On Thursday March 10, Russia announced that it would ban the export of over 200 products in retaliation for Western sanctions over its invasion of Ukraine, but Moscow held back on banning exports of energy, metals and minerals.
Originally, Russian President Vladimir Putin announced that he had planned to ban exports of certain commodities and raw materials, according to a decree released the evening of March 8th in Moscow.
Exports account for roughly 30% of Russia's GDP. Oil and gas shipments contribute up to 60% of all Russia's overseas sales. Russia is also the world's largest exporter of wheat, a large exporter of coal, and one of the leading producers of several metals like iron, steel, aluminum, nickel, and palladium.
Global prices for several key commodities produced in Russia have already risen explosively on the back of inflation, economic recovery, news of the invasion, and the threat of sanctions and embargos.
For nickel, all this news sent prices spiraling upwards out of control on the London Metal Exchange, until trading was suspended.
But, the export ban list announced two days after his first decree did not go as far traders had feared, and ending up excluding raw materials from its embargo and focused on manufactured goods such as cars, telecoms, electrical and industrial equipment.
This gives Russia a lifeline for its economy and for temporarily calmed markets but it leaves the inevitable question: what would happen if its metals and minerals were not available?
This very question was answered by the USGS back in 2017 which attempted to model the implications of the removal of six key metals from Russia.
Testing Russia’s Metal
The commodities considered in the study were aluminum (refined primary), nickel (refined primary), palladium (refined) and platinum (refined), potash, and titanium (mill products), and the regions and countries of primary interest were the United States, the European Union (EU–28), and China.
The hypothetical shock used had no end period and only the immediate effects, those limited by a 1-year period, were modeled and expressed as a percentage price movement based on three scenarios (low, central and high) for demand sensitivity to prices (elasticity).
|
Metal |
Low-End |
Central |
High-End |
|
Aluminum |
17.50% |
12.32% |
6.65% |
|
Nickel |
3.61% |
3.50% |
2.41% |
|
Palladium |
170.24% |
110.91% |
82.15% |
|
Platinum |
57.83% |
37.66% |
27.92% |
|
Potash |
35.89% |
18.47% |
7.67% |
|
Titanium |
65.59% |
46.85% |
36.44% |
Palladium would be the most affected metal, followed by titanium, platinum, potash, aluminum and then nickel in the low elasticity assumption. This is revealing because it was nickel prices that spiked the most on news of Russian supply concern.
This reveals commodities may be more exposed to speculative and warehousing risks immediately shock than actual long term supply shortages.
Either way, the metals will have to come from somewhere, the USGS scenario would create winners and losers for producers and end users of commodities, not just commodity traders.
Winners and Losers
Aluminum
According to the study, the European Union would be most affected by a shock from a lack of aluminum supply from Russia. The economic downturn of the Global Financial Crisis of 2008 and 2009 left many of the aluminum-producing facilities in the EU–28 countries either idle or shut down due to increasing energy costs and lower prices and demand for aluminum. The rest of the world, including such aluminum exporting countries as Canada and Australia would benefit from the supply shock in the study.
Nickel
For nickel, the United States and the European Union would bear heavier costs for nickel but those costs are relatively insignificant, despite what speculation did to the price of nickel on the LME. Australia and Canada would benefit from the supply shock, although modestly.
Potash
For potash, in addition to accruing a loss in the form of higher costs of imports caused by higher prices, China and India would probably experience lower domestic food production and resort to increasing its food imports.
The rest of the world, such as Canada and Belarus, could benefit from the supply shock. This model failed to account for US sanctions against Belarus’ potash production which will likely be diverted through Russia.
Palladium and Platinum
In the event of a supply disruption, manufacturers of catalytic converters would be faced with higher palladium prices, as well as the possibility of a shortage in supply significant enough to cause a disruption in catalytic converter production.
Manufacturers could switch from palladium to rhodium or platinum as the catalyst, but that requires 6 to 12 months for retooling and reprocessing. This option would remain appealing if the production in South Africa remained stable
Titanium
The unavailability of the Russian titanium supply in the world market would benefit the United States at any price point, as it would bolster its role as the leading exporter of titanium mill products.
The United States could sell these products at a higher price in the immediate term. U.S. production capacity would be adequate to meet demand if the supply of titanium mill products from Russia disappeared.
As of 2014, China has seen a rapid expansion in production of titanium mill products and has a diverse domestic consumption from its chemical industry, petrochemicals and chlor-alkali in particular.
However, most of China’s production of titanium mill products is not for export, and the output of the Chinese titanium industry is for industrial use at home.
Chinese titanium sponge producers would need several years to become certified for aerospace-grade sponge production, and Chinese gains in the immediate period after the supply shock would be modest.
A Supply Chain Rethink?
While Russia chose not to remove its raw materials from world markets, the threat remains for global supply chains and will force many governments and their economies to consider where they are getting their raw materials and whether they should be exposed to speculation.
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