How Indian metal companies stand to benefit from global supply disruptions due to war

Russia & Ukraine (CIS) are large exporters of raw materials (iron ore, coking and thermal coal, scrap, alumina) and finished products (aluminium and steel). Already, Ukrainian steel and alumina production has been disrupted. While there are no direct sanctions on Russian commodity exports yet, self-sanctioning by countries/companies, sanctioning on SWIFT transactions for Russian banks, disruption/higher freight cost for exports through the Baltic sea should drive supply tightness/higher cost curve.


Near-term Implications – These disruptions bode well for Indian producers on 1) tightness in Asia, 2) export opportunities to Europe. Integrated aluminium producer Hindalco is a net beneficiary of higher aluminium prices (despite some hit to the non-packaging business of Novelis). JSPL should benefit from higher costs (scrap, imported coal prices) for secondary producers. TSL benefits from iron ore tightness, higher EU spreads.

Risks – 1) Repeat of two oil/energy shocks witnessed in the 1970s. Sometimes risk to high prices is actually high prices itself – demand destruction restores parity. 2) China ramps up exports of certain commodities.

How the future may unfold
Can Russia direct more coal exports to China?
Russia and China have entered into an agreement on wheat, despite Chinese reservations historically on quality. Russia would like to step up coal exports as well to China - that could potentially mean lower costs for China vs other countries. But most coal is located in central Russia (Kuzbass). Russia does export to Asia Pacific from here, but Trans-Siberian rail/port infrastructure constraints may limit magnitude in the near term.

Can Russia revive the Ukraine commodity industry?
Donbass was an industrial powerhouse, till Russia annexed Crimea in 2014. Since then Ukraine’s steel production/exports have been cut in half, while coal exports have also dropped sharply. This region has suffered from flooding, rebel takeover, lack of investment, etc.

If Donbass becomes autonomous, could there be an increased Russian investment in reviving steel and coal output here? Otherwise, there could be even more degradation from lack of investment.

Collapse in ruble
The collapse in ruble won’t help lower costs for Chinese commodity imports from Russia, as these deals would likely be negotiated in yuan-ruble. These countries are trying to de-dollarize trade. Notwithstanding that, would Russia supply coal to China at lower prices in return for financing? Chinese yuan has held up strong despite Chinese hard landing and now geopolitical risks.

Strong current account surplus and now safe-haven status has helped continue to support yuan at current levels. This means China is not exporting as much as deflation as it would typically in a commodity downturn. Can this strength sustain even when the Fed tightens and China eases further?

Investment in the Eastern belt of Russia
Russia was looking for investment support from other countries for investment in East Russia (India also signed an agreement), but would countries go ahead with these agreements? Nonetheless, China would step up. One of the most promising coal deposits in the world is Elga in east Russia, providing a direct channel to China.

Russia would increasingly look east for trade, so it needs to perk up infrastructure support. Reaching China directly inland is also on cards, though Russia needs to contend with possible environmental harm in mountainous regions.

(The author Satyadeep Jain is an analyst for metals & cement at Ambit Capital)