So, after weeks of will he, won’t he, Russian President Vladimir Putin finally ordered troops into two regions of eastern Ukraine. After recognizing Luhansk and Donetsk as independent states earlier this week, Putin made an emotional and rambling televised address to the Russian people. Where this will lead no one knows. But it seems unlikely he will limit his actions now.
As expected, the West has done relatively little apart from huff and puff. Germany said it will not certify the Nord Stream 2 pipeline from Russia. This action caught nobody by surprise.
Metal prices increase
Prices of key metals have surged in recent weeks, turbocharged above previous gains earned on the back of power shortages, energy costs, and Chinese environmental restrictions. Aluminum and nickel prices, in particular, have reached multi-year highs on fears sanctions will result in a breakdown in supply from Russia. Although Russia maintains a critical role in the supply of those two metals, particularly to the European market, other metals could also fall in short supply.
According to the US Geological Survey, (USGS) Russia’s Rusal produces about 6% of global primary aluminium, or 3.8m tons last year. Europe’s aluminum market remains tight. It has suffered a shortage of extrusion billets for much of the last year. Since late last year, the Rotterdam physical delivery premium (an expression of metal availability) has become significant proportion of the semi-finished price. For the first time in LME history, it has broken the premium out as a separate definable cost.
Russian produces aluminum billets, nickel, gold, palladium, cobalt and platinum
At over 7% of global nickel production, Russia serves as a major producer with some 193k tons last year. Indonesia and the Philippines remain China’s primary suppliers but Russia provides key materials to Europe’s stainless industry. To make matters worse, European companies generally have longer-term contracts, not easily replaced at short notice.
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Russia’s largest producer, Norilsk Nickel, also serves as a major producer of palladium and cobalt. In fact, Russia remains the largest producer in the world of palladium at some 40% of global mine production. Furthermore, Russia serves as the 10% global producer of platinum. Although Russia’s cobalt production provides only 4% of global supply, it [has] served as a viable alternative to the DRC. Russia plays an equally key role in the gold market. The country controls about 10% of global mine production only behind Australia and China.
Don’t forget about Russian steel
Russia also produces nearly as much as the US per annum. But unlike the US, at least half of Russian production goes toward export markets, again mainly Europe. Steel supply does not face the same constraints as base metals. However, while European mills may welcome the reduction in competitive supply, consumers would find some grades or product areas have limited alternatives as Russia has built up outsized roles in some product areas like pipes.
As previously mentioned, Russia of course has a dominant position in oil, natural gas and other commodities like diamonds and foodstuffs such as grains and agricultural products like fertilizers. For anyone interested in further data Statista.com/, OEC.com, and Trading Economics all provide good reference points.
The takeaway
Metal buying organizations should brace for considerable volatility.
As the market saying goes “buy on bullets, sell on fear”.
For now, metals markets face supply disruption. Prices reflect that. If and/or when some sanity prevails, markets will sell as constraints appear less imminent. In the meantime, expect prices to oscillate with every media release and rumor. Belt up for the ride!
By AG Metal Miner
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