It may sound barbarous, but investors need not fret about the war's very worst-case scenario. With the flick of a switch, any considerations over the value rotation, much less social distancing protocols, would be rendered meaningless. Perhaps what we should be looking at is which responses to Russia’s military action in Ukraine will engender permanent change in global trade patterns, wide-ranging as they may be.
It’s hard to imagine that the freezing of oligarch assets held in western banks will have any substantive implications over the long run, even though some crypto tub-thumpers have suggested that it will stimulate further interest in blockchain technologies. At any rate, if you happen to be in control of a former Soviet utility, chances are you have pretty good credit lines in place.
Naturally, there has been endless speculation over where energy markets are headed. At the time of writing, European and US policymakers are examining whether a ban on Russian oil imports is feasible. Unfortunately, countries can’t simply go on a price comparison site to meet their energy needs overnight, a point that appears to have been lost on some fund managers and senior oil executives in recent times. It seems likely that whatever the outcome of the crisis in Ukraine, there will be increased political pressure to put the brakes on the renewable energy transition as the emphasis reverts to security of supply. It may be too early to tell what impact the crisis will have on western oil majors, as a strong pricing environment is set against the twin impacts of forced divestiture and a likely decline in replacement barrels.
Yet, following on from pestilence and war, it might be worthwhile for investors to consider the third leg of the apocalypse, namely famine – or the threat thereof. Prior to the pandemic, the European Union was the largest producer of wheat, at around 150m metric tons of annually, compared with a combined total of 112m metric tons for Russia and Ukraine. The trouble is that the former Soviet states are the largest and fifth-largest exporters globally, accounting for just under a third of world exports in aggregate. Beyond the logistical challenges presented by the invasion, not least of which is the ability to harvest the winter wheat crop, the sanctions handed out to Russia have disrupted payment procedures.
To make matters worse, the crisis is set to exacerbate the existing global shortfall in fertiliser production. It pays to remember that natural gas, a key input in the production of nitrogen fertiliser, is trading at an all-time high. Both Russia and China produce huge quantities of this type of fertiliser, but both nations have imposed export restrictions, with the former recently implementing a two-month ban on ammonium nitrate exports. And midway through February, Belaruskali, one of the largest state-owned companies of Belarus, declared force majeure, warning that it won’t be able to meet its fertiliser contracts after the Lithuanian Rail company terminated a transportation agreement.
The result is that Chicago grain futures have hit their highest levels since the onset of the global financial crisis, while phosphate and potash markets have also been on a tear. That’s good news for the likes of Mosaic Company (US:MOS), a NYSE-listed producer of concentrated phosphate and potash crop nutrients. These types of mined fertilisers aren't as reliant on energy to produce them as synthesised versions, so the impact of rising energy prices won’t have as great an impact on Mosaic’s operating costs.
Higher crop prices usually support input expenditure, so farmers may look to cash in on surging prices in the soft commodities space by increasing plantings through the spring, in turn producing further supply-side pressure for soil nutrients. Yet it’s also true that the existing shortfall in fertiliser production, or at least distribution, is bound up with the hostilities in Ukraine, and we can’t be sure if any political settlement will be achieved. It should come as no surprise that shares in Mosaic have increased by 40 per cent since early February and have doubled over the past 12 months, but the company has also booked a net earnings loss in two out of the past five years. The company may be in a “sweet spot” for the moment, but forward trades on soft commodities tend to be rather volatile at times.
Longer-term, the crisis in Ukraine, like Covid-19 before it, is likely to accelerate changes under way in global supply chain management, with globalism increasingly giving way to localism. Perhaps stocks within the more UK-focused FTSE 250 will be the principal beneficiaries.
