Russia’s invasion of Ukraine has led to ‘windfall gains’ for Australian companies

Russia’s war in Ukraine has devastated the country and killed thousands – but it has delivered huge profits to Aussie companies, a new report has said.

Russia’s invasion of Ukraine has led to “windfall gains” for Aussie mining companies, a new report shows.

Deloitte Access Economics has looked at the war in Ukraine and its implications for Australia’s resources industry as part of its Investment Monitor, which analyses major engineering and commercial construction projects.

Russia is a key energy exporter and sanctions over its war in Ukraine have led to sharp increases in the prices of iron ore, coal, gas and base metals.

“Russia’s invasion of Ukraine has led to windfall gains for Australian producers of iron ore, coal, gas and base metals,” Deloitte partner and lead author Stephen Smith said.

The report noted the Reserve Bank of Australia’s measure of commodity prices was now 60 per cent above pre-Covid levels.

“Prices have increased 13 per cent since January amid the impact of Russia’s invasion of Ukraine,” the report said.

The iron ore price has recovered from a low of $US85 ($A121) a tonne in late 2021, to around $US140 ($A200) a tonne in April 2022, partly because Russia and Ukraine collectively account for around 13 per cent of the steel trade.

Lockdowns in China as the country continues to cling to its Covid zero policy, have further restricted the global supply of steel and supply disruptions are also affecting other major iron ore exports such as Brazil.

However, the global supply of iron ore is forecast to increase over 2022 and 2023, and this could see demand soften.

Russia is also a key producer of coking coal, typically supplying around one-third of European, Japanese and South Korean demand. The war saw prices soar to record highs in early 2022.

A worker walks by a dump truck carrying freshly excavated iron ore in Poltava, Ukraine. Picture: Vincent Mundy/Bloomberg

The report said Australian premium coking coal prices reached a high of almost $US700 ($A1000) a tonne in March.

Meanwhile, the price of thermal coal – which is burnt in power stations to generate electricity – has seen similar price rises in 2022.

High demand during the northern hemisphere winter pushed prices up as Ukraine war saw buyers looking to replace the approximately 15 per cent of global supply generally sourced from Russia.

However, the report notes China’s unofficial ban on Australian coal put into place towards the end of 2021 may reportedly last up to another two years, creating challenges for Australian coal miners in the future.

Coal consumption is also trending downwards around the world and the report noted Australia’s other trade partners – Japan, South Korea and Taiwan – continued to transition toward less carbon intensive forms of electricity generation.

Meanwhile, Russian sanctions have forced buyers to look elsewhere for liquefied natural gas (LNG) – including to Australia – as Russia produces around two-fifths of all gas consumed in Europe.

Prices for base metals like nickel, copper and zinc have also risen this year amid the war in Ukraine.

While Australian businesses are enjoying the financial benefits now, Deloitte does not believe the increased profits will lead to significant investments in the mining industry.

“There is uncertainty around how long prices will remain elevated and there are added risks for Australia’s more carbon-intensive mining industries,” he said.

“That suggests that today’s record prices may not be followed by a matching increase in investment.”

Russia’s majority state-owned Gazprom is the largest publicly listed natural gas company in the world. Picture: Nikolay Doychinov/AFP

Outlook for investments is still positive

Mr Smith said the good news was that the outlook for business investment in Australia was solid.

“The key positive is that the economy has recovered faster than previously expected. This has boosted business profits and reduced spare capacity,” he said.

“That’s a combination that typically leads to an increase in business investment.”

Mr Smith said as disrupted supply chains return to normal, businesses would likely unleash catch-up spending on investments.

“Much of this will flow into machinery and equipment investment, but there is also expected to be a boost to non-residential and engineering construction,” he said.

Mr Smith said miners were looking to increase production while commodity prices were elevated, airlines were purchasing new planes and there was record public sector infrastructure investment.

However, higher borrowing costs for businesses would be a risk and could dampen investment and commodity prices were also forecast to fall in 2022.

Pandemic-driven tax breaks were also set to end in 2023 and there was uncertainty around the global geopolitical environment.

Regardless of these risks, Deloitte is forecasting business investment will grow faster than the wider economy from 2022, before falling in 2023 as infrastructure investment in the pipeline reaches a peak.

“The war in Ukraine has also prompted a broader rethink of energy security, particularly in Europe,” he said.

“One pathway to bolstering this security is through renewables. This strengthens the business case for new investment in Australia’s critical minerals and metals industry.”