Commodities Linked to Russia and Ukraine - Likely Effect Of The Conflict On Costs

Volatility has picked up  from this week as Western governments look to isolate Russia from the global financial system. That causes pain for the Russian government and Russian-based commodity producers. Isolation also, effectively removes Russian-produced commodities from world markets, creating a supply shock.

The commodity markets that Russia impacts the most are oil, natural gas, aluminum, titanium, and wheat.

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Oil
Benchmark U.S. crude oil prices are 9% in late trading Tuesday, breaking the $100-per-barrel barrier.
Russia, of course, is a large oil producer. The country pumps out about nine million barrels of crude oil a day. The U.S., for comparison, pumps out about 11.6 million barrels. Daily global oil production runs to roughly 78 million barrels, according to Bloomberg data.

Higher prices are boosting energy-producer stocks. Exxon Mobil (ticker: XOM) shares are up about 0.7% in late trading. The S&P 500 and Dow Jones Industrial Average are down 1.7% and 1.9%, respectively.

Higher energy prices are hurting a lot of other stocks though. Car-related and industrial stocks are particularly weak.
General Motors (GM) stock is down 4.9%. Every $10 in crude-oil price works out to roughly 25 cents to 30 cents a gallon at the pumps. Rising fuel prices is a headwind for all consumer-discretionary stocks, including cars. It eats into consumers’ pocketbooks.

Caterpillar (CAT) stock is down 2.6%. If oil stays above $75 a barrel for a sustained period of time it can hit U.S. manufacturing growth, Institute for Supply Management Purchasing Manager Index survey chairman Tim Fiore tells Barron’s. The ISM PMI is a key gauge of U.S. manufacturing activity. The February reading, reported Tuesday, showed that manufacturing growth was healthy and accelerating.

Natural Gas
Russia is also a huge producer of natural gas, pumping out about 639 billion cubic meters in 2021, according to BP (BP) data. Global natural-gas production came in at about 3.854 trillion cubic meters.
Russia’s influence in regional natural-gas markets are a big reason prices are spiking. Some European natural-gas prices spot prices are up 35% Tuesday.
Higher gas prices are actually helping renewable-energy stocks. Shares of wind-turbine maker Vestas Wind Systems (VWS.Denmark), for instance, are down 1.4% Tuesday, but have gained 18% over the past five days.
 
Aluminum
Russia manufactured about 3.7 million metric tons of aluminum in 2021. World production of aluminum amounted to about 68 million metric tons, according to the U.S. Geological Survey.
Aluminum prices have risen about 3% over the past five days, and are up about 20% year to date.
Higher prices are boosting shares of Alcoa (ticker: AA). They are up about 8% over the past five days and have jumped 34% year to date. Alcoa stock hit a new 52-week intraday high on Tuesday.
 
Titanium
Russian is also significant player in a key aerospace material as well: Titanium. China is the largest titanium producer, but Russia comes in at number three, according to the U.S. Geological Survey.

In 2021, global production of titanium sponge, a raw form of the metal, amounted to about 210,000 metric tons. China produced about 120,000 metric tons. Japan made about 35,000 metric tons, and Russia produced about 27,000 metric tons. The U.S. didn’t produce much, if any, as the country’s few plants have been idled because of market conditions.

“In 2014, the last time the U.S. was contemplating Russian sanctions, the U.S. had two titanium sponge plants producing this mission critical, high-technology metal,” Anastasios Arima, CEO of U.S. titanium start-up IperionX, tells Barron’s. “Since then, both U.S. plants have closed and America is now completely reliant on foreign supply of titanium for its aerospace and defense industries.”

The supply situation appears to be causing some weakness along the aerospace value chain. Shares of materials producer Howmet Aerospace (HWM) are down 8.2% Tuesday. Boeing (BA) stock is the second-worst performer in the Dow, off 5.5% in late trading. Airbus (AIR.France) shares dropped 9.3% in overseas treading.
 
Wheat
Both Russia and Ukraine are significant wheat producers. Russia produces roughly 80 million metric tons of wheat annually. Ukraine grows about 33 million metric tons. Global wheat production tops 775 million metric tons annually, according to USDA data.

Benchmark U.S. wheat prices are up about 19% over the past five days and are up about 30% year to date. Prices are now north of $10 a bushel, and haven’t been this high since 2008.

High wheat prices, eventually mean higher bread prices, but elevated food-commodity prices are typically a tailwind for farming-related stocks. Deere (DE) are down 0.5% in Tuesday trading, outperforming the broader market. Shares are up about 4% year to date. The S&P 500 is down about 10% so far in 2022.

Write to Al Root at [email protected]
 
Sunflower and other oils
Ukraine and Russia account for 72% of global sunflower and safflower oil exports.

Palm oil’s record premium over rival oils could squeeze price-sensitive Asian and African consumers already reeling from spiralling fuel and food costs, and force them to curtail consumption and shift to rival soyoil, dealers said.

Crude palm oil (CPO) is being offered at about $1,925 a tonne, including cost, insurance and freight (CIF), in India for March shipments, compared with $1,865 for crude soybean oil.
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Crude rapeseed oil was offered at around $1,900, while traders were not offering crude sunflower oil as ports are closed due to the Ukraine crisis.