In the last article, I discussed the market and resource dependencies and relations of the west, Russia, China and other countries. This time, when discussing the Ukraine war, I shall name the counties, companies and markets that can turn a profit or who suffer losses from the changes brought on by the Ukraine war. This primary entails looking at different markets and industries and seeing who they are now able to supply with resources or who they can no longer supply with oil, gas or wheat etc. Essentially, I will try to analyse new potential supply chains and dependencies. This is of course not fully based on solid data and facts, but is rather an intuitive prediction on future supply chains based on current relationships between the west and the east.
Former dependencies
As a quick recap: Russia has invaded the Ukraine and the west has altered their entire economy to be independent of Russia and levied a lot of sanctions against them (including potential sanctions / sanctions that the west wants to levy). Dependencies like oil, gas, coal and metals that the EU has towards Russia are changing massively, as the west moves away from Russia and Russia moves closer towards China. Russia used to supply the EU and the UK with massive amounts of gas, oil and coal. Now that Europe has decided to move away from their eastern neighbour, where will they get their resources?
Oil
The EU and the UK were supplied with a lot of oil from Russia. Now that Russia is technically moving out of the picture for them, they will have to find close allies and trade partners in order to get the same amount. Germany has already made some progress regarding Oil, as it has signed a long-term Oil deal with Qatar, the 16th largest oil exporter globally. As for the rest of the EU, they will likely start doing deals with the USA (they already have, but I’ll get into that later) and the middle east, with US president Biden pledging to reduce the EUs dependency on Russia. The USA cannot immediately redirect all oil companies to trade with Europe, but it is likely that many companies will take advantage of the surging demand for oil by not only starting deals with EU countries, but by selling oil at record prices. The middle east is also a viable trading option for Europe. Countries like Saudi Arabia, the UAE and Iraq are all possible partners where Europe could possibly import oil from. There is one notable exception to this, though: Iran. Iran ran into some trouble with the United States when the US levied sanctions against them for violating nuclear treaties. This, of course, strained relations and seeing as the EU and UK are extremely close to the USA, Iran will likely refrain from closing deals with them. Iran also hasn’t been mass producing oil as much as its middle eastern neighbours, but if they were to produce oil again, they would likely sell it to China. This is because China has started to ally itself with Russia and it is very likely that Iran will stick to the eastern side of the new cold war instead of the western one.
Speaking of China, they are also likely to get a lot of oil from the Russians at a cheap price, since the entire western market has been blocked off to them [Russia] (or will be in the future). China is the world’s number one oil importer, having surpassed the USA in this industry in 2017.
Russia is selling oil to many south-east-asian countries and strengthening ties could mean finding other large trade partners to sell oil to.
Meanwhile, oil prices have jumped because of the still ongoing inflation combined with the sanctions on Russia, which, after all is the second largest oil exporter in the world. At one point, when peace talks between the Ukraine and Russia broke down, they jumped again, as every breakdown of communication is an indicator for a complete economic separation between the west and Russia. Conversely, when talks were still ongoing, oil prices calmed.
Gas
Much like with oil, Russia is one of the countries taking the lead in the gas industry and Iran is the second largest exporter – convenient as an alliance between Iran and Russia is easy to fathom. Qatar, which has – as mentioned above – begun to trade with Germany, could be a supplier for the rest of the EU, as well. The country has made it abundantly clear which side they were on – simply by closing a deal with Germany. Up next are the US and Saudi Arabia, all in the camp of the west. The major problem with gas is the price, since there are little direct pipelines between the middle east and Europe to transport gas with. So, the only option is liquid gas, which can be transported by sea. Norway could be another option for Europe. There are issues with this, though, since Norway is trying to move away from oil and gas and its resources are not abundant. Instead of depleting the rare resources in northern Europe, developing new trade routes might be the better option for the long term.
The USA has closed an important gas deal with the EU, with the president of the European commission claiming that the deal would replace a third of gas currently flowing from Russia. In order to become a major selling partner for Europe, the USA has to increase gas production by a lot, though. Still, President Biden is insisting on reducing western dependence on Russia.
