The heavy geopolitical overtones to the flash point on the Crimean peninsula in Ukraine has global commodity markets working overtime on the consequences the crisis could serve up to global energy, minerals and agriculture trade flows.
The initial assessment of the escalating tension by commodity markets was that most (price) concern would be shown in oil and gas markets because of Russia’s dominant supply position to Europe, and Ukraine’s strategically important status as a major thoroughfare for the delivery of that energy.
But the resultant spike in prices did not last, with the prospect of a gas revenue-dependent Russia turning off the gas – or its gas being turned back under some yet to eventuate embargo by western Europe, considered a remote possibility. The threat of disruption nevertheless remains in what Deutsche Bank’s commodities desk described as a “new event risk for commodity markets”.
Europe relies on Russia for 30 per cent of its gas supply, of which 50 per cent has to make its way across Ukraine. The reliance is down from the 80 per cent level before the recent start-up of a new pipeline beneath the Baltic Sea, but remains sufficiently high for the potential for a loss of supply to be a cause of major concern in western Europe, most notably Germany.
A roll call of commodity price moves since Russia alarmed the Western world by stepping up its military presence in Crimea does show fear at work, but mainly in the soft commodities of wheat and corn, where prices have in the past week risen 9 per cent and 8 per cent, respectively. Australia, as the world’s fourth-biggest exporter of wheat, stands to benefit if the price rises are sustained.
According to ANZ’s commodities desk, Russia and Ukraine – long referred to as the bread basket of Europe – are forecast to export 26.5 million tonnes of wheat in the 2013-14 marketing season, accounting for 17 per cent of world supply. And in corn, Ukraine itself is a top five corn producer, meeting about 16 per cent of global supply.
While no disruptions to exports have been reported, it is the potential for the increased military build-up in Crimea and the Black Sea in general that has commodity traders pondering where next for wheat.
Rabobank International executive director Berry Marttin said this week he was increasingly uneasy about the military situation around the Black Sea.
Mr Marttin, in Australia as a keynote speaker at the annual Australian Bureau of Agricultural and Resource Economics and Sciences outlook conference, said it was a critical time of the year for Ukraine and the Crimean peninsula, where vast areas of wheat and other grains were due to be sown soon, now that winter was receding.
He said it was impossible to find out what impact the military crisis was having on ordinary farmers and agricultural supply chains. World grain markets are already starting to react upwards because of this uncertainty.
“Because it’s so close to the planting season, what will be critical will be whether fertilisers, seed, machinery and chemicals have been affected, because that could hold back the harvest and affect total crop yield,” Mr Marttin said.
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