Base metals rallied in the week starting Jan. 17 against a backdrop of rising Russia-Ukraine border tensions, higher inflation in major economies and market tightness.
Analysts said continued geopolitical worries over a potential Russian invasion of Ukraine heightened the possibility that new US or international sanctions on trade with major metals producer in Russia could further squeeze tight aluminum, copper and nickel markets.
"Commodity prices could soar if the Russia-Ukraine crisis escalates," said Warren Patterson, head of commodities strategy at ING Economics Jan. 21. "As tensions between Russia and Ukraine grow, so does the risk that it spills over into global commodity markets. Russia is a commodities powerhouse, with it being a key supplier of energy, metals and agri."
"Tough sanctions would rattle commodity markets. It appears that a number of commodity markets are starting to at least price in some geopolitical risk around the growing tension," Patterson added.
"Metals market will definitely react to a Russian invasion of the Ukraine," John Meyer, analyst with broker SP Angel, told S&P Global Platts. "China will buy Russian aluminium and other metals in defiance of EU and US sanctions but there will still be shortages of specific grades in all regions."
Base metals rallied sharply as supply constraints continue to tighten markets, wrote Australia's ANZ Research analysts Brian Martin & Daniel Hynes Jan. 21, referring to the previous day's London Metal Exchange closing prices. "Nickel led the sector higher, trading at a 10-year high of USD24,000/t. The Tagaung Taung nickel plant in Myanmar was halted earlier this month, while tensions over Ukraine are also raising the spectre of disruptions of exports from Russia," the analysts said.
Sucden Financial analysts Jan. 21 noted a rising metals price trend as "the geopolitical tensions between Russia and Ukraine continue to mount, bringing into question the scale and extent of sanctions that could be introduced by the US and Europe.
The comments came as talks took place in Geneva between US Secretary of State Antony Blinken and Russian foreign minister Sergey Lavrov in a move to avert further escalation at what was viewed as a critical moment in the crisis.
US president Joe Biden had stated to a news conference Jan. 19 that the US and NATO allies were prepared to deliver "severe costs and significant harm" via economic sanctions if Russia invades Ukraine, where it has 100,000 troops amassed at the border.
LME cash copper broke through the $10,000/mt barrier earlier in January for the first time in three months before slipping back, rising again in the week starting Jan. 16 to close Jan. 20 at $9,925/mt. Aluminum has remained in recent days above $3,000/mt. Both metals continue near multiyear highs amid supply concerns.
Russia is estimated to hold around 10% of the world's copper reserves and is a major producer of aluminum -- with producers including Rusal accounting recently for some 6% of global world supplies. Nornickel is a major producer of nickel and platinum group metals, key to energy transition. According to ING Economics, Russia currently produces some 43% of the world's mined supplies of palladium.
UBS pointed out Jan. 21 that gold prices have risen around 1% year-to-date despite a more hawkish US Federal Reserve, as investors seek safe haven options.
"Gold is up 1.78% in two days, following fresh inflation data out in the UK, US, and Canada, " commented market report Bullion By Post. "UK inflation is at 5.4%, the highest since 1992, and Canada too is at its highest since that year. Whilst inflation has been a big topic of late, it isn't the only problem. World leaders are growing increasingly concerned with the behaviour of Russia."
The London Bullion Market Association priced gold at $1,835/oz late Jan. 21.
Iron ore and steel prices could also rise in the event of an escalation of the Ukrainian conflict, according to Meyer. Ferrexpo is a major Ukraine-based producer of iron ore and pellets.
While a proposed US Democrat package does not explicitly recommend specific sanctions on metals, ING Economics noted that the US president could identify and impose sanctions on industries seen to pose a risk to national security, including minerals extraction and processing.
"US sanctions against Rusal rattled the aluminium market in 2018, with Russia the largest aluminium producer, after China," ING's Patterson said. "The global aluminium market is in deficit at the moment and so any disruption to these flows would only push the market further into deficit. Given that Europe is a large destination for Russian aluminium, a move which restricts aluminium flows would be bullish for European premiums."
Rusal declined to comment on the current situation when contacted by Platts.
Sanctions on Russian energy could also push metals prices higher. Energy-intensive smelters are already concerned with high electricity prices, which have resulted in zinc capacity reductions and steelmakers charging energy premiums on their product prices in Europe in recent months.
"Natural gas, oil and energy prices will likely go significantly higher in Europe, curbing yet more European metal production," SP Angel's John Meyer said.
Sanctions could impact output from European aluminum smelters, ING Economics warned. "As we are currently seeing, smelting capacity in Europe is having to shut down due to high power prices. In a scenario, where sanctions impact Russian gas flows, this would only drive European energy prices higher, risking even further capacity restrictions in the region.
Russia-Ukraine tension is worrying the gas market, ANZ research analysts Daniel Hynes and Soni Kumari noted Jan. 20. With Germany set to take action against the Nord Stream 2 gas pipeline should Russia invade Ukraine, and the US considering sanctions, 30bnm3 of gas earmarked to enter the continent this year could be impacted. "Despite a wave of LNG cargo hitting Europe, this should underpin prices in the short term," they said.
UBS said: "Energy prices look set to stay elevated ....Tensions in Eastern Europe and the Middle East are supporting prices due to fears of new supply disruptions. We expect oil demand to reach new record highs this year and Brent to trade in a USD 80–90/bbl range for now, with risks skewed to the upside."
Source: S&P Platts