largest agricultural commodity impacted by an escalating conflict between Kiev and Moscow,” said Edmund Moy, strategist with gold-backed IRA provider Morgan Gold, who spent time in Ukraine and lectured at Kiev University.
Russia also supplies around a third of Europe’s natural gas, with more than half of that flowing through Ukraine.
“The real issue is natural gas,” said Matt Lasov, global head of advisory and analytics at Frontier Strategy Group. “Any sanctions led by Europe or the United States or further conflict with Ukraine’s government could cause Russia to squeeze Ukrainian gas flow in response, putting prices sharply higher.”
Ukraine itself is home to large shale natural-gas deposits that the U.S. Energy Information Administration says may allow it to diversify its supply need away from Russia, though commercial exploitation is years away.
Sanctions
Already, the U.S. has put limited sanctions in place, though they’re not a big concern yet.
U.S. President Barack Obama signed an executive order that authorizes sanctions on individuals who threaten the sovereignty of Ukraine, the White House announced on Thursday. The State Department has also put in place visa restrictions on a number of officials tied to what the U.S. calls the invasion of Crimea by Russia.
“These sanctions don’t make a difference,” said Martina Bozadzhieva, head of research for Europe, Middle East and Africa for Frontier Strategy Group. “They are the softest possible sanctions the U.S. could have imposed and effectively only hurt a small group of Russian individuals.”
That could soon change.
“If the situation were to escalate or if Russia hunkers down for the long haul and various sanctions by the U.S. and [United Nations] were imposed, then various key commodities can be expected to be impacted,” said Kevin Kerr, editor of CommodityConfidential.com.
“Clearly, any sanctions could upset the pricing matrix for oil and natural gas, as well as wheat and corn exports, especially if there is a real disruption,” he said, adding that potash, and key agricultural stocks like Deere & Co. DE +0.53% , could be impacted significantly as well.
“There would really be no winners if sanctions were forced to be imposed,” said Kerr.
Palladium and potash
Potash is among the commodities that have failed to come into the spotlight, despite the fact that Russia’s among the few countries that produce it.
Potassium chloride, also known as potash, at a processing plant at the OAO Uralkali mine in Berezniki, Russia.
A potential shortage of potash supplies is of “great concern since the lack of fertilizer is limiting the increase in crop output needed to accommodate the demand,” said Sica Wealth Management’s Sica.
Of course there are some non-Russian potash suppliers that could benefit if trade sanctions were to hurt Russian potash exports.
Those may be Potash Corp. of Saskatchewan POT -1.90% , Mosaic Co. MOS -0.88% and Intrepid Potash Inc. IPI -0.31% , according to Robbert van Batenburg, director of market strategy for Newedge. Shares of Potash Corp. have climbed nearly 5% this week.
Russia is also the largest producer of palladium PAM4 +0.05% , according to Johnson Matthey .
“My guess is that prices would move sharply higher if exports were affected by sanctions,” said Tim Murray, general manager of precious metals marketing at Johnson Matthey.
The metal has a variety of uses for medicine and electronics among others. Much of it is used to make catalytic converters that help reduce harmful vehicle emissions.
For now, however, the more important issue in the near term for the metal is South Africa, as the Association of Mineworkers and Construction Union-led walkout at the three largest platinum producers is in its sixth week, Murray said. Palladium prices on Comex climbed to their highest level in nearly a year on Thursday, fueled by concerns over the strikes as well as the conflict between Russia and Ukraine.
Natural gas
When it comes to energy commodities, shale may end up being Ukraine’s secret weapon.
Russia’s Gazprom has warned Ukraine to pay its bill or risk having its natural-gas supply cut off, according to an AFP report Friday. Ukraine owes Gazprom $1.89 billion, the energy giant said.
“Russia has a track record [of] using gas as a political tool, squeezing Ukraine in 2006 and 2009 with ripple effects in Europe,” said Frontier Strategy Group’s Lasov.
But the energy market needs to take into account Ukraine’s shale natural-gas reserves, which the country is working to develop for domestic consumption and exports to Western Europe by 2020, according to the EIA.
Ukraine has the fourth-largest shale natural-gas reserves in Europe — estimated at about 1.2 trillion cubic meters, EIA data show.
“The biggest threat to Moscow, in our view, may well be 21st-century shale technology,” said strategists at Bank of America Merrill Lynch, in a note this week.
“With NATO military protection, European capital and American technology, Ukraine could potentially become a competitive gas supplier to EU markets,” they said. “After all, the pipeline infrastructure is already in place.” Read: Russian natural-gas supplies aren’t a worry yet for Europe.
http://www.marketwatch.com/story/why-ukraine-and-russia-matter-to-commodity-markets-2014-03-07?pagenumber=1
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