The consequences of the war in Ukraine are profound, says Anil Thakersee, an executive investment solutions provider, PPS Investments.
The regional conflict is already having global ramifications and, coupled with the sanctions imposed on Russia, will continue to impact global trade and commodity markets in the months ahead.
Food and energy prices are central to inflation cycles and remain a major theme for financial markets as many countries around the world are posting multi-decade inflation highs, said Thakersee.
The risk of a recession has increased and markets are likely to remain volatile, Fidelity International chief executive officer Anne Richards said, in the latest dire warning on the outlook at the World Economic Forum, Bloomberg reported.
The conflict in Ukraine has dominated the first in-person forum in Davos, Switzerland in two years, while surging inflation, energy security, food shortages and climate change have also been high on the agenda, it said.
Ukraine foreign minister Dmytro Kuleba said during a Q&A that peace negotiations with Russia are going “nowhere” and compared Moscow’s offensive in the eastern Donbas region to a World War II battle. “Tanks, artillery, combat helicopters, air attacks, multiple-launch rocket systems, everything is involved,” he said.
“When you are conducting an operation like this you basically say ‘no’ to negotiations.”
Thakersee said that global inflation was on an upward trajectory prior to the war in Ukraine. The supply side of the global economy and trade was impacted by the pandemic and ensuing lockdowns.
“To some extent, the war in Ukraine represents a continuation of these global economic challenges, acting as a headwind to the global recovery and placing further upward pressure on inflation.
“While Ukraine may not be a significant trading partner for the major economies, places such as China, Europe and South Africa represent some of the major trading partners for Russia.”
The Ukrainian and Russian economies are key suppliers of commodities, including titanium, palladium, wheat, corn, gas and oil.
Disruption to the supply chain of these commodities is already filtering through to prices paid by consumers, hence impacting disposable income, said Thakersee
Impact on South Africa
Governments of emerging economies are limited in their ability to stimulate struggling sectors in the economy while people rarely have sufficient savings or income to handle price increases, PPS pointed out.
The impact of the conflict between Russia and Ukraine is already being felt by South Africans in a myriad of ways, said Thakersee. “With sharp increases in fuel and electricity prices already plaguing consumers, many South Africans will now need to tighten their proverbial belts further to cover rising food costs.”
The war has raised fears of global food insecurity as these countries are major exporters of grains, oilseeds, fertilisers and crude oil, he added.
Russia is the world’s third top producer of crude oil and oil, which is South Africa’s largest import item. Hence, the sharp rise in oil prices globally has increased local fuel prices significantly. Currently hovering around record-high levels, the fuel price is anticipated to rise even further in the near future.
Cooking oil has also seen a sizeable increase in local prices, PPS said. While South Africa has a healthy supply crop, it still isn’t enough to satisfy local demand and as such, we remain a net importer of sunflower oil.
“Both Russia and Ukraine account for some 18% – 40% of global exports of sunflower oil, so it is no surprise that we are starting to feel the heat. Vegetable oil also forms the base of many other household products, shampoo, cosmetics, margarine and even paint, so we could see increases in many consumables.”
Dr John Purchase, long-serving former chief executive officer of the Agricultural Business Chamber (Agbiz), told Lester Kiewit on Cape Talk that South Africa is the tenth-largest source of sunflowers in the world, producing more than 700,000 tonnes per year.
“This year we are expecting a larger crop of around 900,000 which poses well for our availability of sunflower oil. Although we are still a net importer of veg oil into SA, especially palm oil.”
Purchase said that the Food and Agriculture Organisation of the United Nations’ global food price index points to vegetable oil prices increasing massively over the past few months. Between February and March, it climbed 23% before stabilising somewhat. “Our prices are linked to the international price, if it goes up, local prices will also go up.”
For vegetable oil, Purchase doesn’t see a shortage in the country, “but we see the price remaining high until global stocks have returned to normal”.
Purchase said that agriculture producers are also suffering as a result of rising fuel prices and fertilisers. A huge quantity of fertilisers comes from Russia and Ukraine, he said, and being hugely disrupted, those prices have climbed by 30-50% at least, in some cases even more.
“So this is the price we pay for a war in Ukraine. It does impact on every single person in society.”
Looking at the major inflation cycles in history, food and energy have typically been the main drivers of these cycles due to their broader impact on the price of all goods and services, said PPS.
“With Ukraine set to start planting crops during April/May, depending on how the war progresses, come September harvest season the longer-term impacts may be felt.
“Between Russia and Ukraine, accounts for more than a quarter of the wheat exports and South Africa imports around 30%, so any disruption in supply could impact prices in wheat-based products, such as cereal and bread,” said Thakersee.
There are also major problems emerging, tied to the disruption of supply chains globally, said Purchase. “It’s been a massive problem, especially with the availability of containers and the congestion and lockdowns in Chinese ports. Also the blockage of Ukraine ports and especially Russian ports,” he said.
China and Russia are huge destinations for South Africa for nuts and citrus, he said. All these factors have had negative effects on South Africa’s export industry.