What is the impact of the conflict between Russia and Ukraine on macro markets and commodities?

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With reference to the impact of the events in Georgia in 2008 and Crimea in 2014, we believe that this conflict between Russia and Ukraine has entered a peak period; unless the United States and Europe directly send troops to participate, the current round of conflict between Russia and Ukraine will enter the final stage, and financial markets will gradually return to fundamentals from the impact of the short-term crisis. However, the conflict between Russia and Ukraine has changed the geopolitical pattern in Europe, and Russia-Ukraine relations and Russia-Europe relations will be more tense than before. As Russia and Ukraine are important global exporters of food and energy, geopolitical tensions will exacerbate upward pressure on food and energy prices and boost demand for safe-haven assets. Rising energy prices will exacerbate the current high inflationary pressures, and central banks in Europe and the United States will accelerate monetary tightening and bring the prospect of recession.

The impact of the conflict between Russia and Ukraine on the Macro Market

After Russia will secretly support Donetsk and Luhansk civilian forces into public support, as well as the United States and Europe imposed a new round of sanctions on Russia, we believe that the current round of Russian-Ukrainian conflict has reached its worst. The goal of the United States to alienate Russian-European relations, enhance its influence on Europe, and stop the Nord Stream 2 pipeline project has been achieved, but the data show that the support rate of the Biden administration has not increased significantly, and the Democratic Party is still likely to lose to the Republican Party in the mid-term elections, so the United States has an incentive to continue to jointly exert pressure on Russia and induce Russia to fight back. However, since the United States has said publicly that it will not have a direct military conflict with Russia, Ukraine, which lacks direct support from the West, will not rush to attack eastern Ukraine on a large scale. Russia's goal of maintaining unrest in eastern Ukraine and preventing Ukraine from joining the European Union and NATO can also be achieved after openly supporting Luton civilian forces, so we judge that the possibility of further deterioration of the Russian-Ukrainian conflict in the later period is less likely. However, the conflict between Russia and Ukraine is also difficult to quell quickly, both Russia and Ukraine will strengthen their presence in the Donbass region, Russia wants to consolidate its control over the Donbass region, and the United States and NATO should increase their military support to Ukraine. Russia-Ukraine relations and Russian-European relations are more tense than in the past.

The deterioration of the conflict between Russia and Ukraine is another example of the reorganization of the global political and economic pattern intensified by the novel coronavirus epidemic. The US and European powers that suffered heavy losses in the novel coronavirus epidemic have a strong motivation to create international troubles and transfer domestic contradictions. as a result, global geopolitical risks and financial market volatility have increased in the post-epidemic era. In view of the fact that Russia and Ukraine are important international exporters of energy, food and some minerals, the deterioration of the situation in eastern Ukraine will inevitably lead to expectations of rising energy and food prices and boost the demand for safe-haven assets. As inflation in Europe and the United States is closely related to energy prices, rising energy prices will aggravate the current high inflationary pressure. Central banks in Europe and the United States will accelerate the tightening of monetary policy and bring the prospect of recession in Europe, the United States and even the world. We believe that under the short-term safe-haven demand brought about by the conflict between Russia and Ukraine, the medium-term anti-inflationary demand brought about by worsening inflation in Europe and the United States, and the long-term safe-haven demand brought about by recession expectations in Europe and the United States, it has overcome the negative impact of Fed tightening and rising interest rates on US debt and entered a medium-term upward trend. If gold prices later appear a short-term correction due to the easing of the conflict between Russia and Ukraine It will be another opportunity to get involved in gold's long-term long-term order.

The conflict between Russia and Ukraine seriously affects the supply of oil and gas in Europe.

Russia, which straddles Eurasia, is extremely rich in oil and gas resources, and its oil and gas production ranks third and second in the world, respectively. And because its own consumption is relatively limited, a large number of exports to Europe and Asia, is an important exporter of global oil and gas resources. According to BP energy statistics, Russia produced 524 million tons of oil and 638.5 billion cubic meters of natural gas in 2020, accounting for 12.6 percent and 16.6 percent of the world's oil and gas production, respectively. In 2020, Russian oil (and petroleum products) and natural gas exports accounted for 366 million tons and 238.1 billion cubic meters, respectively, and oil and gas exports accounted for 19.4 percent and 19.1 percent of the world's total.

From the point of view of the export destination, the deterioration of the situation in Russia and Ukraine will have the most obvious impact on the oil and gas supply in the European market, followed by Asia and the Americas. The European market is Russia's largest export destination for crude oil and natural gas and is highly dependent on Russian energy. According to EIA, oil condensate exports to OECD European members accounted for 48 per cent of Russia's total exports in 2020, with Germany and the Netherlands each accounting for 11 per cent. In terms of natural gas, Russia exported 168 billion cubic meters of natural gas to Europe through seven natural gas pipelines in 2020, accounting for about 33 percent of Europe's total demand. Three of these natural gas pipelines need to pass through Ukraine, with a total transport capacity of 99 billion cubic meters per year. The Asian region accounted for nearly 40 per cent of Russia's crude oil exports in 2020, the vast majority of which reached the port of Kozmino in northern China and Russia through the ESPO pipeline and further transported to the Chinese and Asian markets. According to customs data, China's crude oil imports from Russia accounted for about 15% of the original total imports in 2021, while other Asian countries imported relatively small amounts of crude oil from Russia, and the situation of natural gas is similar.

