Out Rawcliffe, 4 March 2014
The crisis in Ukraine has introduced new event risk for commodity markets. Commodities play an important role for the Ukrainian economy since exports account for around 50% of Ukrainian GDP, of which commodities account for around 60% of all exports: Deutsche Bank Report.
The country’s commodity exports include agriculture, chemicals, metals and timber products. However, the country’s strategic position when it comes tonatural gas flows is, in our view, the most relevant.
Europe is dependent on Russia for 30% of its gas supply, of which about 50% of these imports, or 15% of EU gas supply, arrive via Ukraine. The completion of the Nord Stream pipeline route under the Baltic Sea in 2012 reduced this dependence from 80% (to 50%), but a complete halt would still be very disruptive. At the moment there are no signs of any reduction in flows.
Moreover, factors which will moderate the potential impact are the fact that gas storage levels across Europe are at unusually high levels owing to a mild European winter, and we are past the peak winter demand period.
In terms of precious metals, safe havens such as the Japanese yen, Swiss franc and gold have all strengthened in response to the escalation of military tensions in eastern Ukraine over the weekend. If there are international efforts to impose sanctions on Russia then this could start to impact the PGM sector and specifically palladium given Russia is the world’s largest producer of palladium and given its large holdings of above ground stocks.
Ukraine is also a major agricultural producer and consequently any disruptions to the country’s exports could have a meaningful impact on global balances. For example, it is not only forecast to be the world’s third largest exporter of corn in 2013-14 after the US and Brazil, but, Ukraine is also the world’s sixth largest exporter of wheat.