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Analysis

Russian-Ukrainian War Hits the Mining Sector

By Paloma Duran | Tue, 05/10/2022 - 11:45

Miners have benefited from the rally in precious metal prices, as the market fears further uncertainity in Europe following the conflict between Russia and Ukraine. However, the shift in trade due to sanctions, rising energy prices and disruptions in production are all expected to hit the sector in Mexico and elsewhere, adding to the growing global commodity supply problem.

“The global economic outlook, which overall looked promising after the pandemic, was dramatically shaken by Russia’s invasion of Ukraine. For Mexico, it means lower growth for 2022 and  extra pressure on the business environment. The negative impact of the Russian-Ukrainian conflict on Mexico’s 2022 outlook will be felt on supply chains and inflation, tilting toward a significantly more pessimistic scenario,” Alejandro Valerio, Practice Leader, FrontierView, told MBN.

Given fears that the European economy could collapse and that supply from key miners could be affected, prices of many metals hit record highs. Currently, Russia is the world’s leading supplier of palladium, with a market share of 40 percent. In addition, the country supplies 10 percent of the world’s nickel and 6 percent of the world’s aluminum. Once news broke that Russian troops had entered Ukraine, palladium prices jumped to a seven-month high, while gold hit an 18-month high as investors looked to buy safe-haven assets. “Gold prices remain healthy and are sure to perform well under current uncertain political strife being progressed by Russia in the Ukraine,” Ralph Shearing, CEO, Altaley Mining, told MBN.

Moody's Investor Service explained that the rise in prices reflects fears of supply disruptions and low inventories of base and precious metals, reported Mining.com. “The Russian invasion puts markets in panic mode. Investors are throwing shares out of their portfolios and fleeing to safe havens,” said Alexander Zumpfe, Senior Trader, Refiner Heraeus Metals Germany, to Bloomberg.

Experts believe that further aggression and sanctions between Ukraine, Russia and NATO would lead to a major increase in metal prices and demand for key war metals. "Metal prices can be heavily impacted by Western-imposed sanctions or Russian 'weaponization' of metal exports," Natixis analysts said. The conflict is expected to push up energy prices, as well. All industrial activities will be affected by this price hike, mining included. According to experts, metals that required energy-intensive smelting will be the most affected, like aluminum and zinc. In addition, base metals and steel are also expected to be influenced. Wood Mackenzie said that since 35 percent of the cost of making aluminum is energy, rising prices have already significantly reduced production in Europe. If energy prices rise further, there is a risk that production will decrease an additional 400,000 tons per year.

Moreover, the increase in hydrocarbon prices is expected to surpass global inflation and interest rates. This week, oil was US$103.97 per barrel. This is a major challenge for mining, an industry where operations often rely on hydrocarbons. The industry already took a hit in 2021 due to rising inflation, which increased various mining, logistics and commodity costs. This led projects to be put on hold until the market outlook improved, reported MBN.

The final impact will depend on the scale of the conflict and sanctions against Russia. Experts believe that even if trade bans are implemented, Russian products will find their way to other markets. However, this could still affect the balance of the market and create more difficulties for the mining industry. “As we have seen during other market interventions, the rebalancing can be messy and typically comes with a price impact that goes beyond the additional costs of obtaining alternative supply. There is little doubt that any conflict would add to the growing inefficiency of commodity supply that has been a feature of markets over recent years, due to resource nationalism, trade disputes and pandemic disruption,” said Robin Griffin, Vice President, Woodmac.

The BMO Metals and Mining report highlighted that there will be a long-term impact on the mining and energy sector due to the Ukraine-Russia war. Europe is expected to continue to rely on fussiel fuels to achieve greater energy independence from Russia, which will slow down the region's green energy revolution.

How Has the Ukrainian-Russian War Progressed?

Tensions between Ukraine and Russia have been on the rise for months, despite diplomatic attempts to diffuse the situation. Russian attacks began after Russian President Vladimir Putin recognized the Luhansk and Donetsk territories in Ukraine as independent states. Putin said that the launch of a special military operation on Feb. 24 was aimed at protecting people, especially Russians, who he says are being killed in Ukraine. Furthermore, Putin argued that Ukraine's NATO membership was unacceptable as it was a direct move against Moscow’s security. At the start of the conflict, Ukrainian President Volodymyr Zelensky declared martial law and called on world leaders to impose sanctions on Russia. Western countries have said that Russian arguments for invading are based on mere propaganda and that they will continue to support Ukraine.

Russia's initial goal was to take the Ukrainian capital, Kyiv. However, the Russian forces encountered enough resistance to change their objective to "liberate” Donbas, which before the war was already partially occupied by the Russians. Experts believe that now Putin is seeking to create a land corridor along the southern coast from Crimea to Russia. Experts argue that if Russia takes control of these regions, they will be annexed as Crimea in 2014, reported the BBC.

On several occasions, the governments of Ukraine and Russia have negotiated a cease in hostilities. However, no major agreements were reached and there have been no negotiations since March. As Russia seems to want to continue the war, Western countries have supported Ukraine with arms supplies and imposed various sanctions on Russia, shrinking its economy by 10 percent and raising inflation by 20 percent.

In addition, several countries, including the US, accuse Russia of committing war crimes and have argued that its special operation is actually genocide. The UN estimates that there are at least 6.5 million people displaced within Ukraine, 5.7 million have left the country and 6,731 civilian have died. At the moment, it does not seem that the Ukranian-Russian war will end soon, reported the BBC.

The data used in this article was sourced from:  
MBN, Mining.com, BBC, UNHCR, Natixis, Moody’s, Wood Mackenzie, Woodmac, BMO Metals and Mining
Photo by:   geralt
Paloma Duran Paloma Duran Journalist and Industry Analyst