Impact of Geopolitics and Natural Disasters on Commodities

The world has become well-connected in this age of rapid urbanisation and globalisation. However, this has also increased the impact of external factors and natural disasters on the prices of commodities. Political uncertainty, geopolitical risks, and natural disasters like droughts and floods can significantly affect commodity prices. The impact of geopolitics and natural disasters on commodities can lead to disruptions in supply chains, production, and trade.

In this blog, we will dive deeper to understand how geopolitics and natural disasters impact commodity prices.

Geopolitical Factors Affecting Commodity Prices

At present, most countries are part of the global economy. Although the increase in trade, import, and export have proven to be beneficial for commodities, events like wars, conflicts, trade restrictions, or political uncertainty have always posed a major risk.

War & Political Instability

Countries often strive for peaceful and diplomatic relations. However, there are situations in which two countries might go to war, disrupting supply chains, halt, or hamper the production of commodities. Similarly, political instability and uncertainty hurt commodities and can lead to higher prices.

The Russia-Ukraine war is a recent example of geopolitical risks in commodity markets. The war between the two countries led to a significant rise in global food and fuel prices in the first half of 2022.

Sanctions & Trade Restrictions

In certain situations, sanctions or trade restrictions imposed by one country on another can lead to higher commodity prices. Sanctions can limit the supply of a particular commodity from major exporters, leading to lower supply and higher commodity prices.

The U.S. has imposed various sanctions on Iranian oil. These sanctions limited the supply of oil from Iran and resulted in higher volatility in oil prices.

OPEC & Oil Price Control

The Organisation of Petroleum Exporting Countries (OPEC) is a collective of countries that cooperate in the production and export of oil. OPEC has a major influence on the global prices of oil. Any decision to cut production or increase the supply of oil can impact the prices greatly.

For example, in 2022, OPEC+ announced that it would cut the production of oil, leading to a rise in oil prices globally.

Trade Wars & Tariffs

Trade has become highly important for a country’s economy and the commodity market. Trade wars and tariffs play a major role in commodity prices, supply chains, demand, and supply. When a country imposes tariffs on another country, it can drive up costs to import particular products.

The U.S. and China are two major economies. The ongoing trade war between the countries has resulted in the imposition of tariffs which has impacted the prices of products like soybeans and metals.

Export Bans & Government Policies

The government’s role in the commodities market is crucial. The government may impose policies that can ban the production or export of certain products. Governments may make such decisions to protect the domestic markets.

For example, India had imposed export restrictions on broken rice which were then lifted. Meanwhile, Indonesia banned palm oil exports. These decisions impacted global commodity prices and exemplify commodity price volatility due to geopolitical events.

Natural Disasters and Commodity Market Disruptions

Apart from manmade external factors, natural disasters can have a huge impact on the prices of commodities. Additionally, changes in climate and adverse weather conditions also impact commodity prices.

Climate Change & Agricultural Commodities

Climate change has resulted in erratic weather patterns and climatic conditions in recent years.. Agricultural goods rely heavily on suitable climatic conditions. However, unfavourable climatic conditions can result in lower crop yield and drive up the prices of commodities.

Prolonged drought-like conditions in the coffee-growing regions of Brazil impacted the yield of Arabica beans. Consequently, the price of coffee surged and hit its highest level in nearly 50 years.

Hurricanes and Energy Supply Chains

Hurricanes are major storms that can damage farmlands and also bring about severe disruptions in energy supply chains. Strong winds and heavy rains can lead to oil refineries shutting down and disrupting the energy infrastructure.

Hurricane Katrina was a major hurricane that hit the U.S. in 2005. The hurricane caused severe damage and also impacted the energy infrastructure. Following the hurricane, oil prices surged.

Earthquakes & Mining Disruptions

Earthquakes are natural disasters that can cause significant damage to mining infrastructure and activities. An earthquake can halt mining and lead to a rise in prices.

In 2010, Chile witnessed an earthquake of 8.8 magnitude. The earthquake claimed human lives, damaged infrastructure, and also impacted the mining of key metals.

Wildfires & Lumber Prices

Lumber and wood are essential commodities. However, the procurement of these commodities can be impacted by natural disasters like wildfires which may lead to widespread damage to trees and surrounding lands. Subsequently, a lower supply of lumber can lead to higher prices for the commodity.

Canada witnessed severe wildfires in 2023. These wildfires caused sawmills to shut, slowing down production and driving up the prices of lumber.

Tsunamis & Global Shipping Disruptions

Natural disasters like tsunamis severely disrupt natural disasters and commodity supply chains. A tsunami is usually the result of an earthquake, leading to massive waves that can cause significant damage. Ports and shipping routes are impacted by tsunamis which disrupt supply chains.

Japan witnessed a major tsunami in 2011 after an earthquake which caused great damage and negatively impacted the global supply chain.

Case Studies: How Geopolitics and Natural Disasters Impact Commodity Markets

Let’s briefly examine the various events to better understand the impact of geopolitical events and natural disasters on commodity prices.

How Traders and Investors Can Mitigate Risks

Although traders and investors cannot have control over external factors and their impact on commodity prices, there are certain things they can do to mitigate the associated risks.

Diversifying Across Commodities

Traders and investors can spread out risk by holding various commodities. Concentrating only on one commodity or type of commodity can make you more vulnerable to market shocks. For example, investing in safe-haven assets like gold and energy commodities like crude oil can help one diversify their portfolio.

Hedging with Futures and Options

With the help of instruments like futures and options, one can hedge their position and mitigate risk. These contracts help lock in prices and safeguard against adverse price movements. The losses in one position can be offset through gains made in the hedge.

Tracking Global Economic and Political Trends

Traders and investors should closely monitor any political events, economic reports, and relevant developments. Tracking weather trends, interest rate decisions, and trade policies can help traders make sound decisions. For example, traders can track OPEC policy decisions before making an investment decision.

Investing in Safe-Haven Assets

Geopolitical events and natural disasters can contribute to a rise in inflation. It can also negatively impact the prices of certain products and markets. Assets like gold and silver are considered safe-haven assets and are viewed as hedges against inflation. Investing in these assets can help mitigate risks during uncertainty.

Using Technical & Fundamental Analysis

Traders can make use of fundamental analyses like seasonal trends, growth prospects, and demand forecasts to identify trading or investing opportunities. Additionally, traders can use technical analysis like chart patterns or indicators to identify breakouts or trend reversals.

Conclusion

The commodity market’s role has become indispensable in today’s age. Trade of commodities has become vital for the global economy. However, the impact of geopolitical events and natural disasters on commodity markets is a significant challenge. Knowing how these events affect commodity prices can help a trader make sound investment decisions and deploy strategies to mitigate the risk from external factors.

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.

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