The war in Ukraine and sanctions against Russia are already reshaping the agriculture, metals and energy markets.
Catalysts in Play: Investors in domestic and global equities were already contending with a shifting backdrop spurred by inflationary pressures and the ongoing supply chain disruptions stemming from the pandemic. Russia’s invasion of Ukraine adds another variable that will have an outsized influence in certain areas of the commodities market and create a domino effect that has the potential to introduce new risks and open up new opportunities for investors.
Entry Points: For instance, combined Russia and Ukraine account for approximately one fifth of the total export trade of wheat and has a similarly influential role as a producer of corn, sunflower oil and potash, used in fertilizer. Within metals, Russia alone accounts for over 40% of the global supply of palladium, nearly a third of the global diamond supply, and is among the most significant producers of platinum, rhodium, nickel and other metals. But it’s the energy segment, in particular, where the impact of the ongoing conflict may be most acute.
Oil Supply Shrinks as Demand Keeps Growing: The oil market was already dealing with a structural deficit prior to the conflict, which has been exacerbated by the war in Ukraine and following the sanctions against Russia, which accounts for nearly 10% of the global oil supply. As demand is expected to reach pre-pandemic levels later this year, an additional investment of $30 billion to $40 billion, over 2021 levels, would be required for U.S. oil operators to produce the roughly one million barrels per day required to meet growing demand.
Europe Squeezed by New Natural Gas Constraints: Russia also accounts for 17% of the natural gas supply globally and 40% of Europe’s natural gas consumption. Depressed investment in recent years had already created tight conditions in the global natural gas markets. In Europe, leaders have signaled a potential shift to liquefied natural gas, but the infrastructure required could take several years to put in place, suggesting natural gas prices could remain elevated for some time.
Active Strategy: The energy markets are just one area within the commodities space being impacted by the conflict. But given the downstream implications, the unbalanced supply-and-demand picture will have both expected and unanticipated effects across the economy. Boston Partners’ disciplined execution of a value-oriented, research-driven investment approach – incorporating both bottom-up fundamental and quantitative analysis to identify undervalued high-quality companies, while avoiding overvalued low-quality companies – can help investors stay ahead of the changing market conditions.
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Statistics and other information taken from the following sources:
JMAT; De Beers; Wood Mackenzie; Barclays Research; Deloitte; Trade Map; Center for Strategic Research; Joint Organisations Data Initiative (JODI); and Department of Energy.
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The views expressed reflect those of Boston Partners as of February 2022. Any such views are subject to change at any time based on market and other conditions and Boston Partners disclaims any responsibility to update such views. Discussions of market returns and trends are not intended to be a forecast of future events or returns.
