1 00:00:03,410 --> 00:00:05,880 Sean Aylmer: Welcome to the Fear and Greed daily interview. I'm Sean 2 00:00:05,880 --> 00:00:08,889 Sean Aylmer: Aylmer. Every Monday we like to talk about investing, but 3 00:00:08,890 --> 00:00:11,140 Sean Aylmer: at the moment, it's hard to talk about investing without 4 00:00:11,460 --> 00:00:15,530 Sean Aylmer: thinking commodities. Ukraine crisis has sent some commodities soaring with 5 00:00:15,530 --> 00:00:18,570 Sean Aylmer: record prices early last week before they came back a 6 00:00:18,570 --> 00:00:21,209 Sean Aylmer: bit. Vivek Dhar is the Director of Mining and Energy 7 00:00:21,210 --> 00:00:24,739 Sean Aylmer: Commodities Research at Commonwealth Bank. Vivek, welcome to Fear and Greed. 8 00:00:25,160 --> 00:00:25,670 Vivek Dhar: Oh, thank you. 9 00:00:26,180 --> 00:00:27,729 Sean Aylmer: Now, Vivek, I don't know how old you are, but 10 00:00:27,730 --> 00:00:30,720 Sean Aylmer: in the years that you have watched commodities, have you 11 00:00:30,720 --> 00:00:32,071 Sean Aylmer: ever seen a week like last week? 12 00:00:32,071 --> 00:00:36,659 Vivek Dhar: All right. Certainly I haven't seen that level of volatility. We've 13 00:00:36,670 --> 00:00:40,519 Vivek Dhar: certainly seen prices fall very aggressively for certain supply- side 14 00:00:40,520 --> 00:00:44,300 Vivek Dhar: events or rise because of those. But across the commodity 15 00:00:44,300 --> 00:00:47,240 Vivek Dhar: complex we see those moves and in particular for nickel, 16 00:00:47,240 --> 00:00:50,830 Vivek Dhar: I'd say, as the highlight, oh, it's been absolutely fascinating. 17 00:00:51,130 --> 00:00:54,120 Sean Aylmer: Let's just talk about nickel. So what happened? It spiked 18 00:00:54,350 --> 00:00:58,650 Sean Aylmer: 250% in London Metals Exchange, which is where it's traded 19 00:00:58,740 --> 00:01:02,600 Sean Aylmer: primarily, closed or stopped trading nickel as a result. It 20 00:01:02,600 --> 00:01:05,029 Sean Aylmer: did come back a bit, though. What's going on there? 21 00:01:05,360 --> 00:01:08,559 Vivek Dhar: Sure. Look, with nickel and a number of other commodities 22 00:01:08,560 --> 00:01:11,779 Vivek Dhar: that are affected by this, it was effectively a physical 23 00:01:11,780 --> 00:01:15,949 Vivek Dhar: supply disruption and in that, I mean concerns that Russian 24 00:01:15,950 --> 00:01:20,100 Vivek Dhar: supply would be impeded. Now, Russia accounts for about six 25 00:01:20,100 --> 00:01:23,580 Vivek Dhar: to 11% of global nickel supply. But when it comes 26 00:01:23,580 --> 00:01:26,440 Vivek Dhar: to this kind of high purity class one nickel, they're 27 00:01:26,440 --> 00:01:30,680 Vivek Dhar: actually much larger, about 17%. The markets were concerned, so 28 00:01:30,680 --> 00:01:33,610 Vivek Dhar: prices started rising. This is on top of a market 29 00:01:33,610 --> 00:01:37,330 Vivek Dhar: that was already very, very tight start to actually begin 2022. 