Event: on February 26, the United States and Europe announced that some Russian banks would be excluded from the swift system; 3.2 the EU publishes the list of the seven excluded Russian banks.
Core conclusion: in the previous report, we analyzed the impact of the escalation of the conflict between Russia and Ukraine on the global economy, global inflation, asset prices and the Fed’s interest rate hike. On this basis, this paper focuses on how the latest sanctions affect the industrial chain, and suggests focusing on the four industrial chains of energy, metals, agriculture and science and technology.
1. At present, European and American sanctions against Russia are mainly concentrated in the fields of finance, science and technology, transportation and so on; In the field of energy, the sanctions of the United States and Europe and the Countermeasures of Russia are relatively restrained, but if the conflict intensifies further, it is probably difficult to exercise restraint. Specifically, first, there are three main sanctions in the financial field: 1) freezing the overseas assets of institutions and individuals including the Russian Central Bank and President Vladimir Putin; 2) Prohibit domestic institutions or individuals from purchasing Russian assets for the purpose of restricting Russia’s overseas financing; 3) Some Russian banks are prohibited from using swift system. Second, sanctions in the field of science and technology mainly include trade embargoes on high-tech products such as electronics, semiconductors and computers; Sanctions in the field of transportation mainly include the closure of airspace to Russia by the United States, the European Union, the United Kingdom, Canada and other countries and regions. Third, in the field of energy, the sanctions of the United States and Europe and the Countermeasures of Russia are relatively restrained. For example, on February 28, Gazprom said that “it is continuing to transport natural gas to Europe through the transit pipeline of Ukraine”. On March 2, the European Union did not use the Russian savings bank used by European Union countries to pay for crude oil and natural gas Gazprom removed from swift system; On March 1, the United States said that “the U.S. government does not prohibit its companies from buying Russian energy, but welcomes its refusal to buy”, and pointed out that the sanctions plan against Russian oil exports “is still on the negotiating table and has not been excluded”.
2. How does the escalation of sanctions against Russia affect the global industrial chain? Focus on energy, metals, agriculture and science and technology
1) energy: if the sanctions continue to increase, the price probability of crude oil, natural gas, coal and other energy will rise further
> Oil: the expectation of supply contraction has led to a sharp rise in oil prices in the near future. From 2018 to 2020, the average daily output of Russian crude oil was about 11.303 million barrels, accounting for about 12.2% of the global share; The average export value was 5.038 million barrels per day, accounting for about 11.3% of the global share. Among them, the proportion of Russian crude oil sold to Europe is about 53.8%, accounting for about 27% of European crude oil imports (2019). In extreme cases, if Russia’s energy exports are excluded from the swift system, referring to Iran’s experience in 2012 and 2018, Iran’s crude oil exports fell by 42.2% and 64.8% year-on-year respectively in the next year of sanctions (i.e. 2013 and 2019), with an average of 53.5%; If converted linearly according to the same proportion, it means that Russia’s crude oil export will decrease by 2.488 million barrels / day, and the global supply-demand gap will further expand, which will push up the oil price to a high level in the short term and increase the pressure of global inflation (for details, see the 4-point impact of the escalation of the conflict between Russia and Ukraine in the previous report).
> Natural Gas: more than 40% of European natural gas imports come from Russia. If the sanctions continue to increase, European natural gas prices may face further upward, which will drag down the European economy. From 2018 to 2020, the average daily output of natural gas in Russia was about 1.81 billion cubic meters, and the global share was stable at about 17%; The average annual natural gas export is 237.4 billion cubic meters, accounting for about 18.4% of the global natural gas export, of which about 80% is exported to Europe, accounting for more than 40% of the European natural gas import. If the follow-up sanctions continue to increase, it will further exacerbate the shortage of natural gas in Europe and drag down the European economy.
> Coal: in the short term, the imbalance between coal supply and demand outside Russia may intensify, and overseas coal prices may further rise, which will exacerbate the “upside down” between China’s coal prices and imported coal prices and drag down China’s coal imports. For the world, Russia is an important coal exporter. In recent three years (20192021), Russia’s coal export has basically stabilized at about 210 million tons, ranking third in the world. Recently, Japan and South Korea indicated that they might stop importing coal from Russia (Japan and South Korea imported 19.74 million tons and 21.95 million tons of coal from Russia in 2021). The German Minister of economy also said that “after Russia’s military action in Ukraine, Germany will have to buy natural gas and coal from other countries”, This means that some coal demand may be transferred to other regions except Russia (mainly Indonesia, Australia and South Africa). Meanwhile, due to the continuous high natural gas prices, some European countries such as Germany announced that they would restart coal power plants. Therefore, the imbalance between coal supply and demand outside Russia may intensify, which will also push up overseas coal prices. For China, the proportion of imported coal from Russia accounted for 17.6% in 2021 and 82.4% from outside Russia. Considering the transportation capacity constraints, it is difficult for China to significantly increase its coal imports from Russia in the short term. Given that the coal prices outside Russia are likely to continue to rise, it means that China’s coal prices and imported coal prices may further “hang upside down”, which will drag down China’s coal imports.