"This amount is replacing one-third already of the Russian gas going to Europe today. So, we are right on track now to diversify away from Russian gas." - Ursula von der Leyen, President of the European Commission
As for China, their major gas trade-partner will obviously be Russia, as we’ve already established that there will be a large amount of trade between the two new partners in basically every industry. Persia would, again, be of importance in a deal with China, as they also have gas to spare.
Wheat and grains
Since Ukrainian ports have been blocked, the Middle east, north Africa and the EU is suffering a major wheat and grains crisis. While more acute in some areas, solutions must be thought of. In the EU, there is currently a grain crisis and a much worse cooking oil crisis, with oils like rapeseed oil not being available and the prices skyrocketing. The best solution would be to increase production of these grains themselves rather than opening expensive new trade routes. However, as a short-term solution, the idea of importing grains from the USA has been considered. The US would have to temporarily free up land from the Conservation Reserve Program, or CRP, says economist Scott Irwin. Land from the CRP is used for emergencies and a large wheat crisis in the Middle east and Europe would definitely constitute as an emergency. Even though the US wouldn’t be able to plant and harvest grains in record speed, Irwin recommends giving farmers certain securities to protect them for trying something new. If the US wants to do anything to help Europe and the Middle east out, this would be a big step. But what about other partners? Morocco already has other trading partners like Argentina. Tunisia is looking to Balkan countries for its wheat, while Algeria claims it isn’t in any real crisis since Russia isn’t a trading partner at all. Instead, France and Canada are important wheat suppliers for Algeria. In short, many countries in North Africa are looking towards Europe (countries like Poland and France), which can grow a lot of wheat and South American wheat exporters like Argentina and Uruguay.
Steel
For steel, the crisis is twofold: Not only does Russia/Ukraine supply Europe with a lot of it, they also supply a large amount of energy to Europe – a vital component of steel production. Even though Germany, the US and Japan produce a lot of steel (the latter two more than the former), Russia, India and especially China produce far more. This, of course, means that the eastern bloc controls a large portion of steel production, and can thus control a large share of the market (remember, China is still a major partner of Europe). And since Russia controls a large portion of Europe’s energy supply, the steel crisis is even more acute. It is sometimes underestimated how much energy is required for steel production. Once again, for Europe, the answer may lie with the USA. Japan is of course also an option but Germany might just depend on their own steel before finding a large supplier with whom to close a long-term deal.
Gold and Aluminium
When it comes to gold, China and Russia both once again dominate the market, however, the USA also produces an ample amount of gold. Still, the price of gold has rallied, as concerns for other supply chain disruptions due to the war became greater. David Meger, the director of metals trading at High Ridge Futures said: "The combination of roaring energy prices, grain prices [and] base metal prices […] culminated in dramatic inflationary pressures that continue to be the major underlying support behind gold [moving] higher". Of course, worries for gold shortages were also a reason for the rises in price. Gold is traditionally a safe haven in times of uncertainty, which is why many investors look towards it during this crisis.
As for Aluminium, China, Russia and India all produce such a large amount of aluminium that it would be extremely unprofitable for the west not to do some trade with the eastern bloc. China, especially controls a such a large share of aluminium production that blocking trade would be unprofitable for both parties, since Europe couldn’t buy it and China couldn’t sell it to Europe. This means that the west is likely not going to boycott Chinese metals, as they’d suddenly be without this vital metal. It does mean that price control will be more on the eastern side, though, as it controls the lion’s share of the market.
New supply routes – the bottom line
The Ukraine war has affected the way that future supply chains will work and where they will be. Looking at the data, the east has vital resources that Europe needs. Even though the US and other countries can supply Europe with what it needs, certain industries are going to suffer from a boycott of Russia’s resources. New supply chains will likely lead away from Russia – but to what extent can the west alienate the east? Is it all even possible? Price rises are of course inevitable, but separating west and east could have terrible consequences for both sides. Of course, the west has to make sure that their population will not suffer the consequences of not purchasing vital Russian goods. This means that the west has to establish viable and long-lasting supply chains before fully separating itself from its eastern neighbour. Is the west even able to do this for a long time before using up its own resources and without causing extreme environmental damage? That’s debatable and only time can tell as the west has to make some smart decisions regarding the trade of vital goods.
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