Autumn 2022 UK Market Report
Russia-Ukraine war
Impact on commodities
Russia’s invasion of Ukraine has caused a massive humanitarian crisis as well as shock and condemnation around the world.
Other far-reaching effects of the war include major supply disruptions and significant price escalation for commodities.
Metals
Reductions in metals pricing have been seen due to concerns of falling demand, as a result of increasing interest rates from central banks as well as lockdown policies in China.
Copper prices fell to a 16-month low in June but have since fallen further. The metal is seen as a good economic indicator as it is used in many construction materials — demand heats up during expansion phases and cools during times of contraction.
Following Russia’s invasion, metals pricing increased as there was concern that supplies could run low just as economic recovery from the pandemic was ramping up. But stock availability is greater than anticipated, thanks to tempered Chinese demand and higher-than-expected Russian supply.
Aluminium prices dropped on 17 October as inventories in London Metal Exchange warehouses increased due to fears of unwanted Russian-origin metal in the system. Although sanctions imposed on Russia do not impact the buying of Russian metal, metal industry sources said there is concern that Rusal will be unable to sell its metal, leading it to deliver into the LME system which would distort prices.
Falling metals prices are an opportunity for manufacturers in a tough market.
Eurometaux recently highlighted that about 50% of European Union (EU) aluminium and zinc production capacity “has already been forced offline due to the power crisis” and reduced energy costs are needed to prevent the permanent closure of further metal producing plants in the region.
Closing of plants would lead to an increased reliance of imports which typically have higher carbon footprints. According to Eurometaux, “Chinese production is 2.5 times more carbon intensive than European zinc production [and] 2.8 more in the case of aluminium.” It estimates that replacement imports of aluminium have added 6–12 million tonnes of carbon emissions this year.
Food
Food price indices have stabilised following a landmark agreement between the United Nations (UN), Russia and Ukraine, signed in Istanbul in July to resume grain exports from three Ukrainian ports, paused after the start of the Russia-Ukraine war in February.
Tayyip Erdogan, the Turkish president, said that thanks to the deal, more than eight million tonnes of Ukrainian grain had been supplied to world markets with 363 shipments to Europe, Asia, Africa and Middle Eastern countries as of 20 October.
The parties had been negotiating an extension beyond the agreement’s 19 November deadline, as well as expansion to include Russian grain and fertiliser exports.
On 28 October, UN Secretary General Antonio Guterres had called on all sides to renew the grain deal, saying: “If food and fertilisers do not reach global markets now, farmers will not have fertilisers at the right time and at a price they can afford as the planting season begins, endangering crops in all regions of the world in 2023 and 2024, with dramatic effect on food production and food prices worldwide. The current crisis of affordability will turn into a crisis of availability.”
However, Russia withdrew from the deal on 29 October following drone strikes on the Crimean port of Sevastopol.
The EU, North Atlantic Treaty Organisation (NATO) and the UN have pleaded with Russia to reverse its decision, warning that any reduction in exports from Ukraine could have potentially deadly consequences.
According to the UN, Ukraine typically supplies around 45 million tonnes of grain each year. It is also amongst the top five global exporters of barley, corn and wheat.
Shashwat Saraf, the East Africa Emergency Director at the International Rescue Committee said, “The renewed blockade is prompting grave concerns about the growing global hunger crisis, especially in East Africa where over 20 million people are experiencing hunger, or in places like Yemen which relies on Russia and Ukraine for almost half its wheat import and where over 19 million people need food assistance.”
Energy
There has been renewed volatility across the energy markets.
Brent crude oil prices have decreased due to concerns of a global recession.
The Organisation of the Petroleum Exporting Countries (OPEC) announced that it will slash its production quota by two million barrels a day starting in November, which is a month before Europe’s ban on Russian oil is set to be fully established.
As several OPEC members are already pumping below quotas, the impact on global markets is estimated to be a reduction of approximately one million barrels a day — but this will still significantly tighten supply.
Increased gas prices were seen over the summer, as Russia constrained gas supplies to Europe and supplies through the Nord Stream 1 pipeline were completely suspended at the end of August.
Europe achieved its target to fill gas stores by 80% ahead of time, which has led to decreased pricing in September and October, albeit at higher levels than before Russia’s invasion of Ukraine.
Pricing has also been helped by China selling some of its surplus liquified natural gas (LNG) due to weak energy demand at home. Zongqiang Luo, Senior Analyst at Rysad Energy, said that China had imported 7.7 million tonnes of LNG until August, which is 25% less than the same period of last year, meaning that “China is not competing directly with European buyers for the spot value because the majority of the imported LNG was contracted volumes."
Longer-dated Title Transfer Facility contracts have not fallen as much, reflecting that it is anticipated to be more difficult to replenish European storage next year without meaningful volumes of Russian gas. Demand for LNG will also rebound in China upon revival of its economy.
Weather forecasts are being carefully reviewed as gas has a high price-sensitivity to changes in weather, due to demand. Warmer than usual weather in Europe during October has helped the position.
Energy price guarantee
The energy price guarantee had been due to cap prices at £2,500 for an average household for two years but this has now been scaled back to end in April, with the government planning to target help after this date for those most in need.
It was considered irresponsible to expose public finances to unlimited volatility in international gas prices. Jeremy Hunt announced the formulation of “a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need.” He added, “Any support for businesses will be targeted to those most affected and the new approach will better incentivise energy efficiency.”
Until 1 October, the cap was set at £1,971. It was then forecast to rise to £3,549 with further rises anticipated on 1 January and 1 April 2023. The ending of support is expected to add pressure to households, with the energy price cap expected to hit in the region of £4,000 in April when the scheme ends.
