Base Metals Have More Feet To Rally Amid Russia-Ukraine Conflict, Says Motilal Oswal

Prices of base metals like aluminium, copper and nickel, which are used as raw materials for many industries, are set to move higher after Russian invasion of Ukraine, Navneet Damani, senior vice president - commodity & currency research at Motilal Oswal Financial Services said. Meanwhile, prices of precious metals like gold and silver jumped on safe haven demand after geopolitical tensions between Russia and Ukraine triggered a selloff in risk assets like equities across the globe.

Base metals have witnessed a strong rally in the last two years ever since the economies across the world reopened after lockdowns were lifted and given the current circumstances prices are likely to increase, the Mumbai-based brokerage firm noted.

"The latest triggers come from Ukraine – Russian geo political tensions which has led to sharp volatility in most asset classes. Before this Russia-Ukraine crisis escalated, select metals were already seeing very strong fundamentals and there are possibilities of United States and its European allies to announce fresh sanctions against Russia. Aluminum has added over 40 per cent gains in 2021 and added 20 per cent gains in 2022," Damani said.

"Russia produces around 6 per cent of the world's aluminium and 7 per cent of mined nickel. Sanctions on aluminium maker Rusal in 2018 drove the metal's price up 35 per cent in days. Used in stainless steel and batteries for electric vehicles, nickel, is up around 20 per cent this year having risen 25 per cent in 2021. Lower inventories in metals along with strong consistent demand has been already supporting the backdrop, and with the latest trigger, it looks like the metal has got some more feet to rally," he added.

Inflationary pressures are visible across sectors as oil prices have already surged to over eight year highs and wheat has also hit record high in global markets. The conflict threatens to inflict severe economic damage on some countries and industries — damage that could mean hardships for millions of people. Russia is the world’s third-biggest producer of petroleum and is a major exporter of natural gas. Ukraine’s farms feed millions around the world. And financial markets are in a precarious spot as central banks prepare to reverse years of easy-money policies and raise interest rates to fight a resurgence of inflation. Those higher rates will likely slow spending and raise the risk of another downturn.

Russia’s attack could slow Europe’s economic recovery by sending already elevated energy prices ever higher. Europe, an energy importer, receives close to 40 per cent of its natural gas from Russia. A cutoff of that energy source could undercut the continent’s economy. High natural gas prices have already led to higher home utility bills for both natural-gas heat and electricity generated from gas, crimping consumer spending, news agency Associated Press reported.

At centre of dispute between Russia and Ukraine lie two draft treaties by Russia first that Ukraine would not join the NATO as well as a reduction in NATO troops and military hardware stationed in Eastern Europe.