2) metals: the conflict between Russia and Ukraine may aggravate the imbalance between global supply and demand, and there is still upward pressure on metal prices
> non ferrous metals: there are two ways to aggravate the imbalance between supply and demand: first, Russia itself is an important non-ferrous metal producer and exporter in the world. For example, Russia is the world’s second largest producer of primary aluminum (with a share of 6%) and the largest exporter of aluminum ingots (with a share of 17%). During the US sanctions against Rusal (Russia’s largest primary aluminum producer) in 2018, LME aluminum prices rose more than 30% in 10 trading days. Second, the production of electrolytic aluminum and other non-ferrous metals consumes a lot of energy (the power consumption per ton of electrolytic aluminum is about 13500 KWH). The conflict between Russia and Ukraine has led to a sharp rise in the price of natural gas in Europe, which may further push up the price of electricity, resulting in European producers being forced to reduce production. For example, in 2021q4, due to the rise of energy prices, the production of electrolytic aluminum in Europe has been reduced by more than Shanghai Pudong Development Bank Co.Ltd(600000) tons, accounting for about 15% of the capacity built in Western Europe. It should be noted that at present, the United States pays more attention to energy issues and less attention to non-ferrous metals. In view of the precedent of sanctions against Rusal by the United States in 2018, it remains to be seen whether the follow-up non-ferrous metals in Russia will be sanctioned.
> ferrous metals: the imbalance between global steel supply and demand has further intensified, pushing up international steel prices. In recent three years, the average crude steel output of Russia and Ukraine was 73.11 million tons and 20.94 million tons respectively, accounting for 3.8% and 1.1% of the world respectively; Among them, the export of semi-finished steel products of the two countries accounted for 19.8% and 11.2% of the world respectively. Geographically, the EU is its main export destination. However, considering the current situation and possible sanctions and Countermeasures in the future, for example, recently, Russia’s sever steel company said that it had stopped supplying steel products to the EU, and some steel demand in the EU may be forced to shift to other regions, thus exacerbating the imbalance between global steel supply and demand and pushing up international steel prices.
3) agriculture: the conflict between Russia and Ukraine will affect global food production and supply from two aspects, but the impact on China is expected to be limited. For the world, first, Russia, Ukraine and Belarus (Russian allies, some European and American sanctions are also applicable to Belarus) are important food exporters in the world. For example, in recent three years, the sunflower oil exports of the above three countries account for about 55.6%, wheat exports account for about 26.1% and corn exports account for about 14.5% of the world.
The escalation of Russia Ukraine conflict and sanctions may significantly push up international food prices in the short term. Referring to the Crimean crisis in 2014, international wheat prices rose by 17.2% in one month. Second, the above three countries are important fertilizer producers and exporters in the world. In recent three years, the exports of potassium fertilizer and nitrogen fertilizer of the above three countries account for about 37.7% and 14.4% respectively. Recently, due to the intensification of the conflict between Russia and Ukraine, the price of chemical fertilizer has increased significantly. In the future, if the price of chemical fertilizer continues to rise higher than expected, it will also drag down grain production. For China, the self-sufficiency rate of rice, wheat and corn exceeds 90%, and the dependence on imports is not high. It is expected that the conflict between Russia and Ukraine will have a limited impact on China’s food supply. However, from a marginal point of view, it may need to be concerned that corn is an important feed for pigs. If the price of imported corn rises sharply (especially in 2021, China imported 8.24 million tons of corn from Ukraine, accounting for 29.1% of China’s corn imports), it may aggravate the losses of pig breeding enterprises to a certain extent, thus accelerating the de industrialization of production capacity.
4) science and Technology (electronic, semiconductor, automobile and other industrial chains): Russia and Ukraine are important rare gas producing areas in the world, in which neon, krypton and xenon are the key materials for manufacturing chips. In particular, Ukraine accounts for about 70% of global neon gas and more than 90% of semiconductor grade neon gas in the United States. After the outbreak of the conflict between Russia and Ukraine, the price of neon gas in China has risen to 3250 yuan / m3 from 1250 yuan / m3 at the end of January. If the conflict between Russia and Ukraine lasts longer than expected, the prices of rare gases such as neon may remain high, which will exacerbate the global “lack of core” and drag down the automobile, electronics and other related industrial chains.
Risk tip: the conflict between Russia and Ukraine has evolved beyond expectations
