14 April 2022

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Credit Suisse Economics

The “G-SIB” of Commodities

Regular readers of our dispatches are familiar with our framing of J.P. Morgan CONTRIBUTORS
as the “Bakken Shale” of global dollar funding markets, and as the system’s
Lender of Next-to-Last Resort: J.P. Morgan cannot print reserves like the Fed, Zoltan Pozsar
212 538 3779
but it has the most amount of reserves at the Fed relative to other banks, and zoltan.pozsar@credit-suisse.com
the bank that has the most reserves backstops the liquidity of the system
during non-systemic episodes of liquidity shocks. In the world of commodities, Peter Foley
212 325 7946
the equivalent of J.P. Morgan is the Russian Federation. Not only did Russia
peter.foley@credit-suisse.com
own as much in FX reserves as J.P. Morgan owns in reserves at the Fed, but
Russia’s exports of commodities (like J.P. Morgan’s “exports” of reserves)
exceed the exports of every country in the world, including the United States.
What J.P. Morgan is to dollar funding, Russia is to the world of commodities –
both are G-SIBs in a way, with similar phraseologies (“fortress balance sheet”;
“Fortress Russia”). In today’s dispatch, we map Russia’s commodity fooprint…
…which, as the size of the country’s geographic reach would imply, is very big,
or, rather, systemic. The first chart shows that the Russian Federation is the
single largest exporter of commodities, and the U.S. is a very close second.
Saudi Arabia comes third, but they export much less than the U.S. or Russia.
Russia’s dominant position spans many commodities. Similar to how J.P Morgan
is a dominant player as a marginal lender (the marginal lender) in the repo,
FX swap, and equity funding markets, as well as in Treasury underwriting and trading,
Russia is a dominant exporter of energy, grains, metals, and other commodities.
The next set of charts (all in the form of Sankey diagrams) shows Russia’s
commodity exports across a range of commodities, starting with energy exports.
In terms of crude oil, Russia is the single largest exporter outside of OPEC,
and most of the oil Russia exports goes to Europe. The second biggest market
for Russian crude is China, and the re-routing of Russian oil from Europe to
China will lead to severe shipping bottlenecks as we discussed in detail here.
In terms of refined oil products (for example, diesel fuel), Russia is the third
largest exporter in the world, and sends most of its refined exports to Europe.
In terms of natural gas (gas through pipelines), Russia is the biggest exporter
in the world serving primarily Europe: Germany, the Baltics, and Eastern Europe.
In terms of LNG (liquefied gas, seaborne) Russia is not a significant player, but
the point about LNG is that it’s much smaller than the piped gas market, and
(potential) disruptions to the flow of piped gas is impossible to replace with
LNG. Not only in a “spot” sense but also over the medium term. That’s an issue.

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THIS IS NOT RESEARCH. PLEASE REFER TO THE IMPORTANT DISCLOSURES AND CONTACT YOUR CREDIT
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14 April 2022

