OPEC wimped it, China dodged it, but the tough sanctions against Russia have not only crippled the western arms of some of its key companies, including gas suppliers and banks, but also boosted the prices of key commodities to near-record highs.
The sanctions have seen all three ratings groups – S&P Global, Moody’s and Fitch – slash Russia’s credit standing to junk status.
That has left investors and traders scrambling to find replacement cargoes and longer-term supplies of key Russian commodities – oil, gas, nickel, copper, grains, gold and more.
That in turn has boosted prices to levels not seen in a decade or ever – in the case of Australian thermal coal prices which topped $US400 a tonne on Wednesday before retreating to a range of $US350 to $US430 a tonne (depending on the month being traded.
Copper prices surged Thursday to $US4.78 a pound on Comex in New York – just short of the record high a touch above $US4.88 a pound hit last May. Nickel again rose, aluminium hit an all-time high, tin is still around all-time highs while zinc topped $US4,000 a tonne for the first time in 15 years on the London Metal Exchange.
Oil eased back to around $US108 a barrel in New York after peaking above $US116 a barrel earlier on Thursday and Brent was around $US111 a barrel, well down on the $US119 a barrel touched earlier in the day.
Gold jumped another $US20 an ounce to top $US1,940 an ounce with traders looking for the $2,000 level for a second time in three years.
Singapore iron ore futures rose again to top $US158 a tonne for the most traded April contract.
These big moves are in reaction to the still growing realisation in markets that Russia’s invasion of Ukraine and western sanctions have removed a large part of the commodity supply cycle. For how long, no one knows and its why prices are surging and sliding.
The ratings moves by S&P Global, Moody’s and Fitch came as the shares of major Russian companies listed in offshore markets – especially on the London Stock Exchange – collapsed to be worthless. Some had market values of $US100 billion or thereabouts only a month ago.
This means investors around the world have lost tens of billions of dollars in a matter of days – most of the money being from investors other than the managers own funds.
In Australia the losses will be in the billions and spread across the board – from Australian Super with a reported $300 million to the Future Fund with hundreds of millions.
The super fund regulator APRA on Thursday quietly told fund trustees that it “will not be taking any action against trustees who seek to divest Russian assets in this context where trustees have considered such divestments in accordance with their duties.”
The regulator made it clear it was taking notice of “(the Federal) Government’s statement confirming its strong expectation that Australian superannuation funds will review their investment portfolios and take steps to divest any holdings in Russian assets.”
No guidance though on how APRA expects these losses to be treated in quarter and annual results of the funds and distributions to members.
The losses are dramatic – for example the offshore listed shares of gas giant Gazprom, oil giant Lukoil and Russia’s biggest bank, Sberbank are now penny stocks as Russian companies plunged in London. The Austrian branch of Sberbank collapsed and was ordered closed by the European Central Bank.
Fitch followed up the cut to Russia’s credit rating by S&P Global earlier in the week and was later joined by Moody’s.
Fitch cut its Russian rating by six levels to “junk” status. Moody’s made a similar cut and cited “heightened risk of disruption to sovereign debt repayment given the severe and coordinated sanctions and significant concerns around Russia’s willingness to service its obligations”.
Fitch like the others pointed to the Western sanctions over the invasion and war against Ukraine which made it uncertain Russia could service its debt and would weaken its economy in “a huge shock” to its creditworthiness.
Fitch downgraded Russia to “B” from “BBB” and placed the country’s ratings on “rating watch negative.”
“The severity of international sanctions in response to Russia’s military invasion of Ukraine has heightened macro-financial stability risks, represents a huge shock to Russia’s credit fundamentals and could undermine its willingness to service government debt,” Fitch said in a report.
Wednesday’s OPEC+ meeting was joined by a senior Russian government official without comment and proceeded to cut its production cap by another 400,000 barrels, despite global oil prices surging past $US110 a barrel as the group held its meeting.
China, though, is sticking with Russia and will end up being a financial conduit for the isolated country to allow it to trade and sell its exports – especially oil and gas and be paid. At the same time reports emerged that China has asked Putin not to invade Ukraine until the Winter Olympics were over. No similar request for the Para Olympic Winter Games about to start.
