The spiral escalation of the conflict between Russia and Ukraine indirectly supports non-ferrous metals [institutional review]

If Europe and the United States are limited to the current economic sanctions against Russia, the uncertainty of the conflict between Russia and Ukraine will have strong support for precious metals and crude oil, but less support for non-ferrous metals; if the conflict between Russia and Ukraine escalates in the future, the prices of non-ferrous and precious metals will be supported by energy shortage or inflation, respectively.

There is still great uncertainty in the conflict between Russia and Ukraine.

In the face of Russian attacks on several Ukrainian cities, Europe and the United States are still verbally condemning and calling for sanctions, and the United States and France have made it clear that they will not send troops to protect Ukraine. Next, the biggest suspense is whether Russian troops will attack Kiev, the capital of Ukraine, whether it will fully seize Ukraine, or will Ukraine be divided into east and west parts. Either way, it will greatly change the security order of the whole of Europe. The national security of Europe as a whole, including Poland and the Baltic countries, is more dependent on the United States and NATO. Then Europe and the United States will introduce restrictions on Russian oil and gas exports to Russia (more than 40% of Russian exports are energy products in 2021. Does the oil and gas industry account for more than 35 per cent of Russian federal government revenue) and tougher measures such as banning Russia from using the SWIFT international currency clearing system?

First, the energy structure of the European Union is highly dependent on Russia, where more than 20% of crude oil and 30% of natural gas imports come from Russia. The Biden administration is worried that soaring crude oil prices will push up domestic inflation, which is not conducive to the mid-term elections. The United States imports an average of 600000 barrels of crude oil a day from Russia in the second half of 2021. Even the United States and its allies bought $700 million worth of commodities from Russia, including crude oil, natural gas, gold, aluminum and nickel, within 24 hours of Putin's announcement of the independence of Donetsk and Luhansk.

Second, after the United States announced sanctions on Rusal on April 6, 2018, LME suspended delivery of original Rusal aluminum ingots, Glencore CEO withdrew from Rusal's board of directors, Rio Tinto announced that some contracts related to Rusal had encountered force majeure, and other events occurred one after another, and global aluminum prices rose to the highest level of the year in mid-April 2018. Considering that US companies may also suffer from rising aluminum prices, international aluminum prices plunged more than 10 per cent on April 23, 2018, when the US announced that it was considering easing sanctions on Russian aluminum. Although the follow-up news of sanctions against Russian aluminum is repeated, the signal of sanctions against Russian aluminum tends to be relaxed, and the impact of the incident on aluminum prices is gradually diluted. To January 28, 2019, the United States announced the lifting of sanctions on Russian aluminum.

Third, as early as 2014, when the Ukraine crisis broke out, Europe and the United States threatened to cut off Russian banks' links with the SWIFT international currency clearing system, thereby cracking down on Russia's bank card payment system and domestic and foreign economic activities. To this end, Russia quickly established its own national payment card system and financial information exchange system (that is, SPFS), as an alternative to SWIFT. In addition, Vladimir Shapovalov, director of the Foreign Regulatory Relations Administration of the Ministry of International Cooperation of the Central Bank of Russia, said on March 28, 2019, that a number of Russian banks have access to China's cross-border interbank payment system (CIPS), that is, Russian oil, gas and mineral exports can be settled in RMB, which will undoubtedly threaten the international currency status of the US dollar.

These are the reasons for the first round of economic sanctions imposed by Europe and the United States against Russia.

In view of the fact that US President Biden refused to promise to stop NATO's eastward expansion and called on allies to provide military or economic assistance to Ukraine, adding that sanctions and anti-sanctions between Europe, the United States and Russia may escalate in a "spiral", the short-term conflict between Russia and Ukraine remains uncertain and will support the price of gold through investors' safe-haven demand. The continuous escalation of the medium-and long-term conflict between Russia and Ukraine may worsen the already serious persistent high inflation in Europe and the United States and even lead to stagflation and bullish gold prices.

The conflict between Russia and Ukraine spirally escalates and disturbs the supply.

As oil and natural gas account for 20% of Europe's total electricity generation, the geo-conflict between Russia and Ukraine mainly affects the price of non-ferrous metals through the impact of production reduction brought about by energy shortages. In 2021, the output of Russian copper concentrate is 886000 tons, and that of refined copper in Europe is about 3.02 million tons; the production capacity of zinc smelters in Europe is 2.3 million tons; Rusal is one of the largest aluminum producers in the world, with an electrolytic aluminum production capacity of more than 4 million tons, accounting for more than 6% of the global electrolytic aluminum production capacity. Russia's primary nickel production is about 146000 tons, of which refined nickel production is about 121000 tons, accounting for about 5 per cent of the global primary nickel production.

Therefore, if the second round of economic sanctions against Russia by Europe and the United States still does not restrict the export of Russian commodities such as crude oil, natural gas, aluminum and nickel, the normalization of the conflict between Russia and Ukraine will weaken the support for the prices of these commodities. If the conflict between Russia and Ukraine continues to escalate, Europe and the United States restrict Russian energy or metal exports, and Russia takes the initiative to reduce oil, gas or metal exports to Europe and the United States, the shortage of energy such as European electricity or the imbalance between supply and demand in the global industrial chain will negatively affect the supply of crude oil, natural gas, copper, aluminum, zinc and nickel, while prices will rise.

Author: Hongyuan Futures-Wang Wenhu

Original title: "conflict spiral upgrade indirectly supports non-ferrous metals"