Russia’s War, Supply Chain Turmoil and What It Means to You

What a week! Last Thursday, Russia invaded Ukraine. Then this week global supply chains went crazy, with skyrocketing price moves and a global-scale sense of worry about where it all leads.

I won’t dwell on war news, meaning stories and imagery from front lines. It’s tragic and painful to witness, and no doubt you follow events.

But definitely, it’s worth discussing the economic impacts of the war. In particular, consider the almost immediate commercial isolation of Russia that’s now taking shape with a wide array of sanctions on Russia’s government, her banks, businesses and people.

This is an entirely new page for the world economy. And what’s happening is not as easy as just saying, “Russia is bad so let’s punish her.” Sad to say, though, that’s where much thinking across the world is focused. Do something. Make it fast. Think about it later.

Another way to say it is that Russia is a major, global-scale source of key energy and industrial resources. These range from products straight from the well like crude oil and natural gas, to refined hydrocarbons like gasoline, diesel and chemicals. Plus, Russia produces a vast array of industrially critical elements, again ranging from ores and concentrates to highly refined and processed alloys.

For example, as Russian sanctions kicked into play over the past few days the price of oil pulled up into a strong climb, with Brent Crude hitting $114 per barrel at one point. This reflects market uncertainty over future access to Russian exports. Meanwhile, one sees stories of tanker-loads of Russian oil going “no bid” because traders are uncertain about the legality of even making an offer. It’ll sort out, more or less. But for now, it’s a serious mess.

Other important commodities with a Russia-trade angle are also rising in price. Wheat futures are soaring to two-decade highs, according to market tracking services. And lumber futures are up sharply as well, reflecting concern over diminishing Russian supply.

Other materials rising in price include aerospace-grade aluminum, now at record levels according to a market follower with whom I spoke earlier. Meanwhile, a significant fraction of the world’s aerospace grade titanium – about 60% by some calculations – comes from Russia.

Or consider spot prices for other widely used, critical industrial elements like copper, nickel and uranium. All have a strong Russia supply angle, and all are at 10-year highs, per trading data.

You get the picture, right? Literally, overnight, anti-Russia sanctions have created uncertainty over future supplies of key energy resources and metals.

Meanwhile, share prices for important Russian producers have collapsed. Consider just two key companies in the Russian investment space, gas producer Gazprom (OTC: OGZPY) and metals producer Norilsk Nickel (OTC: NILSY). Both companies’ share prices have tumbled in recent days, as you can see here:

Is there an investment angle? Well, the possibilities are many and depend on your risk tolerance.

For the truly bold, the collapse of Russian share prices creates a contrarian setup. If you are aggressive, and perhaps a bit crazy, feel free to wade into the selloff and buy shares of Norilsk and Gazprom. Of course, we don’t yet know what will happen as events unfold, so the “buy low” idea could also lead to even more losses, of not a complete wipeout. You’ve been warned.

Or frame it this way: Russia now has a very significant level of what’s called “war risk” in everything that has to do with its investment climate. Perhaps there’s an upside in the not-too-distant future, but for now the entire space is a very dangerous place to be for most investors.

The safer investment idea is to focus on U.S. and Canadian names that work in the resource space that’s affected by Russian sanctions. Of course, there are many names out there ranging from small exploration plays to large and mighty companies.

For example, let’s look at nickel. Large nickel producers include Brazilian play Vale (NYSE: VALE), as well as Swiss-based Glencore (OTC: GLNCY) and Australia’s BHP Group Ltd. (NYSE: BHP). These names have global operations and everything you would want in a major player. If customers need nickel and cannot obtain it from Russia and Norilsk, they can buy it from these other guys.

On the much smaller, exploration side, though, my strongest play is a Canadian junior operating in Montana, called Group Ten Metals Inc. (TSXV: PGE | OTCQB: PGEZF). This company is relatively early stage in its efforts, but with significant progress on the books. The play is focused within the well-regarded Stillwater District, where the company holds a massive land package. Exploration has already revealed extensive mineralization in copper, nickel, platinum, palladium, rhodium, gold, silver and even chrome. It’s a superb asset (I’ve visited the site and seen the mineralization), with strong technical and management talent.

It’s also worth noting that Group Ten holds lands directly adjacent to Sibanye-Stillwater, Ltd. (NYSE: SBSW), currently producing minerals in the region. This situation makes it more likely that Group Ten can eventually obtain necessary mining permits and move towards development and production.

To sum up, we can’t do anything about the tragic war in Ukraine. Meanwhile, the anti-Russia sanctions are a massive, international phenomenon, again out of our hands. But already these dynamics have set up severe supply chain issues, all based on just a few days of history being made. And more disruptions are, no doubt, in the pipeline as events unfold and politics play out.

Finally, looking ahead the world is not simply on a glide path to a new version of the Cold War. No, Western nations are on the path to a “Commodity War” scenario, firmly embedded inside the looming political, economic and perhaps military confrontations. In this sense, holding real assets – including ores in the ground – is critical to your investment future.

On that note, I rest my case.

That’s all for now… Thank you for reading.

Best wishes…

Byron W. King