Russia’s invasion of Ukraine last Thursday has global commodity markets reeling as investors try to price the impact of harsh sanctions on one of the world’s largest raw materials exporters and how an extended land war in Eastern Europe could impact supply.

Analysts believe a select group of Australian companies could not only weather the ongoing conflict but actually benefit as prices of key local exports soar. They name producers of oil and gas as well as certain miners and agricultural companies.

On oil and gas, Morningstar equity analyst Mark Taylor believes energy producers Woodside Petroleum (ASX: WPL) and Santos (ASX: STO) could extend the recent streak of bumper earnings as spot cargoes of Liquified Natural Gas (LNG) fetch record prices.

To date, US and European sanctions have excluded Russia’s massive natural gas and oil exports. The country supplies 40% of Europe’s natural gas and is the world’s third-largest oil producer.

Prices for both commodities have nonetheless spiked since the invasion as investor sentiment soured and the risk of conflict-related disruptions increased, says Taylor.

Spot prices for Asian LNG rose 53.6% to US$37.50 mmBtu last week, according to Reuters.

Dr Suhas Nayak, a portfolio manager at Allan Gray, argues today’s higher gas spot prices could also flow through to longer-term contracts, where Woodside and Santos sell much of their LNG. Those contracts are often benchmarked against oil and also benefit from higher prices there. 

The Australian equity manager holds investments in Woodside, Alumina and Santos.

"The pressure on energy prices is upwards rather than downwards now,” he says.

“At the moment, the market isn’t pricing oil and gas stocks in Australia in line with the kind of oil prices we’re seeing.”

Futures trading points to oil prices easing in the coming months while remaining at highs. Brent crude oil contracts for delivery in January 2023 last closed at US$88.16, up from around US$70 in December. 

War and sanctions come as commodity prices hover at record highs amid supply disruptions and a rebound in demand post-covid.

Bloomberg’s Commodity Index, which includes energy metals and agricultural products, is at a seven-year high while the global benchmark Brent crude oil hovers above US$100 for the first time since 2014.

Woodside closed Tuesday at $28.68, a 28% discount to fair value. Santos finished at $7.26, a 29% discount to fair value.

Aluminium rising

Other commodity exporters looking at windfall profits from higher prices are aluminium exposed miners South32 (ASX: S32), Rio Tinto (ASX: RIO) and Alumina (ASX: AWC), according to Aaron Binsted, a portfolio manager at Lazard.

Russia produces 6% of global aluminium and prices for the metal rose 12% in February, according to London Metal Exchange data. Alumina, a precursor to aluminium metal, was up 18%.

“Aluminium is a commodity that has rallied even harder,” says Binsted. “Russia is a major player in the metal. That’s beneficial to our aluminium stocks.”

South32 is up 4.2% since Wednesday’s close, the day prior to Russia’s invasion. Alumina and Rio Tinto are down 0.7%% and 2%, respectively over the same period. All three miners have exposure to aluminium or its precursors. Alumina owns a 40% stake in Alcoa, the west’s largest alumina business.

Morningstar considers both Alumina and South32 to be trading in a fairly valued range. Rio Tinto closed Tuesday at an 30% premium to fair value.

Wheat could see short term boost

War in Eastern Europe also has the potential to curtail grain exports from Europe’s breadbasket and add to already high wheat prices in the short term, says Morningstar equity analyst Angus Hewitt, who covers Graincorp, an ASX-listed wheat logistics and storage firm.

Ukraine and Russia export almost a third of global export production, according to the US Agriculture Department. Rural commodity prices tracked by the Reserve Bank, which include wheat, meat and other crops, rose 2.2% in February. They’re up 34% relative to average prices in 2019 and 2020.

Australian wheat exporters are already benefiting from good weather, bumper harvests and a poor Northern Hemisphere growing season, says Hewitt.

“This might be the best conditions for GrainCorp for a very long time,” says Hewitt.

“But we do not expect this to be a structural change in the market and our valuation is based on long-term forecasts rather than near-term fluctuations.”

Graincorp (ASX: GNC) rallied sharply this week and is up 6% since Monday. Morningstar thinks shares are trading at a 42% premium to fair value.

Reserve Bank steady on interest rates

Outside specific commodity exporters, Australian investors will feel the impact of war in Europe primarily through greater volatility on the ASX, says Diana Mousina, senior economist at AMP Capital.

“The main channel will be through financial markets because the Australian economy is so far away from the conflict and has such low exposure to Russia and Ukraine from a trade point of view,” she says.

AMP Capital’s research into previous conflicts and crises, including Pearl Harbour and the Korean War, showed sharp market selloffs usually reversed after 6 to 12 months. However, Mousina says if the conflict escalates and draws in NATO members in the US and Western Europe, markets could fall another 10% to 15%.

The major macroeconomic question for markets remains the path and pace of interest rate rises, says Mousina.

In comments on Tuesday, Reserve Bank Governor Philip Lowe stuck to his plan to be patient on rate hikes and said it was too early to tell if inflation was sustainably in the bank’s bank. He called the war in Ukraine a “major new source of uncertainty” while flagging the resilience of the Australian economy.

Mousina thinks the war in Ukraine has given the Governor something to think about without changing the overall outlook.

“I don't think this changes the RBA's profile for domestic inflation, growth or the labour market for now. I still think we’re on a path where inflation is headed higher,” she says.

“Despite this negative shock of higher oil prices and lower growth in Europe, I don’t think it will limit the RBA from hiking interest rates domestically.”.

AMP Capital is forecasting two RBA rate hikes this year.

In the US, the story more complicated. Mousia says conflict in Ukraine could make the Federal Reserve more cautious around timing of rate hikes but is unlikely to change their overall quantity.

Market participants have reduced bets that the US Federal Reserve will hike rates by 0.5% in March and 88% now expect a smaller 0.25% increase, according to CME data as of Monday.