Explained: How the Ukraine conflict rocked commodity markets

As the war rages, here's a look at the fallout on commodity markets since the February 24 invasion.

Aluminum prices soared after Australia banned exports to Russia of key raw materials used to make the metal.

Just as the first Russian tanks and military vehicles rolled into the Ukrainian territory on February 24, commodity prices surged with oil breaching $100 (€91) a barrel, aluminum climbing to a record high and wheat prices soaring to a nine-year high. The surge reflected traders' worries that the war involving Russia — a key supplier of oil, natural gas, coal, aluminum and wheat — and Ukraine, also a key exporter of wheat and oilseeds, could stoke inflation, further disrupt supply chains and derail the global economic recovery.

A month into the conflict, most of those fears are coming true. Inflation has shot up mainly due to higher energy and food prices, a shortage of wheat is deepening the food crisis in countries like Egypt, and economic growth is stalling, prompting economists to cut global growth forecasts. "Over time, global commodity trade flows will need to adapt to some or all of Russian/Ukrainian supply being unavailable, whether due to infrastructure damage, sanctions or ethical concerns," major commodities trader Glencore said in its annual report last week.

Aluminum's sanction woes

Aluminum prices have been skyrocketing over the past month, surpassing the peak they hit in 2008 during the global financial crisis. Traders are fretting over supplies from Russia, which produces around 6 per cent of the world's aluminum supply. The most recent surge in prices came after Australia decided to ban exports to Russia of alumina and bauxite, which are used to make the metal. Australia supplies almost 20 per cent of Russia's alumina. Canberra's move is expected to further disrupt production at Russian aluminum behemoth UC Rusal.

"Although the ban on bauxite exports is immaterial given that UC Rusal does not import any bauxite from Australia, the ban on alumina exports will have a material impact on the company," Uday Patel of Wood Mackenzie wrote in a note. "It is becoming increasingly likely that the only option for UC Rusal to source alumina will be via purchases through Chinese entities. One possible outcome could be Chinese buyers purchasing alumina and redirecting sales via eastern Russian ports. However, this poses a significant political challenge for China and its trading relationship with the rest of the world," Patel said.

Oil and gas prices at elevated levels

Oil and gas have arguably been the most followed commodities over the past month as the European Union struggles to impose an oil embargo on Russia to turn off Moscow's biggest source of revenue. While the U.S. has imposed a ban on Russian oil, the E.U., heavily reliant on Russia for its energy needs, is still debating joining the embargo. Oil and gas prices have surged over the past months amid supply concerns precipitated by "self-sanctioning" companies refusing to buy or ship Russian oil to avoid falling afoul of sanctions, for moral reasons, or to prevent any reputational damage.

Global benchmark Brent crude, which stood at around $90 in February, jumped to a multiyear high of $139 a barrel on March 7. It is now trading at $118. Gasoline and diesel prices have also gone up significantly. "The oil bulls have again gained an upper leg in the market in anticipation of U.S. President Joe Biden's visit to Brussels and a potential announcement of the E.U. joining the embargo on Russian oil imports," Rystad Energy's Louise Dickson said in a note, referring to a rise in oil prices this week. "Russia has threatened to turn off gas supplies to Europe in the case of an E.U. oil embargo, which has added to the short-term market volatility."

Natural gas prices in Europe climbed to an all-time high of €345 per megawatt-hour (MWh) earlier this month. They have been relatively stable in recent weeks falling to around €100MWh. However, Russian President Vladimir Putin's decision on Wednesday that "unfriendly" countries purchasing Russian gas would have to pay in rubles instead of euros or dollars added an element of uncertainty in the European gas market.

"The implementation [of Putin's decision] looks very unclear: nearly all Russian gas purchase contracts into Europe are denominated in euros or dollars," said Vinicius Romano, an analyst at Rystad Energy. "Gas supply agreements are generally considered sacrosanct: and in an extreme scenario, insisting on ruble payments may give buyers cause to re-open other aspects of their contracts -– such as the duration -– and simply speed up their exit from Russian gas altogether," Romano said.

Deepening food crisis

The war in Ukraine has hit supplies of wheat, corn and sunflower oil in several parts of the world, prompting U.N. Secretary-General Antonio Guterres to warn of a "hurricane of hunger and a meltdown of the global food system." Russia and Ukraine together account for about 30 per cent of global wheat exports. The two countries together account for 80 per cent of the world's sunflower oil exports.

Russian forces have been blocking ships carrying wheat from leaving the Black Sea, a key trade route for grains. The war has also jeopardized Ukraine's wheat harvests, further threatening food security. Wheat prices are the highest they've been since 2008 and are expected to continue to rise. Sunflower oil prices have also gone up across the world. Fears of supply shortages are causing people in several European countries to stockpile cooking oil and flour.

The crisis is being compounded by a rise in fertilizer prices which is causing farmers globally to reduce the amount of land they're planting. Russia is a major exporter of soil nutrients like potash, ammonia and urea. The E.U. is set to distribute €500 million ($550 million) to help farmers deal with higher fuel, feed and fertilizer prices. It is also allowing them to grow crops on fallow land to help curb the rise in food prices and prevent any potential shortages.

Nickel goes crazy

As commodity prices jumped following the Russian aggression, the price movement of one metal stood out. On March 8, nickel prices more than doubled to over $100,000 a ton as a major Chinese producer Tsingshan Holding was forced to buy large amounts to cover its short positions. The market squeeze, which took place amid worries over supply delays emanating from the Ukrainian conflict, prompted London Metal Exchange (LME) to halt trading.

Russia supplies about 10 per cent of the world's nickel, which is used in lithium-ion batteries and to produce stainless steel. LME nickel prices have since dropped to about $30,000 per ton but remain well above pre-invasion levels. High nickel prices have added to the troubles of electric-car makers who have been struggling with rising costs of raw materials such as lithium and cobalt over the past few months. High input costs have forced market leader Tesla to raise prices across various models of its cars. More than a dozen of Chinese electric-vehicle makers have also raised their sales prices in recent months.