30 00:01:37,770 --> 00:01:40,440 Vivek Dhar: So when the price rose, everyone was like, " Okay, this 31 00:01:40,440 --> 00:01:44,119 Vivek Dhar: is natural. We should expect this." But it actually turned 32 00:01:44,120 --> 00:01:47,560 Vivek Dhar: into a financial market event, and that event is a 33 00:01:47,560 --> 00:01:51,340 Vivek Dhar: short squeeze. It's because there was a very large position, 34 00:01:51,340 --> 00:01:55,610 Vivek Dhar: a short position where basically Tsingshan, which is a major 35 00:01:56,150 --> 00:01:59,169 Vivek Dhar: stainless steel producer in the world, it had a very 36 00:01:59,270 --> 00:02:01,610 Vivek Dhar: large position of nickel that they were going to benefit 37 00:02:01,610 --> 00:02:05,440 Vivek Dhar: from if prices fell. Now, as this price crept higher 38 00:02:05,440 --> 00:02:08,650 Vivek Dhar: and started picking up, they had to actually cover that 39 00:02:08,650 --> 00:02:11,860 Vivek Dhar: position off and buy more and more nickel and in 40 00:02:11,860 --> 00:02:16,130 Vivek Dhar: the end that led to such upward momentum. We saw 41 00:02:16,130 --> 00:02:19,330 Vivek Dhar: nickel go from, it started this year just south of $ 42 00:02:19,340 --> 00:02:23,180 Vivek Dhar: 21,000 a ton, and it rose above a hundred thousand 43 00:02:23,180 --> 00:02:25,889 Vivek Dhar: dollars a ton at the peak of this short squeeze. 44 00:02:26,050 --> 00:02:30,990 Vivek Dhar: Then basically the LME (London Metals Exchange) had to do extraordinary intervention, even canceling 45 00:02:30,990 --> 00:02:35,220 Vivek Dhar: trades so that price could come back and the market could settle. Hopefully, 46 00:02:35,220 --> 00:02:38,480 Vivek Dhar: this week we see the market reopen, but we actually 47 00:02:38,480 --> 00:02:38,889 Vivek Dhar: don't know. 48 00:02:39,169 --> 00:02:42,070 Sean Aylmer: Okay. Oil, that's the big one for many of us, and many of 49 00:02:42,790 --> 00:02:44,790 Sean Aylmer: us who have been around for a while, well, we've 50 00:02:44,790 --> 00:02:47,800 Sean Aylmer: heard stories about the early 1970s and oil shocks and things 51 00:02:47,800 --> 00:02:50,110 Sean Aylmer: like that. What's going on in the oil market at 52 00:02:50,110 --> 00:02:52,980 Sean Aylmer: the moment, and how does that actually feed through to 53 00:02:52,980 --> 00:02:54,351 Sean Aylmer: we, as consumers, in Australia? 54 00:02:54,351 --> 00:02:58,610 Vivek Dhar: Sure, sure. In terms of the oil market itself, look, 55 00:02:58,860 --> 00:03:02,530 Vivek Dhar: it actually, even before the conflict with Russia and Ukraine, 56 00:03:02,910 --> 00:03:07,070 Vivek Dhar: the markets were very, very tight. Global oil stockpiles were at seven- 57 00:03:07,070 --> 00:03:11,050 Vivek Dhar: year lows. More than that, there were some serious questions 58 00:03:11,050 --> 00:03:14,639 Vivek Dhar: being asked about OPEC+, which is basically a group of 59 00:03:14,639 --> 00:03:18,989 Vivek Dhar: countries that control a significant percentage of global supply. They're 60 00:03:19,000 --> 00:03:22,030 Vivek Dhar: the ones that the market looks to, to balance. That 61 00:03:22,030 --> 00:03:25,150 Vivek Dhar: means cutting supply and that also means adding supply. But 62 00:03:25,150 --> 00:03:28,410 Vivek Dhar: their ability to add supply came under some serious questions 63 00:03:28,410 --> 00:03:30,880 Vivek Dhar: because they haven't been able to hit their production targets. 