Metals sector warily monitors Ukraine tensions

Metal market participants are closely monitoring the escalation of tensions between Ukraine and Russia, attempting to gauge the potential impact that military action or sanctions could have on supply-demand fundamentals and prices.

For now, China's approaching lunar new year holiday continues to set the tone for many metal markets, but the complex network of metal production and transport routes in Russia and Ukraine is such that a significant escalation of tensions could quickly jolt the fundamentals and sentiment.

Cobalt traders are keeping a close eye on whether events could impact Nornickel, Russia's largest nickel and cobalt producer. Nornickel produces 1,800-2,100 t/yr of cobalt metal, although most comes from its plant in Finland, which suggests that any impact on supply may be limited. It also has strong ties to other parts of Europe, including an agreement to supply nickel and cobalt to German chemical producer BASF to manufacture battery materials.

"We hold stocks in Rotterdam as well, so there's no immediate issue. For the future this may be an issue," said a trader familiar with Nornickel. "I hope it will not reach that point, it's becoming quite scary."

Nornickel declined to comment. As yet the company has not indicated that its business is encountering any disruptions.

Discussion of possible sanctions on Russia is also unnerving the markets, with one trader suggesting that western banks might be unwilling to finance companies producing or handling material that falls under sanctions. It remains to be seen if the US or Europe will impose any such measures and which sectors they would hit.

Ferro-vanadium traders are also voicing supply concerns, particularly given that European prices have already risen by more than 15pc since the start of 2022 as flooding disrupts supply from Brazil. Now there are concerns about whether vanadium products from Russia's Evraz could get caught in the crosshairs, further tightening the European market. Evraz produced 19,533t of vanadium slag in 2020 and 15,202t in the first nine months of 2021.

Evraz had not responded to a request for comment by the time Argus went to press, and as yet has not indicated that its business is encountering any disruptions.

The tungsten market is also at risk of potential disruptions, particularly because it is a strategic material used in military applications, although as yet no discernible issues have emerged. Any fresh conflict could result in Russia — the third-largest producer of tungsten after China and Vietnam — withholding tungsten supply for domestic use, one market participant said, adding that Russia could even consider imposing an export tax on products like tungsten in response to any sanctions.

Aerospace demand

While metal supply is at risk of tightening, demand could rise if Russia were to invade Ukraine — although Moscow has repeatedly denied that it has any such intentions. In particular, market participants point to metals linked to aerospace production because of the military connections.

"Cobalt and other high-temperature metals always do well in times of war because they're used in aerospace. The large weapons manufacturers will all be selling weapons to Ukraine," a cobalt trader said.

It might take time for any increased demand downstream to translate into fresh bookings and higher prices, depending on how well-stocked buyers are for various metals. With regard to chromium, a European trader commented that while he is concerned about the risk of logistical disruptions, "a lot of consumers bought more than needed in November and December so are not buying now and will wait until the very last minute to secure material in the hope of a lower price".

Traders and consumers of titanium and ferro-titanium have expressed concerns about the stability of their long-term contracts (LTCs) with Russian suppliers, but most remain hopeful that a diplomatic resolution will be reached.

"Boeing depends on Russian titanium for their aircraft and landing gear, so the US is limited by its dependence on Russian metal," a ferro-titanium producer said. "I can see some nervousness at steel plants, asking if it will influence LTCs. We have a renewal on gas coming up in the summer, which is also making us more nervous."

Risk of further energy price hikes

Energy costs have been a major challenge for the metal industry for several months now, and market participants are bracing for a potential further squeeze on margins if the Russia-Ukraine tensions lead to fresh upheaval.

Gazprom's 55bn m³/yr Nord Stream 2 gas pipeline could be included in potential sanctions if Russia takes military action against Ukraine, German foreign minister Annalena Baerbock said today. The pipeline is ready from a technical perspective, with its two strings already filled with operational gas. But German energy regulator Bnetza has yet to certify the pipeline's operator and last month said it would not make a final decision in the first half of 2022. The pipeline developer Gazprom subsidiary Nord Stream 2 said on 26 January that it has established a German subsidiary, a prerequisite for the link's certification by Bnetza.

European coal burn could also be affected, given that Russia is the predominant source of the continent's imported hard thermal coal. Argus estimates that Germany, the Netherlands and Belgium would potentially lose around 67pc of their total imports in the event of a complete halt to Russian shipments — although at this stage there is no indication that this will happen. At the moment, firm demand means European thermal coal buyers are scrambling to secure all available Russian spot supply, rather than avoiding it because of geopolitical risks.

After many months of soaring energy prices and freight rates, European producers of particularly energy-intensive metals such as silicon and aluminium have limited scope to keep shouldering these additional cost pressures. And on the demand side, ferro-alloy suppliers voice concerns about the impact of high energy costs on producers of carbon and stainless steel — their major customers. Steel mills in Poland have already switched to producing at night so as to bring down energy costs, and several ferro-alloy traders note a reduction in contract volumes being booked or called up.

"Very high energy prices will have an effect on capacity. Customers say steel demand is strong, but they cannot produce at this rate," a European ferro-alloy trader said.

By Thomas Kavanagh, Sian Morris, Yusuf Khan and Anuradha Ramanathan