The Russian invasion
Some of the products affected are obvious and one-dimensional: Ukraine is Europe’s “breadbasket” and is a major exporter of corn, wheat, flour and other basic ingredients used in food manufacturing. It has been overrun, so supplies from Ukraine of these products are at risk.
But there are also far less obvious impacts that could still have a huge impact on the world, like neon gas.
Up to 50% of the world’s neon gas supply comes from the combined capacity of Ukraine and Russia. Neon gas is an essential component in the semiconductor manufacturing process.
The world is already experiencing huge supply chain problems due to an undersupply of microchips.
And these are only the first-order effects; imagine what second-order effects might show up in 6 months or a year if this conflict is still ongoing or has morphed into a truly horrific larger conflict.
The best performing companies in yesterday’s trading session were all resource stocks positioned in mining, oil and mineral exploration.
Coal Asia [COAL 0.32 21.15%] jumped more than 20%. ACE Enexor [ACEX 28.00 11.33%] jumped more than 11%. Industrial Vulcan [VUL 1.12 10.89%] also increased by just under 11%.
I don’t have any crystal ball predictions of what’s to come, I’m just trying to explain, in part, why there’s been such a run in stocks in these sectors.
I’m not going to play armchair general and predict how the machinery of war will work and how this conflict will end.
The truth is, no one has any idea what will happen next, and for how long what will happen will happen.
That’s really what’s at the heart of these huge price swings that we’ve been talking about in oil and coal. Huge global suppliers are in conflict, their supply is at risk, and every country, industry and business that depends on these commodities has scrambled to buy what they can while they still can.
If the conflict de-escalates, the coal price of $435/ton will absolutely collapse and everyone who bought at that price will look ridiculous because the price per ton is trading at 50% or 75% off per compared to this price.
However, if the conflict goes awry – if NATO gets involved, or if China literally does something out of the ordinary – that price is likely to look cheap compared to the “new” spot price at which buyers will face as tensions intensify.
A good example of this is Semirara Mining and Electricity [SCC 32.70 7.57%]; the high price of coal is obviously good for SCC because they mine coal and sell it on the open market, but $435/ton of coal is only good for SCC as long as the coal is $435/ton.
A peak at $435/tonne for a few weeks and then a drop to $100/tonne for the rest of the year will not support a huge rise in the stock price.
It’s a different story, however, if the price of coal stabilizes around that price level and stays here for a few months or even a few quarters.