China’s banking and insurance regulator said on Wednesday that the country opposes and will not join financial sanctions against Russia.
“China’s position has been stated clearly by the Ministry of Foreign Affairs. Our international policies are consistent,” said Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, according to a translation from the CNBC financial website and news service.
Guo, who is also Chinese Communist Party secretary of the People’s Bank of China (which means he makes sure it sticks to the cant promoted by President Xi Jinping), added piously that he hopes all sides will maintain normal economic exchanges and that the sanctions have had no apparent impact on China so far.
Reuters reported that it had heard that hundreds of Russian companies were being allowed to open yuan denominated bank accounts in some of Chinese largest banks.
Sberbank and Gazprombank, Russia’s largest and third-largest lenders, which are used for oil and gas payments, were not excluded from the interbank Swift payments system in the latest sanctions. These banks were already under sanctions limiting their access to EU capital markets since Russia’s annexation of Crimea in 2014.
Brussels, Washington and London have banned Russia’s central bank from accessing foreign currency reserves – a devastating move when a sizeable chunk of its $US640 billion held in dollars, euros and sterling and this will cripple the country eventually.
This will make it much harder for Russia’s central bank to support the rouble, which crashed 40% to a record low on Monday, igniting fears of surging inflation (8.7% on January from a year earlier and up from an annual rate of 5.5% in late 2021) and a crash in living standards for ordinary Russians.
China’s refusal to join the sanctions will mean Russia will be able to get some US dollars – but at a price and at the risk of turning itself into a debtor of the Chinese Communist Party run government, which always seeks payment for its aid.
Fitch said that US and EU sanctions prohibiting any transactions with the Central Bank of Russia would have a “much larger impact on Russia’s credit fundamentals than any previous sanctions,” rendering much of Russia’s international reserves unusable for FX intervention.
“The sanctions could also weigh on Russia’s willingness to repay debt,” Fitch warned. “President Putin’s response to put nuclear forces on high alert appears to diminish the prospect of him changing course on Ukraine to the degree required to reverse rapidly tightening sanctions.”
What, then, does this mean for commodities?
OPEC kept the blindfold on at its OPEC+ (Russia and a few smaller producers) meeting on Wednesday. A senior Russian politician participated in the meeting and the final statement did not mention the Russian attack on Ukraine at all.
That’s not surprising seeing the UAE had abstained on a key UN vote on Ukraine this week (despite it hosting US troops in Abu Dhabi). This week the UAE suddenly ended visa-free travel for around 15,000 Ukrainians living in the Emirates.
OPEC only referred to unspecified “geopolitical developments” as it cut the group’s production cap by 400,000 barrels a day from April.
The Saudis are supposed to be America’s best friend in the Middle East among Arab states but there are no favours when it comes to screwing the most out of its oil exports via OPEC, an organisation it dominates.
OPEC did raise eyebrows by claiming the “current oil market fundamentals and the consensus on its outlook pointed to a well-balanced market, and that current volatility is not caused by changes in market fundamentals.”
That was why oil was charging past $US110 a barrel and peaked above $US119. Traders are reacting to the disappearance of Russian exports – put at 4 to 5 million barrels a day and between 2 to 3 million barrels a day of refined products such as petrol, avgas and bunker/diesel fuels.
Reuters reported on Wednesday that Russian traders could not sell Urals type oil (the Russian benchmark) for an $US18 a barrel discount when Brent physical was just over $US100 a barrel.
There were no bidders and another energy blog said there are no buyers and no way to ship the oil at the moment because western shippers have stopped accepting Russia sourced cargoes as no western insurer or trade financier/bank will insure or underwrite the cargo, as they normally do every day.
Several major European based shipping lines announced this week they would stop Russian trade – there are reports Russian LNG carriers are finding it hard to discharge their cargoes in some European ports.