As Russia is an important oil and gas producer and exporter in the world, the deterioration of the conflict between Russia and Ukraine and the sanctions imposed by Europe and the United States on Russia will affect the energy supply in Europe and even the whole world, and global energy prices will continue to be strong. In terms of crude oil, at present, global supply and demand is in tight balance, and inventories are at a five-year low; the remaining production capacity of OPEC+ is about 6 million barrels per day, and it is impossible to judge whether it can cover the supply gap in Russia, but there is a good chance that oil prices will continue to rise in a pulse, with the possibility of hitting an all-time high. The European natural gas market is also likely to be hit hard, considering that Russia's natural gas exports to Europe (pipeline gas + LNG) account for nearly 1% of its total demand, if the supply of natural gas from Russia is seriously disrupted, it will cause already high European gas prices to soar again. It is worth noting that a considerable part of Russia's oil and gas exports to China are realized through Sino-Russian direct pipelines, and if later sanctions and other factors hinder Russia's exports of oil and gas resources to the West, then Russia may further increase its exports to China, making the increase in domestic oil and gas prices relatively moderate.

Conflict between Russia and Ukraine pushes up the cost of zinc and aluminum production

According to ICSG statistics, Russia's refined copper production and exports in 2020 were 1.04 million tons and 740000 tons respectively, accounting for 4.2% and 8.9% of the world's total, respectively, making it the fifth largest copper producer and the third largest exporter in the world. However, Russian exports fell sharply by 40% to 463000 tons in 2021, mainly due to the Russian government's decision to impose export duties on ferrous and non-ferrous metals from August 1 to the end of 2021. We believe that the impact of Russia-Ukraine impact on Russia's own copper production and exports will not be very great, and the current low inventory situation in the copper market and the demand for imported copper from Europe and the United States do not support Europe and the United States to impose sanctions on Russian copper enterprises. The impact of the conflict between Russia and Ukraine on the copper market mainly comes from two aspects: one is that rising energy costs have hit the enthusiasm of European local copper enterprises to start work, and the other is that inflationary pressures have increased to boost copper demand for preservation of value. In view of Russia's small copper consumption and long-standing sanctions, it is difficult for the market to continue to rise in risk aversion, and copper prices will return to their own fundamentals; at present, domestic real estate relaxation signals are frequent and infrastructure investment is expected to accelerate, and construction is expected to start in spring. Overseas spot stocks continue to be tight, and copper prices are easy to rise but difficult to fall.

Russia's production of zinc ingots is small, and the impact of the conflict between Russia and Ukraine on zinc prices is mainly due to higher energy costs in Europe, where refineries cut production due to a sharp rise in natural gas prices in October last year. On October 13, 2021, Nyrstar announced a 50% reduction in production at its three European zinc smelters with a combined annual capacity of nearly 700000 tons of zinc ingots, pushing up Shanghai zinc to 27715 yuan per ton at one point. According to statistics, the current smelting capacity in Europe is about 2.4 million tons. With the escalation of the conflict between Russia and Ukraine, the Beixi No. 2 natural gas pipeline project cannot be put into use under sanctions, the energy cost in Europe is high and difficult, and the production losses of European zinc smelters may continue to depress European zinc ingot output. The current LME spot premium begins to climb as the conflict intensifies, and overseas spot prices are tightening. The logic of zinc ingot production reduction promoted by the early European energy crisis may reappear. Coupled with the start of the domestic spring peak season, we expect zinc prices to stop falling soon.

The impact of the conflict between Russia and Ukraine on the aluminum market is similar to that on the zinc market, pushing up the price of electrolytic aluminum through rising energy costs in Europe and production cuts in European refineries. The difference is that Russia is rich in aluminum resources, accounting for 5.5% of the world's aluminum production and 6% of the world's electrolytic aluminum production. If European and American sanctions on Russia are extended to Rusal at a later stage, the surge of Lunal caused by US sanctions on Russian aluminum in 2018 will be repeated. The conflict between Russia and Ukraine will also have a non-negligible impact on the supply of nickel. Russia is rich in nickel resources, accounting for 11.2% of the world's nickel output, Russian nickel exports to Europe account for about 40%, and China's imports of refined nickel from Russia accounted for 20% of the total imports in 2021. The conflict between Russia and Ukraine and European and American sanctions against Russia may hinder the way of Russian nickel exports to Europe, causing Lunni to rise, but at the same time, Russian nickel imports into the country may increase, resulting in a situation of external strength and internal weakness.

The conflict between Russia and Ukraine has little direct impact on the black system.

Russia's exports of iron ore, thermal coal and coking coal and the amount exported to China are relatively small, so the conflict between Russia and Ukraine has little direct impact on iron ore and coal coke; although Russia and Ukraine account for more than 10% of the world's steel exports, however, since the United States and Europe are steel importers, the United States and Europe are unlikely to impose sanctions on the Russian steel industry. The impact of the conflict between Russia and Ukraine on the black system is mainly through rising energy prices and inflation expectations to push up the production costs and demand of the black system. Due to the huge production capacity of the black system in China and sufficient regulatory adjustment tools, we believe that the impact coefficient of the conflict between Russia and Ukraine on the black system will be significantly smaller than that of grain, energy and non-ferrous metals.