64 00:03:31,610 --> 00:03:34,619 Vivek Dhar: When you have both those factors playing out, you have 65 00:03:34,620 --> 00:03:37,840 Vivek Dhar: a market that's very vulnerable to a supply shock. That's 66 00:03:37,840 --> 00:03:41,790 Vivek Dhar: exactly what we saw when this conflict with Russia escalated 67 00:03:41,790 --> 00:03:44,750 Vivek Dhar: because Russia accounts for about 10 to 11% of global 68 00:03:45,090 --> 00:03:48,540 Vivek Dhar: oil supply. But what is really at risk is around 5% 69 00:03:49,240 --> 00:03:53,330 Vivek Dhar: of global supply because that's what's exported. Once that happened, just 70 00:03:53,360 --> 00:03:56,860 Vivek Dhar: the extent of what supply disruption there was, that's what 71 00:03:56,860 --> 00:04:01,700 Vivek Dhar: caused the prices to spike. The implication for Australia actually 72 00:04:01,700 --> 00:04:07,390 Vivek Dhar: comes primarily through the fuel prices. That's because the benchmark, 73 00:04:07,440 --> 00:04:12,640 Vivek Dhar: which Australia actually effectively the fuel price comes from, that 74 00:04:12,640 --> 00:04:17,020 Vivek Dhar: is actually what is impacted and translates through. But what 75 00:04:17,020 --> 00:04:20,430 Vivek Dhar: we have seen is that that fuel price is so 76 00:04:20,430 --> 00:04:24,270 Vivek Dhar: linked to what is happening in Russia, that we are 77 00:04:24,270 --> 00:04:28,909 Vivek Dhar: living and breathing basically any movement in intention, any movement 78 00:04:28,910 --> 00:04:32,440 Vivek Dhar: in sanctions. That's really what we're absorbing here in Australia. 79 00:04:32,820 --> 00:04:35,010 Sean Aylmer: Okay. So we're seeing petrol at well and truly more 80 00:04:35,010 --> 00:04:37,900 Sean Aylmer: than $ 2 a liter, record levels that consumers in the 81 00:04:38,370 --> 00:04:41,750 Sean Aylmer: US are seeing exactly the same thing happening. What we 82 00:04:41,750 --> 00:04:43,589 Sean Aylmer: did hear last year is that Joe Biden, the US 83 00:04:43,589 --> 00:04:48,700 Sean Aylmer: president, talking about banning imports of Russian oil, but European 84 00:04:48,700 --> 00:04:51,929 Sean Aylmer: nations were far less enthusiastic about that, Germany, particularly, though 85 00:04:51,930 --> 00:04:54,840 Sean Aylmer: the UK did talk about perhaps taking steps down that 86 00:04:55,120 --> 00:04:57,750 Sean Aylmer: path. Where I'm leading to is how do you think 87 00:04:57,750 --> 00:04:59,680 Sean Aylmer: this will play out? I mean, if the US does 88 00:04:59,680 --> 00:05:03,589 Sean Aylmer: ban oil imports, what happens in the oil market? Just 89 00:05:03,810 --> 00:05:05,710 Sean Aylmer: not too difficult a question there, Vivek. 90 00:05:06,380 --> 00:05:09,630 Vivek Dhar: Yeah. No, no. Look, clearly it's negative, but it's actually 91 00:05:09,630 --> 00:05:13,130 Vivek Dhar: important to separate what's rhetoric and what actually leads to 92 00:05:13,130 --> 00:05:17,250 Vivek Dhar: an actual supply disruption. When we talk about what has 93 00:05:17,250 --> 00:05:20,890 Vivek Dhar: happened because of this conflict, the sanctioning has been very critical, 94 00:05:20,890 --> 00:05:24,980 Vivek Dhar: in particular, the first round of banking and finance sanctions, 95 00:05:25,180 --> 00:05:27,740 Vivek Dhar: because that has frozen up a lot of the commodity 96 00:05:27,740 --> 00:05:31,790 Vivek Dhar: trade financing. So you have a lot of commodities stuck, 97 00:05:32,100 --> 00:05:35,409 Vivek Dhar: unable to leave Russia because we can't get the financing 98 00:05:35,410 --> 00:05:39,620 Vivek Dhar: in order, or we have companies unilaterally doing self- sanctioning 99 00:05:39,620 --> 00:05:42,820 Vivek Dhar: where they don't want exposure to Russia. Now that has 100 00:05:42,820 --> 00:05:47,500 Vivek Dhar: tied up roughly about 70% of