Since the Russian invasion of Ukraine, most richer nations have imposed trade sanctions against Russia. This has cut many of Russia’s key exports out of European markets, upsetting their balance and providing opportunities in the rest of the world.
While this does not imply that Australian companies moved to intentionally profit from the war in Ukraine, the shifts in the market caused by the war have undeniably benefitted some Australian miners. The removal of Russia’s mineral wealth from markets has increased the market share of other countries, opening new opportunities.
Two months into the war in Ukraine, several markets have seen instant reactions settle into apparently more normal patterns. Each market has reacted differently to the war, and while traders now know roughly what prices to expect, some of these new standards have yet to face their biggest test.
Gold: still riding pandemic highs
In 2020, the prices of most metals fell as the pandemic suppressed demand. Gold was the main exception, as investors sought to secure their assets in the supposedly dependable metal. As a result, gold prices rose to a level where they have remained ever since.
In March, the US banned all dealing in Russian gold. Later in the month, the G7 met to discuss further steps against gold dealt by Russia’s central bank. When Russia’s central bank resumed gold trading after a two-week pause, it set a fixed price approximately 20% below market rates, diminishing the internal value of the metal.
Gold represented approximately 7% of Australian exports and 5% of Russian exports in 2020, according to the Observatory of Economic Complexity. Both export similar values of gold, but more than 90% of Russian gold exports went to the UK in the same year. Although Australia exports the largest single share of its gold to the UK, approximately 45%, its exports are much more diversified.
As a result, disruption in the gold trade will have a lesser impact on Australia than in other regions. Even so, wholesale gold prices spiked just after the invasion of Ukraine and have remained high ever since. This will benefit Australian gold miners, while complicating trade networks.
Coal: stockpiling drives massive price spike
This year began with Indonesia blocking coal exports, causing prices to rise as supply shrank. The country has now reopened its coal market, courting European nations following an even larger disruption to the market.
The EU has legislated to prevent the signing of new Russian coal import contracts within its jurisdiction. From August, all existing contracts must end, meaning that Russian coal will likely flow into other markets.
In the short term, the war in Ukraine will cause pain for coal-reliant European economies such as Poland and Germany. As the ban deadline approaches, European economies have stockpiled coal for winter.
However, the war has left the long-term outlook for coal in Europe largely unchanged. Decarbonisation has suppressed the overall European coal trade, with most economies hoping to drastically reduce coal burning in the next 20 years, regardless of the war. The real test for coal prices will come when embargoes come into force later this year, signalling the beginning of European coal’s final chapter.
Meanwhile, Russia exports most of its coal to Asia, where it competes directly with Australia. Despite accounting for more than 4% of Russia’s exports, Australia’s coal exports dwarf those of Russia. In this case, Russia poses a more direct threat Australia’s market, as the country seeks new buyers for its coal produce over the coming months.
Asian demand provides opportunity for Russian exports
Because of political positioning, China has shunned Australian imports in favour of Russian coal. This leaves the massive coal consumers of Japan and India on the open market, but neither favours Russia for coal imports.
In 2020, Japan imported 62% of its coal from Australia, compared to 10.8% from Russia. In India, the disparity seems wider, with 44% of coal coming from Australia compared to 4.4% from Russia. However, India plans to boost its coal imports over the next three years, providing a good opportunity for newly-available Russian coal.
The reliability of this demand, alongside European stockpiling, will have contributed to the volcanic rise of coal prices since the invasion of Ukraine. Coal now trades at near-record prices, causing India to double its imports of petcoke to fire power stations, despite the fuel’s toxic emissions.
Within Australia, rising coal prices have pushed up power bills in areas without clean energy investment. According to the Sydney Morning Herald, wholesale power prices in New South Wales more than doubled to A$87/MWh in the first three months of this year because of the state’s reliance on coal power. In Queensland, a power station outage further exacerbated the problem, pushing power prices to A$150/MWh.
At the same time, Victoria’s cleaner energy system charged just A$57/MWh. South Australia, owner of the country’s cleanest energy system, charged A$71/MWh.
