The war in Ukraine has triggered a dramatic shift in the geopolitical landscape for Russia, a major supplier of various commodities. Western sanctions targeting Russia’s economy aim to cripple its access to crucial markets and hinder its war effort. However, the global response has been far from uniform, creating a complex situation for both Russia and the world.The US, EU, UK, and G7 have imposed a series of sanctions on Russia’s metals and mining sector, including key products like aluminium, copper, nickel, and steel. These sanctions create trade barriers through additional tariffs or outright bans, impacting the profitability of Russian metals and deterring some traditional buyers. This disrupts established trade flows and forces a recalibration of global supply chains for these essential commodities.

Energy research consultancy Wood Mackenzie unpacked the impact of Western sanctions on global metals, mining, and coal markets in a recent webinar, highlighting some key takeaways.

First, Ying Lu, Wood Mackenzie’s energy transition and battery raw materials principal analyst, noted that the impact of sanctions on critical battery raw materials has been uneven. Copper, aluminium, and nickel have experienced price volatility due to tighter market balances caused by restricted Russian supplies. Manufacturers involved in the burgeoning electric vehicle (EV) industry are particularly concerned about potential disruptions to the supply of these battery metals. However, the global markets for cobalt and lithium have remained relatively stable as Russia plays a minimal role in their production.

EU’s ‘precarious position’

Turning to aluminium, Uday Patel, Wood Mackenzie’s research manager for aluminium, pointed out that Russian primary aluminium is a significant player in the global supply chain, particularly for low-carbon aluminium, where it accounts for a substantial portion outside of China. Sanctions have limited the profitability of selling Russian metal, dissuading some consumers from buying outside of China. This has placed the European Union in a precarious position, he noted. If they consider a full ban on Russian aluminium, they may be forced to rely on alternative sources, potentially increasing their dependence on higher-carbon aluminium production. This would be a setback for the EU’s ambitious green initiatives.

For coal, senior research analyst Duman Baimbetov, observed that the EU and UK’s bans on Russian coal imports have forced Russian producers to redirect their exports eastward. Despite challenges with infrastructure limitations, Russia managed to increase coal exports to key Asian markets like China, South Korea, and India by over 80% in 2023, according to Wood Mackenzie figures.

However, recent US sanctions against major Russian coal producers are expected to impact around 8%-10% of Russian coal exports in the near future, tightening the market for high-quality thermal and metallurgical coal, he said. Non-Russian producers are expected to fill the gap, potentially leading to short-term price increases.

Steel, meanwhile, is suffering from a patchwork of policies. Steel markets senior analyst Charvi Trivedi noted that the impact of sanctions on the Russian steel industry has varied depending on the country. The US has completely cut off Russian steel imports, while the EU has adopted a more nuanced approach. Initial sanctions in 2022 caused a sharp decline in Russian steel imports to the EU, which were replaced by increased imports from Asia. The EU has also implemented additional bans on semi-finished steel products like billets and slabs, but these have been met with resistance from some European companies, Trivedi said. This lobbying effort resulted in extended import grace periods included in the EU’s 12th sanctions package in December 2023. Overall, significant changes in trade flows for steel products are not expected until the latter half of this decade.

Balancing act

Sanctions on Russian iron ore have been less stringent compared with other commodities. This reflects the EU’s balancing act of maintaining sanctions pressure on Russia while safeguarding its domestic steel industry, which relies heavily on Russian iron ore. Wood Mackenzie’s iron ore markets senior analyst Chris Bandmann noted that while there are currently no explicit bans on Russian iron ore, targeted sanctions and self-sanctioning by EU importers have significantly concentrated Russian iron ore exports into China. By 2024, the Chinese market’s share of Russian exports has surged from 38% to 90%, “indicating a high dependency on China and an increased vulnerability to any protectionist measures that might arise,” said Wood Mackenzie.

“Russian iron ore exporters are exporting to fewer countries. In 2021, 28 countries reported imports from Russia, In 2023, this fell to only 12 – and to only three in Q1 2024,” said Bandmann. “Russian miners will be eager to find new markets, given the risk of such an undiversified set of export destinations.”

Source: Baltic Exchange