The UK's Commodity Supply Chain Adapts

Seemingly every couple weeks, we see more news breaking that yet another global energy producer is ramping up oil and natural gas exports to Europe. Israel is the latest example, with its energy ministry announcing natural gas production is up bigtime year to date amidst plans to increase exports to the EU.^[i] We have seen many such anecdotes involving non-Russian suppliers, including Azerbaijan, Qatar, the US and others, but data on how all of this is panning out has been a bit thin, in our view.^[ii] Germany publishes monthly crude oil imports by country but not natural gas. The Netherlands publishes both, but the data are values (in euros), not volumes (in barrels or tonnes or the like), subjecting them to big skew from commodity price swings. So you can imagine our excitement on Wednesday, when the UK’s Office for National Statistics (ONS) posted a report detailing how the country has adapted to Russian sanctions. It is but one example, but we think knowing how the UK has replaced Russian commodity imports may help investors get a better sense of how supply chains are readjusting, perhaps easing uncertainty as we head into the winter.

The UK’s main commodity sanctions included a pledge to phase out all Russian crude oil imports by yearend, cease natural gas imports as soon after that as possible, and ban all iron and steel products.^[iii] As the ONS notes, Russia accounted for 24.1% of the UK’s refined oil imports in 2021, 5.9% of its crude oil imports and 4.9% of its natural gas imports.^[iv] Now, the UK also produces its own crude oil, refined petroleum and natural gas, so these percentages don’t represent Russia’s share of UK consumption, which was more like 8% of total oil and oil products, according to Business Secretary Kwasi Kwarteng’s March estimates.^[v] Much of its natural gas imports are also re-exported to Continental Europe.^[vi] But refined petroleum imports in particular play a key role in the UK, making Russia’s impending absence an important hole to fill.^[vii] Unsurprisingly, UK businesses haven’t waited for the bans to take effect: Russian fuel imports fell to zero in June.^[viii] Meanwhile, the UK imported more refined oil from the UAE, Saudi Arabia, Belgium, the Netherlands and India.^[ix]

That last one is perhaps most of interest, in our view, given India hasn’t ceased buying Russian crude—actually, it has ramped up Russian imports bigtime and is reportedly refining Russian oil into petrol and diesel shipped globally.^[x] We think it is entirely possible that the UK is now simply buying Russian crude that was refined in India, underscoring an important point about energy markets, in our view: They are fully global, and total global production is what ultimately matters most. Even if Russian petroleum products are taking a more circuitous route than usual, they are still contributing to global supply, which we think goes a long way toward explaining oil prices’ fall from their March peak.^[xi]

As for metals imports, here, too, the UK has been able to replace Russian supply. The ONS reports imports of non-ferrous metals (e.g., silver, copper, aluminium and lead) from Russia were -94.7% below the pre-invasion average in June.^[xii] Taking their place were shipments from Switzerland, South Africa and China, all of which increased since sanctions took effect.^[xiii] A similar phenomenon played out in ferrous metals (e.g., iron and steel). June’s imports from Russia were down -88.6% from the pre-invasion average, yet total ferrous metal imports were higher in June than February thanks to rising shipments from the Netherlands, India, Spain and Italy.^[xiv]

This isn’t a mission accomplished moment, of course. June is just one month, the UK was never a key trade partner of Russia’s, and we think competition from other nations will probably ramp up. But supply chains have reshuffled much faster than commentators we follow projected when sanctions took effect. In our view, as supply chains continue adjusting in the months ahead, it will likely become increasingly clear that global energy markets can adapt and survive, which we think should help investors continue moving past one of the primary concerns that accompanied this year’s stock market downturn.^[xv]