Russia's oil exports. So 101 00:05:47,730 --> 00:05:49,979 Vivek Dhar: even though the rhetoric is that, " Oh, wow, we're ratcheting 102 00:05:49,980 --> 00:05:52,570 Vivek Dhar: up sanctions," and that's certainly a concern that the financial 103 00:05:52,570 --> 00:05:55,760 Vivek Dhar: market takes into account, the physical impact may actually be 104 00:05:55,760 --> 00:05:59,500 Vivek Dhar: very immediate. Because what's frozen already, it may not actually 105 00:05:59,500 --> 00:06:02,839 Vivek Dhar: have an impact that the US and the UK, because the 106 00:06:02,839 --> 00:06:05,160 Vivek Dhar: UK's ban will come at the end of this year. 107 00:06:05,440 --> 00:06:08,969 Vivek Dhar: Both of those countries, they're not that dependent on Russian 108 00:06:08,970 --> 00:06:11,270 Vivek Dhar: oil as much as Europe and so it makes sense 109 00:06:11,270 --> 00:06:13,170 Vivek Dhar: for them to do it. But will it actually change 110 00:06:13,170 --> 00:06:15,710 Vivek Dhar: the status quo in the physical market? I think that's 111 00:06:15,710 --> 00:06:19,560 Vivek Dhar: where people have a lot more doubts. But certainly what 112 00:06:19,610 --> 00:06:22,330 Vivek Dhar: impact this does have is that it's going to galvanise 113 00:06:22,330 --> 00:06:25,589 Vivek Dhar: this approach that we should be looking at banning. And 114 00:06:25,589 --> 00:06:28,599 Vivek Dhar: if we do see Europe eventually play that card, it 115 00:06:28,600 --> 00:06:32,099 Vivek Dhar: could see oil prices spike even higher. We're talking potentially $ 116 00:06:32,110 --> 00:06:35,559 Vivek Dhar: 150 a barrel for Brent and that, in our view would, 117 00:06:35,560 --> 00:06:39,640 Vivek Dhar: would lead to you potentially fuel prices here at the 118 00:06:39,640 --> 00:06:43,700 Vivek Dhar: retail side, going up to potentially $2.40 to $ 2. 45 a litre. 119 00:06:44,260 --> 00:06:44,659 Sean Aylmer: Ouch. 120 00:06:45,080 --> 00:06:45,490 Vivek Dhar: Absolutely. 121 00:06:46,760 --> 00:06:48,380 Sean Aylmer: Something else I've learned about in the last couple of 122 00:06:48,380 --> 00:06:52,359 Sean Aylmer: weeks is European gas as opposed to gas gas. So 123 00:06:52,839 --> 00:06:55,919 Sean Aylmer: just explain how European gas, what we talk about there, 124 00:06:55,990 --> 00:06:59,520 Sean Aylmer: and why prices in Europe have spiked so much, but 125 00:06:59,520 --> 00:07:01,710 Sean Aylmer: not so much in the US and certainly not anywhere 126 00:07:01,710 --> 00:07:02,900 Sean Aylmer: near as much in Australia. 127 00:07:03,370 --> 00:07:07,320 Vivek Dhar: Yeah. Look, the key linkage is just how dependent Europe 128 00:07:07,320 --> 00:07:10,250 Vivek Dhar: is on Russian gas. It accounts for about 40% of 129 00:07:10,250 --> 00:07:13,040 Vivek Dhar: their gas needs and so it's very, very challenging for 130 00:07:13,040 --> 00:07:15,950 Vivek Dhar: Europe to find another supply source. What they've had to 131 00:07:15,950 --> 00:07:19,130 Vivek Dhar: rely upon actually, and this has an impact on Australia, 132 00:07:19,130 --> 00:07:22,989 Vivek Dhar: is that they've had to compete away LNG exports that 133 00:07:22,990 --> 00:07:25,340 Vivek Dhar: were going to Asia and try and divert that to Europe. 134 00:07:25,980 --> 00:07:29,830 Vivek Dhar: So the spot LNG price, which effectively impacts about a 135 00:07:29,830 --> 00:07:34,380 Vivek Dhar: quarter of Australia's LNG exports, that has been forced higher. 