Russian-Ukrainian War Hits the Mining Sector

Miners have benefited from the rally in precious metal prices, as the market fears a war in Europe after 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.

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 as independent states. Putin said that the launch of a special military operation aimed to protect 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. Ukrainian President Volodymyr Zelenskyy has 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.

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. “The Russian invasion of Ukraine puts the markets in panic mode. Investors are throwing shares out of their portfolios and fleeing to safe havens,” said Alexander Zumpfe, Senior Trader at Refiner Heraeus Metals Germany, to Bloomberg.

Furthermore, 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.

In addition, the conflict is expected to push up energy prices. 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 rose to above US$105/b, the highest price since 2014. This is a major challenge for mining, an industry where operations often rely on hydrocarbons to power operations. 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 improves, 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, it will 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, VP, Woodmac.