Commodities have been in the spotlight worldwide since the outbreak of the Russia-Ukraine conflict. Commodity markets are experiencing their most significant turbulence since 1973.
It is important to note that this situation differs significantly from the 1973 oil embargo in that it does not merely affect the oil supply. There is a jolt to the entire commodity chain: grains and oils, precious metals, copper, nickel, and uranium are among those that have suffered.
One of the most significant distinctions between the current commodity crisis and the 1973 one is that this time it is a buyer boycott, not a seller boycott. A prolonged rising commodity price period raises investor concerns about a new commodities supercycle.
Russia’s invasion of Ukraine has had a ripple effect worldwide, adding to the difficulties of the stock market and spooking investors. Palladium, copper, and gold prices have all reached new all-time highs in recent weeks, and now fertiliser prices have also followed the same pattern in the last month of the first quarter of 2022.
It is imperative that we make the most of the current supercycle by broadening our perspectives to maximise opportunities and limit possible risks
The trend of natural gas prices in Europe has continued to maintain an upward trajectory in the second week of March 2022. Recently, the price of lithium, aluminium, nickel, zinc and uranium have also surged to record levels.
Consequently, it is imperative that we make the most of the current commodity supercycle by broadening our perspectives to maximise the opportunities and limit the possible risks.
The crisis is yet to be properly reflected in the retail prices of fuel and food. However, if Russia and Ukraine do not deescalate their hostilities quickly, the world could verge a recession and a food catastrophe.
Let’s take a brief look at the supply chain and commodity pricing to understand where we are.
Grains are perhaps the most pressured market, with a significant danger to overall production, not just trade, resulting from the current circumstances. Ukraine is a major grain producer.
The United States Department of Agriculture (USDA) anticipated Ukraine will produce 42 million tonnes of corn in 2021-22, with 33.5mt projected to be exported. As a result, Ukraine would have accounted for almost 17pc of the worldwide export supply and ranked fourth in grain exports. The concern is what kind of planting season Ukraine will experience this year?
Ukraine is the world’s top producer of sunflower seeds in oilseeds, with the USDA forecasting a total output of 17.5mt in 2021-22, accounting for more than 30pc of global production.
Additionally, it has a sizable domestic crushing business, from which significant quantities of sunflower meal and oil are exported. Hence, there will be a great deal of uncertainty in the oil market in the near future.
Experts have also anticipated that wheat yields will fall short of their objective levels on the food front due to a lack of urea fertiliser during the sowing season. Moreover, the price of wheat on the global market will continue to rise in the next months and years.
Inflationary pressures on wheat prices worldwide would give home investors an extra incentive to smuggle wheat into neighbouring western countries. If domestic wheat is scarce in Pakistan, the government would be forced to import more expensive wheat, resulting in a rise in domestic flour costs and the price of imported wheat. Additionally, this would have a similar impact on the price of edible oils.
Top global lenders such as the International Monetary Fund, the World Bank, and others have recently warned of the severe economic consequences of the Ukraine conflict. The groups have issued a joint statement warning that violence exacerbates poverty and elevates inflation globally.
Unfortunately, we are again experiencing political turmoil in Pakistan. Imran Khan, Pakistan’s former Prime Minister, threw the country into political limbo by acting like a toddler discovering that other children also have birthdays for the first time. His frame of mind indicates that no one else would be able to rule the country if he was not in command.
I believe that all this political upheaval is distracting the parliament from focusing on and addressing issues arising from the current commodities supercycle. To confront the global financial crisis, instead of executing popular short-term measures, all political parties should collaborate with Pakistani Prime Minister Shahbaz Sharif to develop a long-term strategy and take effective measures to improve the lives of the less privileged.
The writer is a Director of the Business Finance Programme at Birmingham City University, UK.
Published in Dawn, The Business and Finance Weekly, May 30th, 2022