Iron and nickel: two sides of a magnetic coin
Iron ore is Australia’s most valuable export, but a small part of Russia’s economy. Iron ore’s main price threat comes from disruption to supplies coming out of Ukraine, which produced approximately $4.27bn of iron ore in 2020. In the same year, Russia produced just over $2bn of iron ore, approximately 25 million tonnes compared to Ukraine’s 40 million. Meanwhile, Australia exported almost $80bn in 2020, more than 10 times both Russia and Ukraine combined.
Australia’s dominance of the iron ore market has mostly insulated it from disruption. Prices have now settled after supply chain concerns in 2021, and the outbreak of war has done little to affect commodity prices. While European countries seek new suppliers to maintain the security of their supplies, analysts have highlighted that ports currently hold 158 million tonnes in stockpiles.
On the other hand, nickel prices have already leapt from a 10-year high to an all-time high. In March, the London Metals Exchange suspended trading for nickel when it surged by more than 250% within one day. The jump came as a direct consequence of the war in Ukraine, and saw several orders reversed to minimise disruption. Although the price has since declined, it remains around four times higher than seen at the start of the year.
Russia exported approximately $3.5bn of nickel products in 2020, compared to $308m from Australia in the same year. Russia’s comparative dominance of nickel means that the market tells the opposite story to that of iron. Because of this, Australian miners may not radically change the market, but they do have the opportunity to somewhat increase their market share.
Spiking prices wounded Vale when the company lost $75m on nickel hedges, but otherwise, rising prices have proved fruitful for Australian miners. Nickel Mines, an Australian company with projects in Indonesia, recorded an 18.7% increase in raw earnings in the first three months of this year, with production up 10%. The company seems likely to improve on its profits in the next quarter, alongside some of its larger competitors.
How has this affected the Australian market so far?
The best measure of the war’s true effect on Australian mining will come with next year’s annual general meetings (AGMs). As businesses approach this year’s AGM season, the war has only affected the most recent two months of operations, giving little time for reactions.
At the same time, the April dividends announced by the largest miners give some insight into companies’ appraisals of their own prospects. Dividends represent many business factors beyond commodity prices, but hypothetically give a way of assessing a business’s comparative performance over time.
More than stock prices, dividends give an insight into a company’s assessment of its own performance, and while businesses make mistakes, the overall upward trend this April speaks of an industry that has confidence in its current position.
As the world’s greatest coal producer, 2022 has been a good year for Australian miners still in the fossil fuel business. While BHP mostly mines metallurgical coal, it has benefitted from rising coal and iron prices, and the company has noticed.
This year, dividends have generally jumped up compared to previous years. Given the chilling effect of the pandemic, improving on the performance of 2020 is not difficult. However, despite the pressures of decarbonisation and disrupted trade with China, shares at the largest miners now greatly exceed any previous year.
Rio Tinto and Fortescue show different sides of market fluctuation
At Rio Tinto , production of most metals fell in Q1 2022, compared to both Q4 2021 and Q1 2021. Despite this, April’s dividends marked the second-largest ever, with only last September’s dividend exceeding it.
The company’s first quarter production results also highlighted that the company had started severing its relationship with Russian companies, while supporting its workers “of Ukrainian and Russian heritage”. Both Rio Tinto and BHP have also donated to humanitarian charities helping in Ukraine.
Next in line, Fortescue tells a different story. The company posted its second-largest interim dividend, although this remained significantly behind last year’s offering. In an investor’s call, CEO Elizabeth Gaines remarked on the “market uncertainty and volatility” sprouting from the war in Ukraine.
She remarked that iron ore’s price rises, or “price recovery” was driven by rises in expected steel demand. While China has so far demanded less steel than expected this year, Gaines expects this to increase later in the year, driving more demand for iron ore.
The company has otherwise remained largely quiet on events in Europe, but its future technology division has pulled out of Russian hydrogen projects and signed massive deals to supply the new fuel within Europe.
Ultimately, while many would not like to entertain the thought, the war in Ukraine could continue for many months. As such, these first two months could prove to be a brief prelude to a more settled post-Covid market, or the tip of a geopolitical iceberg. Regardless, while the current state of affairs benefits many Australian miners, the industry’s reaction will only be fully known 12 months from now.