136 00:07:34,710 --> 00:07:37,600 Vivek Dhar: But for Europe, the pain on the gas side has 137 00:07:37,600 --> 00:07:41,929 Vivek Dhar: been very, very significant and already resulted in demand disruption. 138 00:07:42,150 --> 00:07:46,930 Vivek Dhar: We've seen steel mills in Spain, fertiliser companies in Europe, 139 00:07:47,000 --> 00:07:50,760 Vivek Dhar: as well as paper mills already closed down or cut capacity 140 00:07:51,130 --> 00:07:54,280 Vivek Dhar: because those gas prices are so high. It's just economically unviable. 141 00:07:55,100 --> 00:07:57,470 Sean Aylmer: Okay. Stay with me, Vivek. We'll be back in a 142 00:07:57,470 --> 00:07:57,800 Sean Aylmer: minute. 143 00:08:02,570 --> 00:08:05,690 Sean Aylmer: My guest this morning is Vivek Dhar, mining and energy economist 144 00:08:05,690 --> 00:08:07,920 Sean Aylmer: at Commonwealth bank. Kind of want to move on to 145 00:08:07,920 --> 00:08:10,240 Sean Aylmer: the overall impact on the global economy from this, but, 146 00:08:10,480 --> 00:08:13,330 Sean Aylmer: I mean, we saw gold past $ 2, 000 US an 147 00:08:13,330 --> 00:08:16,100 Sean Aylmer: ounce last week, that's on the back of the safe 148 00:08:16,100 --> 00:08:19,490 Sean Aylmer: haven status. But coal, iron ore, why are those sorts 149 00:08:19,490 --> 00:08:20,870 Sean Aylmer: of commodities rising? 150 00:08:21,250 --> 00:08:25,610 Vivek Dhar: Sure. Coal is very much linked to exactly the Russian disruption. 151 00:08:26,150 --> 00:08:29,710 Vivek Dhar: They account for about 15 to 20% of thermal coal 152 00:08:29,710 --> 00:08:33,990 Vivek Dhar: trade and about 10% of coking coal trade. So those 153 00:08:33,990 --> 00:08:37,790 Vivek Dhar: markets have certainly been hit hard from the Russian disruption. 154 00:08:38,240 --> 00:08:41,270 Vivek Dhar: But when we talk about what we've seen in terms of 155 00:08:41,510 --> 00:08:44,860 Vivek Dhar: iron ore, that's a very China- centric story. In fact, 156 00:08:44,860 --> 00:08:47,719 Vivek Dhar: it's one of the few commodities, which is beholden to 157 00:08:47,720 --> 00:08:52,030 Vivek Dhar: China right now. That's because China accounts for about 70 to 75% 158 00:08:52,030 --> 00:08:54,479 Vivek Dhar: of the world's iron ore imports and so it's very 159 00:08:54,480 --> 00:08:57,950 Vivek Dhar: much been driven by short- term policy in China, as 160 00:08:57,950 --> 00:09:00,320 Vivek Dhar: well as what we potentially could see in the medium- 161 00:09:00,320 --> 00:09:04,189 Vivek Dhar: term from China. Right now it's steel demand hopes. We 162 00:09:04,190 --> 00:09:07,140 Vivek Dhar: saw China's two sessions happen over the weekend, which is 163 00:09:07,140 --> 00:09:10,570 Vivek Dhar: a key policy meeting where they decide economic growth targets 164 00:09:10,570 --> 00:09:14,630 Vivek Dhar: for 2022. What came out of that was effectively a 165 00:09:14,630 --> 00:09:19,559 Vivek Dhar: very strong increase potentially for infrastructure investment. So that has 166 00:09:19,559 --> 00:09:22,270 Vivek Dhar: lifted steel demand hopes, on top of the fact that 167 00:09:22,270 --> 00:09:26,530 Vivek Dhar: policymakers already had an easing bias from a monetary policy 168 00:09:26,530 --> 00:09:27,870 Vivek Dhar: point of view from earlier this year. 169 00:09:28,340 --> 00:09:33,160 Sean Aylmer: Yeah. Okay. So wrapping all of this up, somehow, we 170 00:09:33,160 --> 00:09:35,380 Sean Aylmer: know how it affects all of us at the petrol 171 00:09:35,380 --> 00:09:39,300 Sean Aylmer: bowser. But high- commodity prices generally, what's it mean for 172 00:09:39,300 --> 00:09:43,580 Sean Aylmer: global growth and then inflation and potentially how that flows 173 00:09:43,580 --> 00:09:44,510 Sean Aylmer: through to interest rates? 