Russia and Ukraine are both important grain exporters, accounting for 1/3 of the world’s traded wheat. The invasion of Ukraine has cast a pall over the commodities sector because it has also made it impossible to ignore the geopolitical faultlines for key raw materials.
The conflict itself and sanctions on Russia are causing disruption in a number of markets, reports Financial Times (March 3, 2022). The rising cost of energy has important ripple effects in other commodity markets, including for the cost of fertilizer. On top of that, firms are growing increasingly worried about the way that many raw materials have the potential to be used as weapons of foreign policy — especially in a new cold war.
For the past 3 decades, commodities have been one of the most striking examples of globalization. And markets themselves have been built around the expectation of open global supply. But two events have changed the world. The pandemic highlighted the perils of relying on a handful of countries or companies, which had led to severe supply chain disruptions. Now from grains to energy to metals, Russia’s invasion of Ukraine has served as a reminder of how some countries wield considerable influence over raw material supplies thanks to their large market share of vital commodities. As well as being Europe’s main supplier of gas (it accounts for 40% of the EU’s consumption), Russia is also dominant in the markets for neon, oil, wheat, aluminium, and palladium.
The short-term response to the war has been to increase stockpiles of important raw materials. In the long-run, it is forcing industry to consider alternative supply chains that can bypass the conflict that is building between Russia and the west.
As businesses and governments cut costs in their supply chains and made them more efficient, they became more reliant on certain producers, leaving them vulnerable to sudden disruption in product flows. But perhaps one of the more worrying effects of the war in Ukraine has been the impact on grains and food prices. The conflict comes at a time when food prices are already high, the result of poor harvests around the world.
Classroom discussion questions:
- What could the U.S. do to alleviate stresses on oil and gas supply chains?
- What is the U.S. position on supply chains from China?