Ripple effect

The Russia-Ukraine conflict is set to have a widespread impact on SA

Ripple effect

As I sit here writing a column about the outlook for global commodity prices in 2022, and the implications for SA, it’s impossible not to feel a little like a soothsayer. Russia’s invasion of Ukraine is entering its fifth week. When it will end is anyone’s guess. What we do know is that there’ll be lasting implications for commodities, energy policy and the energy transition.

Soaring energy prices and inflation concerns were already dominating news headlines before the invasion, thanks to years of loose monetary policy and, more recently, bottlenecks in global supply chains. Now, as the conflict intensifies, inflation risk has magnified, adding more pressure on central banks to regulate monetary policy to fend off global stagflation. We’ve seen this play out in SA, where our Monetary Policy Committee has taken early action, raising rates three times since November, with another two 50 basis point hikes expected in May and July this year. The invasion has roiled global markets, driven the oil price to above $120 a barrel (with predictions that it can go to $150), and brought untold misery to both Ukrainian and Russian civilians. This prompted Jim Rogers, designer of the Rogers Commodity Index, to comment pithily that the only winner in war is commodities. Everyone else is a loser.

Our global dependence on Russia for certain commodities cannot be overstated. It is a leader when it comes to the production of metals such as nickel, copper and iron. Russia is also involved in the export and manufacture of other essential raw materials, such as neon, palladium and platinum. Sanctions have driven the price of these metals through the roof. This may prove to be (another) windfall for SA, which is the world’s biggest exporter of PGMs, along with Russia. Palladium is used to reduce emissions in petrol vehicles, among other things, and demand is growing beyond supply. The current trading price of just around $2 000 per oz is almost double what it was last year, and well off the $756 of five years ago.

As countries around the world tighten their emission rules for vehicles, so the demand for palladium has increased. Other factors driving the palladium price are its lack of substitutability and, in the renewable-energy arena, the new lithium battery technology being developed, which also requires palladium. Demand for electric vehicles (EVs) has already driven up the prices of other metals such as nickel and copper, and the war has added fuel to this.

Another product SA traders are watching is coal. There is talk that coal prices could cross $500 per ton in 2022, underpinned by soaring gas prices. This bodes well for SA exporters – it’s just a pity they are limited by their inability to deliver coal at full capacity.

Looking beyond minerals and metals, food prices are a particular concern. Ukraine is a significant grower and exporter of wheat and other agricultural commodities. The sowing season is being disrupted and there are concerns for winter wheat. This crisis may be averted with Western support, but in the meantime wheat futures have risen. SA does not import wheat from Ukraine and is self-sufficient when it comes to fertiliser, but the impact ripples across all markets and it will be detrimental for everyone if the Ukrainian planting and growing season is disrupted.

This conflict may also have longer-term inflationary implications. An acceleration in the pace of energy transition away from fossil fuels towards renewables is inflationary. Input costs for renewables hardware have been escalating, and the production thereof has an upfront energy cost. In addition, a potential acceleration in supply-chain diversification and economic polarisation via greater regard for security of supply in relation to certain products, is also inflationary. Thanks to the sustained commodity boom, SA has a healthy trade surplus, reporting our largest current account surplus in the last quarter of 2021, as the value of gold exports rose to its highest level since 1960. However as import demand grows, this surplus is narrowing.

In addition, as the war drags on, global growth will slow, impacting different markets in different ways. There’s no doubt the conflict will see some winners, but the nature of war means that they are likely to be in the minority.

By Sasha Planting