Why Putin’s invasion will impact everyone in the world
Russia’s invasion of Ukraine is showing no signs of slowing down. It may be half a world away but the shockwaves of war are coming for us.
As fighting in Ukraine continues to rage amid Russia’s invasion of the largest country in Europe, shockwaves are echoing around the globe that will impact more or less everyone in the world.
For the week ending March 6, the Bloomberg Commodity Spot Index saw the largest increase in the indices 62 year history, with prices rising by 13 per cent.
Considering this index includes some extremely volatile events such as the outbreak of the 1970s oil crisis, the 1979 Islamic revolution in Iran and the 1990 Iraqi invasion of Kuwait, it serves to illustrate how severe the current crisis is for the global economy.
From the supplies of basic foodstuffs such as wheat and corn, to the ability to traverse the world through Russia’s vast airspace, these simple things that we took for granted just a few short weeks ago are in potentially long term jeopardy.
As the implications and challenges of this vastly different new world continue to become apparent, it’s understandable why commodity prices are rocketing as companies and entire nations move to secure vital supplies.
In recent days, Chinese President Xi Jinping warned that China cannot rely on international markets to ensure food security.
China should focus on its domestic food markets, while making sure it has an appropriate level of import capacity, Mr Xi said.
Mr Xi’s view has been echoed by China’s National People’s Congress, which has recently stressed that food security is a key issue for China this year, particularly following Russia’s invasion of Ukraine.
As China continues to secure food to feed its populace and commodities to drive its economy, there are the makings of a silver lining for Australian exporters.
Making hay while the sun shines
Amid all of this turmoil, rocketing commodity prices are a major boom to Australia’s exporters and to the federal Treasury’s coffers.
In the past 15 days the price of Newcastle coal futures for March has risen by over 100 per cent to $US415 ($A567) per tonne. This compares to an average price of around $US65-70 ($A88-95) in the months before the pandemic began.
For Australia’s most valuable export in overall dollar terms, iron ore, there has been upward pressure on prices, but significantly less than within energy markets. According to Singapore-based iron ore futures, prices have risen by 14.3 per cent since Russia’s invasion began.
In the world of agricultural commodities, price moves have also been explosive. In the past three weeks the price of wheat has risen by more than 71 per cent.
With Australia being a major exporter of all these commodities and a long list of others that have benefited significantly from rising prices due to the war, it is one of the relatively few nations that may see a benefit from the conflict at least at first glance.
The China factor
In the weeks and months leading up to the war, Beijing had been engaged in a campaign to bring commodity prices down. In mid-February, several iron ore producers were called to a meeting with China’s top planning body in Beijing amid an attempt to crackdown on rising iron ore prices.
After seeing iron ore prices rise to almost $US240 ($A328) per tonne in May last year amid a wave of stimulus driven demand, Beijing was eager to make all possible moves to prevent that from occurring again as Beijing’s focus shifts towards the steel intensive business of infrastructure construction.
Ultimately their efforts would come to naught. The moment Moscow began its full scale invasion of Ukraine, the fundamentals that underpins commodity markets were completely transformed.
In short order Beijing’s state-owned commodity buyers shifted from attempting to use Beijing’s leverage as a major commodity importer to put downward pressure on prices, to all of a sudden being forced to focus on ensuring sufficient supplies.
On March 2, Bloomberg reported that, “Government agencies, including the country’s top economic planning body – the National Development & Reform Commission – have been ordered to push state-owned buyers to scour markets for materials including oil and gas, iron ore, barley and corn to fill any potential gaps brought on by the conflict.”
According to people familiar with the matter, officials made no mention of prices, indicating that cost is not currently a major factor.
A double edged sword
As uncertainty surrounding supplies of commodities and the ongoing evolution of sanctions against Russia continues, Australia’s commodity producers can make hay while the sun shines.
In the longer run, things are quite a bit more challenging for Australia. Despite being a large producer of a long list of different commodities, the Australian economy remains overwhelmingly driven by consumer spending.
If sustained, in time higher commodity prices will feed into the prices consumers pay for everything from the latest smartphone to a box of Weet-Bix at the supermarket checkout. This could also place significant pressure on the RBA to raise interest rates much sooner than it is planning to.
Ultimately, the future is a highly uncertain one. We could see the beginnings of a permanent shift away from Russian produced commodities or this could somehow be resolved in the coming months, with something akin to the pre-war status quo restored.
In the short term, Australia will continue to enjoy yet another unexpected silver lining, just as it did while the Global Financial Crisis was causing havoc in much of the rest of the developed world.
In the long term we’ll just have to wait and see if the lucky country’s luck holds.
Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator
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