In terms of coal, Russia is the world’s third biggest exporter after Australia and
Indonesia, and much like with oil and gas, its biggest market for coal is Europe.
Now onto foodstuffs.
Russia is the single largest exporter of wheat, and Russia and Ukraine
combined are an even more systemic source of wheat exports to the world.
Combined, Russia and Ukraine export as much wheat as the U.S. and Canada
combined. Unlike energy, most of the wheat exports of Russia and Ukraine
go to emerging economies – Egypt and Turkey and other countries in Africa and Asia.
In other words, while in Europe industry is reliant on Russian energy to function,
in EM, people are reliant on Russian grains to sustain themselves. Either way,
much like you need funding to survive, and J.P. Morgan ensures your survival
in that sense, you need energy to sustain industry and food to sustain yourself,
and in those departments, Russian exports to Europe and EM countries
ensure survival. That’s how you define systemic. Russia is a “commodity G-SIB”.
In terms of fertilizers, Russia is systemic again – it is the single largest exporter
of fertilizers, and much like reserves in finance, nothing gets done without
fertilizers in an age of industrialized agriculture when land is never given a
chance to rest: unless you stuff earth with potash, you can’t grow stuff, and
everything from peppers to tomatoes, potatoes, strawberries, and watermelons
needs lots of potash. No reserves, no harvesting of basis points. No potash,
no harvesting of fruits or veggies. No good harvest, higher headline inflation,
not to mention the extra costs to growing vegetables that come from higher
energy costs (to heat a greenhouse) and from the higher cost of plastic wraps
used to build greenhouses and to cover the soil to keep the produce “tucked in”.
Now onto metals.
Russia is the single largest exporter of palladium to countries like the U.S.,
Japan, and the U.K., where the domestic auto industry is the main user of it.
In terms of aluminium, Russia is the second largest exporter behind Canada,
and like with energy and palladium, its biggest export market is Europe, and
presumably the auto industry in Europe; platinum exports paint a similar story.
In terms of nickel, Russia is again the single largest producer in the world, and
the single largest supplier of nickel for the industrial needs of Europe.
So far, we only talked about flows: commodities that get produced in excess of
domestic needs that clear the shortage of commodities elsewhere via exports.
Let’s next take a look at commodity inventories…
…the real world equivalents of HQLA portfolios and their “exports” of reserves:
banks like J.P. Morgan lend reserves in excess of “domestic needs” (LCLoR)
to clear the shortage of reserves elsewhere in the system via arbitrage trades.
What J.P. Morgan does with reserves, some countries do with commodities.
Russia is not a big player in warehousing stuff, which makes sense: it does not
have to warehouse anything because it has a lot of land to grow stuff, and
has mines and oil and gas fields to ensure energy and food security at home.
China less so, and that’s why China is the single largest commodity warehouse
in the world (i.e. the largest owner of commodities already above the ground).
In absolute terms, China has the largest wheat stockpiles in the world, about
seven times as much as the U.S. or India. Expressed as a share of annual

The “G-SIB” of Commodities 2

14 April 2022

consumption, all that wheat in China is actually not that much – it covers only
one year of consumption. Other than China, only Saudi Arabia has stocks covering
one year of consumption, which makes sense: both countries have systems
of governance where there is no real outlet for political frustration, so to ensure
that the demos are content, one needs to deliver basic necessities like food
(energy is obviously not an issue for Saudi Arabia). Other countries have a food
security problem, which has been well articulated by others, and food security
issues can spill over into commodities like oil, for example via Egypt spiking
transit fees at the Suez Canal and increased risk of piracy as discussed here.
In terms of crude oil inventories, China is the leader again. U.S. inventories are
far behind China’s and Japan’s inventories in terms of annual oil consumption.
Europe looks bad: not only is it extremely reliant on imports of Russian energy,
it has no oil reserves to fall back on in case the energy flows get disrupted…
…all that focus at the Bundesbank over the years on QE and price stability,
while no focus on energy security at higher levels of government. Unsinn…
…Gillian Tett’s book (The Silo Effect) should be required reading.
The release of oil from the SPR in the U.S. – the biggest ever in SPR history –
appears motivated by the White House’s desire to shield the U.S. consumer from
sanctions against Russia at the pump, and also reflects the U.S.’s inability to
secure extra production from OPEC allies in sufficient size and quickly enough.
The release of 200 million barrels of crude between now and November’s
midterm elections will bring SPR stockpiles down from 600 million barrels to
400 million barrels – and then what? The SPR will have to be filled back up,
and unlike the Fed filling up HQLA portfolios with a round of repos and QE
(when the money ran out in September 2019 and March 2020), the government
won’t be able to print oil to fill it up. Frack maybe, but then it will have to pay
well above the $80 per barrel the press reported the government has budgeted.
Meanwhile, China will stock up on oil from the Urals, trading at deep discounts,
if not at negative prices (like WTI did) once storage tanks in Russia get full,
and the inflationary impact of that re-stocking asymmetry will be quite massive.
Finally, leverage. Commodity leverage…
We got a foretaste of commodities leverage when industrial production in the
Japanese auto sector plummeted by 40% in 2020, when the auto industry
could not secure crucial semiconductor components from Southeast Asia. The
degree of this commodities leverage is shown on the first chart on page 12,
which shows that $6 billion worth of semis basically drive $400 billion in output
in the Japanese car sector – no semis, no production, $400 billion of lost sales…
For Germany, the same type of commodities leverage exists in terms of all the
commodities it gets from the G-SIB of commodities – the Russian Federation.
For Germany, $27 billion worth of commodity imports (mainly energy imports)
supports a whopping $2 trillion worth of economic activity! Commodities leverage
can wreak havoc on not just financial and price stability, but also economic stability.
From the perspective of the West, and in particular Europe, commodity exports
come from the wrong place (the Russian Federation), commodity inventories
exist in the wrong place (China), and leverage, in the form of commodity leverage,
exists in the wrong place too – at home. The inflationary impulse from this is BAD.

