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Commodities markets: nickel up 91%, palladium up 32% since invasion


Highly volatile commodities markets seem to be the main game this week for traders, with no end in sight for the war in Ukraine and further sanctions on Russia possible. While we anticipated late last year that 2022 would be defined by gains in commodities – we were loading up on shares in the oil and mining sector, and already own Glencore (up 62% since we bought in) – we weren’t expecting commodities price moves to be quite as violent as this.

Oil, natural gas and wheat prices dramatically dipped yesterday after having raced upwards on multiple daily runs since the invasion began, while the equities roared back as bargain hunters raced to pick up stocks and investors mulled the potential of talks in Ankara aimed at trying to find a resolution to the escalating conflict.

The FTSE 100 has opened lower after jumping 3.2% higher yesterday after bargain hunters came out in force and oil prices eased off dramatically. That has helped the index make up losses since the invasion, down around only 1% over the fortnight. The DAX in Frankfurt has been on a nail biting rollercoaster ride, dipping dramatically since the invasion, before surging by almost 8% in trade yesterday in a relief rally.

Fresh scenes of devastation are still unfolding and refugees continue to pour over borders, so trading on exchanges is set to stay volatile until a lasting solution is found and investors assess the impact of the conflict on soaring inflation and the potential of stumbling growth.

OPEC news has taken out some oil upside

A calm of sorts though has descended after OPEC+ member, UAE said it was minded to encourage other members to pump more oil to relieve the super high prices, and provide more stability to the global economy. That set off the biggest drop in Brent crude since April 2020, with the benchmark falling 13% during the session. A barrel is currently trading around $117, which is still almost 18% higher than when the invasion began, an eye watering increase for companies and consumers already struggling with higher fuel costs.

Although wheat prices have cooled a little from their red hot peak earlier this week, futures contracts trading in Chicago are still around $11 per bushel, still around 14 year highs and are up by almost 15% since the invasion began. Russia and Ukraine make up 29% of wheat exports and with measures put in place by Kyiv to limit the export of grains given the crisis in the country, supplies from the region have been shrinking dramatically.

Commodities prices gains since invasion of Ukraine began

  • Brent crude +18%
  • Wheat +15%
  • Nickel +91%
  • Palladium +32%
  • Gold +4%
  • FTSE 100 -1%

The suspension of operations in Russia by large commodity merchants is set to keep the squeeze ongoing. “Ukraine is described as the breadbasket of Europe and so the limit to the amount of grain leaving the country is set to make a trolley load of goods more expensive with the price of baked goods, beer and pasta in particular expected to rise,” explained  Susannah Streeter, Senior Investment Analyst at Hargreaves Lansdown. “Some producers may have hedged against this dramatic rise in prices for now but the volatility is expected to linger.”

Nickel and palladium in focus

Nickel prices have also seriously hit nerves, with Russia a key global exporter of the metal which is highly in demand as the EV revolution speeds up. The metal has soared by 91% over the past fortnight with a run of highly volatile deals leading to a suspension of trading on the London Metal Exchange, which is unlikely to resume until Friday.

Worries are mounting about secure exports of palladium, with prices of the metal rallying by almost 32% since the invasion.

“Given its status as an essential material for the manufacture of computer chips, with Russia the world’s leading exporter, there is little surprise it’s shot up in price given such high demand but shrinking supply of the metal,” Streeter said. “Gold has dipped back again from its recent high but overall has come to the fore again as a traditional safe haven, rising by 4% since the invasion of Ukraine began as investors have sought to diversify across a range of different asset classes.”

Although Germany and other Eurozone countries have for now put the brakes on sanctioning Russian energy exports, supplies have already been disrupted as shipping companies avoid ports in the region and companies across the board start to reduce their exposure to Russia. European Natural Gas has dipped, but is still 9% higher since February 24th, as traders still fret about the risks that the taps to Europe will be turned off in a desperate retaliatory move by Russia.

Tough challenge ahead for Bank of England

With consumers and companies facing an inflation shock, these are testing times for many economies around the world, particularly in the UK. In exactly a week Bank of England policymakers will decide on rate rises and they are faced with a largely unsolvable conundrum. The commodity chaos is set to cause inflation to run even hotter than forecasts in the months to come, with speculation that the CPI index will soar to 8% before dipping back and rising again in the autumn as higher energy bills land.

But the double whammy is that these super high prices affecting oil, metals and grains may be hard to bear for companies and consumers, leading to less spending and investment and could push the recovery into reverse. Already household confidence has hit the lowest level in a decade according to the most recent YouGov survey, and an interest rate rise will pile on fresh financial pain at a time when tax rises will also soon hit.

The Bank of England’s main task is to maintain stable prices and oversee financial stability amid rip roaring inflation risks undermining that and overall economic health. So steering inflation back to the target of 2% is still set to be its priority and it’s highly likely a rate rise will be on the cards next week. But given the highly volatile situation, policymakers are expected to limit the increase to 0.25%, to try and dampen demand but not squeeze life out of the economy.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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