Maersk has stopped sailings to and from Russia, as will MSC Mediterranean Shipping Company (based in Switzerland). The two are the leading container lines in the world. Another giant, CMA CGM has joined the ban, though so-called ‘humanitarian’ products will still be carried.
Bulk carriers have curtailed or stopped liftings and loading activities in Russian ports, even though they are not part of the sanctions (nor were the container lines),
This followed news on the first day of the invasion of a coal carrier chartered by US commodities trader, Cargill, being hit by a shell while in Ukrainian waters in the Black Sea. It was one of three cargo ships hit since the war started.
The incidents have seen insurers drop coverage for sailings into the Black Sea, meaning all shipping movement have halted and cargos including oil, coal and wheat have been left stranded.
The disappearance of this oil and associated products and a growing fear of a loss of Russian gas exports to Europe, is why Australian thermal coal futures prices have soared to all-time highs on Thursday of above 4US440 a tonne (Well over $A530 a tonne), according to the ICE Newcastle thermal coal index.
That’s more than doubled in just over a week and up $US146 a tonne in a day. The price fell back under $US400 a tonne for the current month on Thursday (to around $US350 a tonne).
Energy and commodities consultants, Wood MacKenzie say there are growing dangers to the world economy in this surge in prices (which is being seen in wheat, gold and to a lesser degree in copper, thought aluminium and nickel prices have surged as well).
“Having to replace Russian coal volumes would result in a price shock to global coal markets and a coal shortage in Europe,” Wood MacKenzie said on Thursday.
“Russian coal accounts for roughly 30 per cent of European metallurgical coal imports and over 60 per cent of European thermal coal imports. The primary issue with replacing Russian coal exports in Europe is its reliance on Russia’s particular quality of coal.”
Russia exported 170 million tonnes of thermal coal in 2020 and with the 5 to 6 million barrels of oil and oil products a day and an unknown amount (but considerable) gas, will leave an impossible to fill hole in global energy (and some key commodity supplies – wheat is at 13-year highs) as well as key grains.
Bloomberg reported Thursday that Chinese power plants and steelmakers are looking for alternatives to Russian coal after some domestic banks suggested they avoid purchases due to the mounting sanctions being imposed on Moscow.
China could find coal from Australia, if it lifted the bans that have applied for nearly 2 years.
“At least two of China’s largest state-owned banks are limiting financing for Russian commodities. That includes Industrial & Commercial Bank of China Ltd., which has stopped issuing U.S. dollar-denominated letters of credit from its offshore unit for Chinese firms seeking raw materials from Russia. Yuan-denominated credit lines are still available for some clients, however,” according to Bloomberg.
The Chinese coal importers are now waiting for clearer policy signals from Beijing on whether they can resume purchases, while traders are seeking transactions in yuan rather than dollars, according to Bloomberg.
China is not that reliant on coal imports, producing around 90% of its needs itself. Imports are capped at 300 million tonnes a year and around 14% came from Russia last year. China was forced to quietly use all the Australian coal – well over 13 million tonnes at one stage – it had banned in 2020.
Bloomberg reckons Russia will need to divert 38% of its annual coal exports, or 82 million tonnes, from Europe and Ukraine to China and other Asian countries if the crisis goes on.
But in response to last October’s power rationing and coal shortage, China has boosted production and approved three new mines (at a cost of more than $US3 billion) to produce around 20 million tonnes of thermal coal a year.
India might buy more from China, a traditionally ally, but Australian coal exports to India have been rising because of better quality, price and quicker delivery.
Indonesia is planning to increase its shipments overseas this year but that country banned exports in January for at least a month because exporters had failed to deliver enough coal to keep its power stations well stocked.
Wood Mackenzie added that “The world’s dependence on Russia for certain commodities cannot be overstated ‒ from gas, coal, oil, iron ore, aluminium, platinum group metals and zinc to copper, lead, petrochemicals and fertilisers.”
Not helping Russia to sell (and in the long run produce) key energy commodities is the departure of a growing number of western energy giants and their people and expertise.
Major oil companies BP, Exxon Mobil and Shell have already said they are exiting all Russian operations with costs in the billions of dollars.