The FTSE 100’s oil, mining, and bank stocks are reporting bumper profits, as tensions at the Russia-Ukraine border could see a capital flight to safety.
The FTSE 100 index has experienced a rollercoaster start to 2022. The index was worth 7,505 points on 4 January, rose to 7,611 on 17 January, and then dropped to 7,297 points on 24 January.
It then hit 7,672 points on 10 February, before falling to 7,438 points yesterday morning. But over the past 24 hours, the UK’s premier index has risen to 7,525 points, despite, or perhaps because of, the escalating crisis on the Russia-Ukraine border.
FTSE 100: Ukraine and FTSE 100 miners
In recent years, the FTSE 100 has been criticised as a ‘dinosaur.’ And since the covid-19 pandemic crash of March 2020, the tech-heavy NASDAQ Composite has outperformed the FTSE 100 by a large margin. But as monetary policy tightens, the investment case was already swinging in favour of the banking, oil, and mining giants of the UK index. And now, the Ukraine crisis could see the FTSE 100 begin to outperform its international competitors.
Russian President Putin has said that the Minsk peace deal no longer applies and has even questioned the right of Ukraine to exist as a state. He has recognised ‘the independence and sovereignty of the Donetsk People’s Republic and the Luhansk People’s Republic,' and is on the verge of a full-scale invasion of the country. Ukraine has declared a state of emergency and is conscripting reservists into the army.
As a result, Western countries are now imposing harsh economic sanctions on Russia. The most significant so far is Germany’s decision to halt approval of the Nord Stream 2 gas pipeline. And in the UK, PM Boris Johnson is under intense pressure to increase current sanctions from across the political divide.
The effect on FTSE 100 miners could be drastic. Russia produces 6% of the world’s aluminium and 7% of its nickel. When sanctions were applied on Russian aluminium giant Rusal in 2018, the mineral’s price rose 35% in the space of week. And Aluminium is already trading at a multi-year high of $3,325 per ton, up from $1,444 in April 2020. Meanwhile, nickel is at $25,203 a tonne, up from $11,155 in March 2020.
According to Jyske Bank , the already sky-high prices are a result of extreme undersupply. The covid-19 stimulus packages which have boosted global construction, as well as the push towards green technology, especially in China have both seen aluminium consumption rise. This has seen aluminium inventories in LME-approved warehouses fall to 835,125 tonnes, down from 2 million last year. Meanwhile Nickel is down to 82,314 tonnes from 260,000 in April.
Analysts are sceptical that sanctions will be reimposed on Rusal. CRU’s Eoin Brophy believes ‘lawmakers initially underestimated the impact of the Rusal sanctions… Aluminium inventories are so low today that a replay of that error would be explosive for prices.’ And Macquarie analyst Marcus Garve thinks ‘there will not be disruptions to Russian aluminium supply... the market is extremely tight.’
But US President Biden has said ‘we’ll continue to escalate sanctions if Russia escalates.’ And Rio Tinto has warned that US sanctions could disrupt the global aluminium supply. The FTSE 100 miner’s revenue doubled to £15.6 billion in 2021, as rising prices for iron, aluminium, and copper boosted profits.
FTSE 100 banking and oil
Then there’s the impact on FTSE 100 oil stocks BP and Shell. With Brent Crude hovering at a multi-year high of around $100, both have announced bumper profits. And there could be more to come. BP CEO Bernard Looney has already called the FTSE 100 company a ‘cash machine.’ And with approval for Nord Stream 2 now indefinitely delayed as Russis warns that gas prices could double, presuure on oil prices towards the $120 territory in the near-term seems likely.
The FTSE 100’s bank stocks are also reporting copious profits. Standard Chartered's annual profits have doubled to £2.4 billion. HSBC's profit is up 79% to $21.9 billion. NatWest's profits rose to £4 billion, up from a £481 million loss the year before. And today, Barclays has announced its profits nearly trebled to £8.4 billion in 2021. With Lloyds still to report, FTSE 100 banks are now seriously boosting the index. And with HSBC predicting the Bank of England will raise interest rates to 1.25% by the end of the year, profits could soar even higher.
Interest rates are rising. Metals are rising. Oil is rising. As uncertainty rocks the markets, the FTSE 100 is becoming a haven of relative safety.
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*Based on revenue excluding FX (published financial statements, June 2020).
Charles Archer | Financial Writer, London
24 February 2022