Escalation in Ukraine will radically change the metals and energy markets in Europe
Metal market participants are closely monitoring the escalation of tensions between Ukraine and Russia, trying to assess the potential impact of military action or sanctions on supply and demand fundamentals and prices.
For now, the approaching Lunar New Year in China continues to set the tone for many metals markets, but the complex web of metal production and transport routes in Russia and Ukraine is such that a significant escalation in tensions could quickly affect fundamentals and sentiment.
If Russia invades Ukraine, though Moscow has repeatedly denied that it has such intentions, the supply of metals could shrink and demand could rise. In particular, market participants point to metals associated with aerospace and defense production.
“Cobalt and other high-temperature metals are always good in times of war because they are used in aerospace. All major arms manufacturers will sell weapons to Ukraine,” Argus cobalt trader.
Market players are closely watching whether developments in Ukraine could affect Norilsk Nickel, Russia's largest producer of nickel and cobalt. Norilsk Nickel produces 1,800-2,100 tons of cobalt metal per year, although most of it comes from its Finnish plant, suggesting that any impact on supply may be limited. It also has close ties with other parts of Europe, including an agreement to supply nickel and cobalt to the German battery chemicals manufacturer BASF.
The discussion of possible sanctions against Russia is also unnerving markets: it is suggested that Western banks may be reluctant to finance companies that produce or process materials subject to sanctions. It remains to be seen whether the US or Europe will introduce any such measures and which sectors they will affect.
Ferrovanadium traders are also expressing supply concerns, especially with European prices already up more than 15% since early 2022 as flooding disrupts supplies from Brazil. There are now fears that Russian Evraz's vanadium products could be targeted, further narrowing the European market. Evraz produced 19,533 tons of vanadium concentrate in 2020 and 15,202 tons in the first nine months of 2021.
The tungsten market is also at risk of potential disruption, especially as it is a strategic material used for military purposes, although there have been no obvious problems so far. Any new conflict could see Russia — the third largest tungsten producer after China and Vietnam — suspend supplies of tungsten for domestic consumption, with Russia even considering imposing an export duty on products like tungsten in response to any sanctions. .
It may take time for any increased demand in later stages to translate into new orders and higher prices, depending on how well buyers hold stocks of various metals. Regarding chromium, a European trader noted that while he was concerned about the risk of logistical disruptions, “many consumers bought more than they needed in November and December, so they are not buying now and will wait until the very last minute in the hope of a lower price.”
Titanium and ferrotitanium traders and consumers have expressed concerns about the stability of their long-term contracts (LTCs) with Russian suppliers, but most are hopeful that a diplomatic solution will be reached.
"Boeing depends on Russian titanium for its aircraft and landing gear, so the US is limited by its dependence on Russian metal," the ferrotitanium producer said.
Risk of further increase in energy prices
Energy costs have been a major concern for the metals industry for months now, and market participants are bracing for potential further margin squeeze if tensions between Russia and Ukraine lead to new turmoil.
German Foreign Minister Annalena Berbock said that the Nord Stream 2 gas pipeline with a capacity of 55 billion m³ /year could be included in potential sanctions if Russia takes military action against Ukraine. The pipeline is technically ready, two of its strings have already been filled with operating gas. But German energy regulator Bnetza has yet to certify the pipeline operator, and said last month it would not make a final decision in the first half of 2022. On January 26, Gazprom's subsidiary Nord Stream 2 announced that it had set up a subsidiary in Germany. a prerequisite for link certification by Bnetza.
Coal consumption in Europe may also be