(Bloomberg) — Trade relations between China and Russia have grown complicated since the start of the war more than three weeks ago, raising questions about future flows of energy, metals and crops between the two powers.

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Before the war in Ukraine, Russia’s importance to China as a supplier of raw materials was only growing. This materialized in the announced “limitless” friendship between the two nations before the Winter Olympics in Beijing, which was celebrated by the signing of new agreements to supply China with oil, gas and Russian wheat.

Immediately after the invasion, Chinese officials said they disagreed with unilateral sanctions and would continue normal trade relations with Russia. But since then banks have suspended funding purchases and traders are grappling with logistics, while more recently China’s foreign minister said Beijing does not want to be affected by sanctions.

Here is an overview of the commodity trading situation with Russia and how it might play out.

Energy

The biggest business opportunities could be in energy. Its growing economy means that China has an ever-increasing need for coal and gas to heat homes and power factories. The country is coal-rich but still prone to shortages and relatively gas-poor, making imports crucial to meet demand.

Russia is now the second-largest coal shipper to China after Indonesia, while its gas exports have increased significantly since the Power of Siberia pipeline began flowing in 2019. Crude shipments have also increased in recent years – including pipeline oil, Russia was China’s second largest supplier in 2021, behind only Saudi Arabia.

Russian coal has helped fill the void caused by China’s ban on Australian shipments since late 2020 and more recent disruptions to shipments from Mongolia and Indonesia. In addition, the United States and Australia supply China with just over half of its liquefied natural gas imports, which transit by ship, and it is a dependency that Beijing is trying to break.

But after the invasion, Chinese buyers and the lenders financing their purchases largely shunned Russian shipments of coal and LNG as well as crude. This hesitation may be temporary given the unknown outcome of the international action against Moscow. But it could also reflect companies’ deeper concerns about being trapped in sanctions that could affect global banking deals, as well as government fears of being locked out of much larger markets for products. Chinese.

“For any Chinese company with significant overseas operations, continued access to the US financial system is more valuable than any deal it can strike with Russia, although some smaller companies may be willing to take the risk,” Capital Economics said in a note last week. .

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Logistics is also a problem. According to the China Coal Transportation and Distribution Association.

Certainly China is committed to the long-term success of Russia’s biggest energy projects. Another gas pipeline is under discussion and Wood Mackenzie Ltd. estimates China’s oil and gas investments in its neighbor at $24 billion, including stakes in the Yamal and Arctic LNG projects in Russia.

There’s no way China will follow international companies and exit its Russian energy assets, said Neil Beveridge, Hong Kong-based senior energy analyst at Sanford C. Bernstein. “China has this huge growth opportunity for Russia.”

Under these circumstances, it would be strange for China to reduce its purchases of Russian LNG in the longer term. But the outlook for coal is entirely different. Russian sales are almost a rounding error compared to the 4 billion tonnes of fuel extracted in the country, and Beijing’s plan to increase the capacity of its coal industry by 300 million tonnes suggests that it is looking to improve its energy security by eliminating imports entirely.

For crude, the math also revolves around freight rates and the high premiums attached to Russian shipments due to the war. Many countries supply China with oil, and even when prices are skyrocketing, this allows buyers to be a little more picky.

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Cereals

Rising transport costs are also the likely hurdle for Moscow to increase grain sales. Russia sells wheat to more than 100 countries, but China is one of the few major markets it is struggling to capture. Until recently, shipments were limited because most Russian wheat was banned due to fungus problems.

In February, China gave the go-ahead to import wheat from all over Russia as part of a series of deals struck during Vladimir Putin’s visit to Beijing. This decision was to call into question the sales of countries such as France, Australia, Canada and the United States.

But even if the restrictions have been lifted, China will likely continue to import from its usual sources, said Darin Friedrichs, co-founder and director of market research at Sitonia Consulting in Shanghai.

“I don’t think it’s possible to import huge quantities from new sources like Russia. They will have to pay more,” he said.

Metals

For some metals, China’s dependence on Russia has only weakened in recent years. Indonesia has become its main supplier of nickel. And even though Russia’s share of refined copper imports has increased, the expansion of China’s smelting industry means that importing ore directly from miners in places like South America has become more important.

In any case, China already buys most of Russia’s refined copper exports, according to a note from UBS AG this week, which suggests the upside is limited.

For palladium, which is mainly used to reduce automobile pollution, exports from Russia to China have increased in recent years and could theoretically increase further. A potential obstacle, according to UBS, is that companies listed in Europe produce most of the catalytic converters sold in China, and they may not want the Russian supply.

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