Ukraine eight months on: Investing opportunities as the war rolls on

The tide does seem to be turning in the Ukrainians’ favour, particularly with the recent bombing of the Crimea-Russia Bridge. I’m hesitant to be too confident given anything can happen. Regardless, it’s still worth a look at what we expected to happen, what has happened and what might be coming ahead.

So, what was predicted?

• A swift end to the conflict (pending what Russia actually wanted to achieve. Some commentators suggested the aim was to prevent Ukraine joining NATO).
• Short-term spikes in commodity prices, such as energy spikes, movement into gold.
• Some bond rallies and stock market volatility.

And what has actually happened?

The world failed to predict the tenacity and bravery of the Ukrainian people in defending their homeland. It’s not been a Russian walkover and the world has found itself stepping up sanctions against Russia and supporting Ukraine financially and with weapons.

The bigger story has been spiking commodity prices. To be fair, the Ukraine crisis is not the sole cause of this – the pandemic had already heighted supply challenges, but it hasn’t helped either.

There are a few reasons behind this.

• Russia is a major supplier of gas, coal and oil. In fact, they were responsible for approximately 25% of global gas trade, 18% of thermal coal exports and 10% of oil. The combination of sanctions on Russia, and Russia’s decision to close gas lines, has resulted in sharp increases in prices and shortages across Europe. Many countries have had to reopen defunct coal plants to support needs, for example, Germany has bought back 7.2GW of coal capacity.
• A number of the supply chains Russia uses to service Europe are via Ukraine.
• Coal and gas fields have been underinvested in for many years due to the transition to green energy meaning that supply was already challenged before the Ukraine invasion.

Australia and energy commodities

Australia is a major exporter of liquified natural gas (LNG). While the Ukrainian crisis has yet to see a huge change in our market, this is likely to change in the coming months as Europe heads into winter. The Department of Industries, Sciences and Resources suggested in its quarterly report that LNG exports could climb 29% to fill gaps in Europe from Russian supply.

The Ukrainian crisis has also been an unexpected supporter of the Australian coal industry. We export 75-80% of our thermal coal and are the 2nd largest exporter in the world. The Chinese embargo on Australian exports was expected to particularly hit coal, but instead, the gap was initially filled by Japan, India and Korea but is now increasingly directed towards Europe. 

The Department of Industries, Sciences and Resources have revised their forecasts for thermal coal exports in 2022-23 up by 36%.

On the consumer side though, high prices are far from a plus.

Energy prices have been one of the challenges for the year locally. Despite Australia producing more natural gas than it needs, consumers are still feeling the pinch. The Australian government does have the ability to regulate gas prices for consumers as well as restrict exports to support domestic demand but to date, has chosen not to exercise the full extent of this power.

Australians had a short break from the fuel excise tax to attempt to bring petrol prices down and the tax has now returned. Prices at the bowser seem to have barely moved, hovering at around $2/L. It’s worth noting the impact of this extends to industry – it becomes more expensive to fuel farming equipment like tractors or harvesters for example. This then pushes up the cost of production and what farmers can afford to produce so has implications for food supply and costs too.

The increasing threat to food

It’s easy to be complacent about food in Australia. We are a large agricultural producer after all. So it may come as a surprise that food shortages arising from the Russian war against Ukraine have implications for us.

It’s worth noting that both Russia and Ukraine are considered amongst the world’s top agricultural producers and together produce around 1/3 of the world’s wheat supplies. 

In addition to that, Ukraine previously supplied the World Food Programme with around 40% of its wheat – this programme provides food aid to countries in crisis.

The below chart from Rabobank demonstrates the significant role both countries have in agricultural supplies.

Australian exporters have benefited to an extent from higher prices. The Australian Bureau of Agriculture and Resource Economics and Sciences has tipped the value of wheat exports to reach a record high of $11.7bn in 2022-3.

Companies like Manildra Group and Agracom which produce and export wheat have benefited. Other companies to reap the rewards have been those to offer storage logistics or marketing such as Graincorp (ASX: GNC).

Fertilising the seeds of shortage

Russia and Belarus are the biggest exporters of fertilisers in the world, with Russia accounting for 12% of world exports. 

While Australia only imports 4% directly from Russia, there will be flow-on effects more broadly to Australia from both supply and higher fertiliser costs. While on one hand, the higher production costs (and existing food shortages) could benefit farmers in terms of higher food prices, the flip side is that the production costs are likely to offset any profit anyway. And once again, consumers also lose out from rising grocery bills.

Food and stability

While Australia is lucky to supply the bulk of its own agricultural needs, other countries are not so fortunate. The map below shows countries which import wheat from Ukraine or Russia and may struggle as a result. 

The good, the bad and the ugly

As awful as it is to say this, wars do have economic benefits for some. And in the case of the war in Ukraine, there has been some advantage to date for Australian exporters – particularly in terms of thermal coal. Will those benefits last? Perhaps for some time longer, at least in the case of energy. There also continue to be opportunities for Australian agriculture in this environment.

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