The “G-SIB” of Commodities 3

14 April 2022

Russia Is a Commodity “G-SIB”

share of global commodity exports as of 2020; commodities include mineral fuels and products, cereals, industrial metals, platinum, and palladium

Source: OEC, Credit Suisse

Global Crude Oil Flows

millions of tons, as of 2020

Source: BP, Credit Suisse

The “G-SIB” of Commodities 4

14 April 2022

Global Refined Oil Products Flows

millions of tons, as of 2020

Source: BP, Credit Suisse

Global Gas Pipeline Flows

billions of cubic meters, as of 2020

Source: BP, Credit Suisse

The “G-SIB” of Commodities 5

14 April 2022

Global LNG Flows

billions of cubic meters, as of 2020

Source: BP, Credit Suisse

Global Coal Flows

exajoules, as of 2020

Source: BP, Credit Suisse

The “G-SIB” of Commodities 6

14 April 2022

Global Wheat Flows

billions of U.S. dollars, as of 2020

Source: UN Comtrade, Credit Suisse

Global Fertilizer Flows

billions of U.S. dollars, as of 2020

Source: UN Comtrade, Credit Suisse

The “G-SIB” of Commodities 7

14 April 2022

Global Palladium Flows

billions of U.S. dollars, as of 2020

Source: UN Comtrade, Credit Suisse

Global Aluminium Flows

billions of U.S. dollars, as of 2020

Source: UN Comtrade, Credit Suisse

The “G-SIB” of Commodities 8

14 April 2022

Global Platinum Flows

billions of U.S. dollars, as of 2020

Source: UN Comtrade, Credit Suisse

Global Nickel Flows

billions of U.S. dollars, as of 2020

Source: UN Comtrade, Credit Suisse

The “G-SIB” of Commodities 9

 10
Japan Japan
Syria Syria
Kazakhstan Kazakhstan
Korea, South Korea, South
Uzbekistan Uzbekistan
Philippines Philippines
United Kingdom United Kingdom
Indonesia Indonesia
Turkey Turkey
Argentina Argentina
Bangladesh Bangladesh
Morocco Morocco
Canada Canada
Saudi Arabia Saudi Arabia
Egypt
Egypt
Iran
Iran
Australia
Australia
Pakistan
Pakistan

% of annual domestic consumption

Algeria

The “G-SIB” of Commodities

Algeria

Source: USDA, Credit Suisse

Source: USDA, Credit Suisse

Ukraine
Ukraine
Wheat Stocks (1)

Wheat Stocks (2)

European Union
European Union
Russia
Russia
United States
14 April 2022

United States
millions of tons India
India
China
China

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
160

140

120

100

0
80

60

40

20
14 April 2022

Oil Stocks (1)

millions of barrels of crude oil stocks
1,400

1,200

1,000

800

600

400

200

0
China

United States

Japan

Germany

Saudi Arabia

South Korea

Canada

India

Turkey

Poland

France

Italy

Spain

Brazil

United Kingdom

Taiwan

Thailand

Nigeria

Mexico

South Africa

Netherlands

Angola
Source: JODI, Oxford Institute for Energy Studies, Credit Suisse

Oil Stocks (2)

days of forward cover; calculated as crude oil stocks from the chart above divided by daily consumption estimates from the EIA
140

120

100

80

60

40

20

0
China

United States

Japan

Germany

Saudi Arabia

South Korea

Canada

India

Turkey

Poland

France

Italy

Spain

Brazil

United Kingdom

Taiwan

Thailand

Nigeria

Mexico

South Africa

Netherlands

Angola

Source: JODI, Oxford Institute for Energy Studies, EIA, Credit Suisse

The “G-SIB” of Commodities 11

14 April 2022

Japan’s Commodities “Leverage”(1)

billions of U.S. dollars; sources of value added are shown on the left; sales shown on the right

Source: World Input-Output database, Credit Suisse

Germany’s Commodities “Leverage” (2)

billions of U.S. dollars; sources of value added are shown on the left; sales shown on the right

Source: World Input-Output database, Credit Suisse

The “G-SIB” of Commodities 12

14 April 2022

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The “G-SIB” of Commodities 13