Commodities from metals to wheat rally as Russia faces isolation

[SINGAPORE] Commodities from aluminium to wheat and gold rallied in a jittery start to the week, as traders grappled with a fraught geopolitical environment and an array of supply risks triggered by war in Ukraine.

Aluminium surged to a fresh record, while nickel rose and wheat advanced near its highest level in more than 13 years. Bullion - a haven in times of international tensions - climbed more than 2 per cent before paring gains.

The US and a sweep of European governments agreed to penalise Russia's central bank and exclude others from the SWIFT messaging system that is used for trillions of dollars worth of global transactions. The tougher restrictions add to deep uncertainties for commodities, which have been roiled by Russia's invasion of its neighbour.

"Barring a breakthrough in peace negotiations, we believe this leaves commodity prices having to rally sharply as we see demand destruction as now the only significant remaining balancing mechanism," Goldman Sachs Group Inc wrote in an e-mailed note.

While metals and agricultural commodities aren't in the direct crosshairs of western policymakers, prices are surging as investors bet that the latest measures could snarl payments to suppliers, and prompt banks to further curtail financing for purchases of Russian goods.

Meanwhile, investors across financial markets are gauging the rising threat to global economic growth from the biggest security crisis in Europe's post-war history. Gold is heading for its best month since May - outstripping other haven assets - as the conflict combines with rampant global inflation to boost demand.

Russia and Ukraine together account for a quarter of global wheat exports and a fifth of corn sales. Russia is a major supplier for a swathe of commodities including aluminium, nickel, palladium, oil and gas.

As the war intensifies, the risk of logistical turmoil is rising fast across commodities markets, with insurers either refusing to offer cover for vessels sailing into the Black Sea, or demanding huge premiums to do so. Turkey was the biggest single buyer of Russian aluminium in 2020, ahead of China and Japan, according to UN Comtrade data.

In grains markets, ports in Ukraine are closed and traders say they are staying away from Russian grain. Some exporters cannot agree to contracts at the moment because they do not know if they will be able to fulfil them as the situation evolves, Bloomberg reported.

Aluminium rose 5 per cent in London to go above US$3,500 a ton for the first time ever. Palladium climbed as much as 7.8 per cent; wheat futures in Chicago surged as much as 8.7 per cent to US$9.34 3/4 a bushel, while corn climbed 5 per cent and soybeans rose 3.9 per cent.

Palm oil in Kuala Lumpur gained 6.4 per cent at one point but remained below a record high.

Iron ore exports from the region will be affected by any prolonged military campaign in Ukraine, Navigate Commodities managing director Atilla Widnell wrote in a note. The steelmaking ingredient gained 3.4 per cent in Singapore.

Gold has outdone other haven assets including Treasuries, the yen and the Swiss franc in February, with an advance of about 6 per cent. High oil prices are diminishing the appeal of bonds.

"Gold has only one trajectory at present, and that's upward," said Gavin Wendt, senior resource analyst at MineLife. "Already well-supported on the back of inflation and interest-rate uncertainty, the political contagion with Russia has supercharged gold and it looks set to maintain its positive momentum."

The latest Western sanctions prompted a pledge from Russia's central bank to resume purchases of the precious metal that have been on pause for nearly two years.

Spot gold rose as much 2.2 per cent to US$1,930.85 an ounce, before trading at US$1,899.83 by 3.28 pm Singapore time. Silver and platinum were little changed.

BLOOMBERG