174 00:09:44,880 --> 00:09:48,520 Vivek Dhar: Yeah, sure. Look, when we have high- commodity prices, certainly 175 00:09:48,520 --> 00:09:51,850 Vivek Dhar: the fear right now is translating through to inflation, and 176 00:09:51,900 --> 00:09:55,839 Vivek Dhar: that's something happening in a market where inflation was already 177 00:09:55,840 --> 00:09:58,809 Vivek Dhar: a concern. So the problem is that this is all 178 00:09:58,809 --> 00:10:02,660 Vivek Dhar: additive. We were in a state before, but now it's 179 00:10:02,660 --> 00:10:05,380 Vivek Dhar: looking like this could play out even worse. So how 180 00:10:05,380 --> 00:10:10,070 Vivek Dhar: exactly will this play out for global inflation is such 181 00:10:10,070 --> 00:10:12,069 Vivek Dhar: that we are now worried that growth is going to 182 00:10:12,070 --> 00:10:15,939 Vivek Dhar: be impacted, particularly on the energy side. High- energy prices 183 00:10:15,940 --> 00:10:19,309 Vivek Dhar: act as almost a tax on consumption, and so that 184 00:10:19,320 --> 00:10:22,910 Vivek Dhar: already hurts your global growth potential. But when we also 185 00:10:22,910 --> 00:10:25,640 Vivek Dhar: add into that the fact that inflation was already rising, 186 00:10:26,000 --> 00:10:29,530 Vivek Dhar: it really puts policymakers in a very difficult position that 187 00:10:30,110 --> 00:10:32,770 Vivek Dhar: we don't want to be in the case where rates 188 00:10:32,770 --> 00:10:35,840 Vivek Dhar: will rise, but we're looking at tempering that. But if 189 00:10:35,990 --> 00:10:39,670 Vivek Dhar: global growth falls and inflation is still rising, you're caught 190 00:10:39,670 --> 00:10:43,070 Vivek Dhar: in a very difficult position as policymakers. I think that's 191 00:10:43,070 --> 00:10:46,650 Vivek Dhar: where this word stagflation has come up, and this is 192 00:10:46,650 --> 00:10:50,350 Vivek Dhar: a world where we have high unemployment and high inflation. 193 00:10:50,600 --> 00:10:53,610 Vivek Dhar: Right now we're not seeing the unemployment play out anywhere 194 00:10:53,610 --> 00:10:56,500 Vivek Dhar: near as that, but that is certainly the market worry 195 00:10:56,679 --> 00:10:59,390 Vivek Dhar: and why financial markets are very concerned about this high- 196 00:10:59,390 --> 00:11:00,010 Vivek Dhar: energy price alone. 197 00:11:00,860 --> 00:11:04,001 Sean Aylmer: Vivek, thank you for talking to Fear and Greed. 198 00:11:04,001 --> 00:11:04,002 Vivek Dhar: Thank you. 199 00:11:04,002 --> 00:11:07,459 Sean Aylmer: That was Vivek Dhar, Director of Mining and Energy Commodities Research at 200 00:11:07,460 --> 00:11:10,319 Sean Aylmer: Commonwealth Bank. This is the Fear and Greed daily interview. 201 00:11:10,320 --> 00:11:12,429 Sean Aylmer: Join me every morning for the full Fear and Greed 202 00:11:12,429 --> 00:11:14,760 Sean Aylmer: podcast with all the business news you need to know. 203 00:11:15,030 --> 00:11:16,610 Sean Aylmer: I'm Sean Aylmer. Enjoy your day.