The war in Ukraine and sanctions against Russia have profound implications on supply and demand in shipping. Worst of all, it could plunge the world into recession. By Michael Hollmann[ds_preview]
The world order and the global economy may face monumental change as the iron curtain between Russia and the western world falls again. Commodity markets – already suffering from shortages before the war – were immediately thrown into turmoil as supplies from Ukraine were shut off while cargo flows from Russia got pressured by sanctions and boycotts.
Compared with the roller-coaster in prices of oil, gas, coal, grains and metals, shipping markets have fared comparably stable over the past weeks. The Baltic Dry Index (BDI) is up 17 % month-on-month driven by gains in the panamax and geared sectors, container ship charter rates have been firm, and so have multipurpose and shortsea/mini-bulk rates. In the short term, there is enough cargo available from other sources to compensate for war-related losses, it seems.
Inflation hitting import demand?
The odd one out is the container freight market which saw spot rates easing up by double-digit percentages over the past weeks. Benchmark rates of the World Container Index for Shanghai-Rotterdam and for Shanghai-Los Angeles decreased by -18 % and -10 %, respectively.
Some argue that the correction is still within seasonal expectations after Chinese New Year and that capacity overall remains constrained by pandemic-related congestion. Others sense increased uncertainty and greater caution among importers who now seem to hold back on bookings for containers.
The urgency in getting cargo moved is flagging even though a collapse in demand is not on the cards as Russia and Ukraine together hardly account for 1 % of global container trade. Concerns are mainly building around the medium-term impact of inflation on consumer demand in the main importing regions on Europe and North America or a possible shock effect on manufacturing costs due to spiralling electricity and commodity prices. There have been no major updates to growth and trade forecasts yet.
The new World Economic Outlook by the IMF, due in a few weeks, will be eagerly awaited by many in the shipping community. In the meantime, a piece of research by Germany’s Kiel Institut für Weltwirtschaft (IfW Kiel) offers the slightest comfort to container shipping. The economists argue that a tentative trend for »deglobalisation« sparked by supply chain disruptions during the pandemic will intensify and that inflation (based on a projected oil price of 90 $/b) will dampen growth.
However, a recession can be avoided, says IfW who projects world GDP growth to slow to 2.8 % during 2024-2026, down from a long-term average of 3.5 %. It remains to be seen how shipping analysts will revise down their forecasts for container trade growth under such a scenario.
Projections for global container loadings this year are still in the +3 %–4 % range. Notable structural changes in trade patterns are rather unlikely given Russia’s and the Ukraine’s limited role, except in niche sectors such as reefer container trades in which Russia plays a bigger role as importer.
Capes losing, panamaxes winning?
The mid-term implications for dry bulk shipping could be more severe, with Arrow Research warning that cargo volume losses would initially outweigh the positive effects of longer voyage distances due to trade route changes. The main drag would come from missing iron ore volumes ex Ukraine for capesize bulkers with a net impact of -211 bill. ton miles, according to Arrow (0.8 % of capesize ton mile demand). This makes an estimated positive contribution of +80 bill. ton miles chiefly for panamaxes from a trade shift in coals pale in comparison.
First of all, large amounts of Russian Atlantic coal would travel to other customers worldwide while the EU would absorb larger coal volumes from Colombia, the US and from South Africa to make up for Russian supplies.
Smaller dry cargo ships will be affected mostly by changes in the grain trades. Russia and Ukraine collectively account for one third of global wheat exports, supplying mainly countries in the Mediterranean and in the Middle East with small-to-midsize consignments. Who will these buyers turn to instead?
Based on crop forecasts and inventory levels, research units at broking houses Barry Rogliano Salles and Arrow agree that Australia and India are the most immediate alternative sources, followed by Argentine, France and Germany. In the cases of Australia and Argentine, there would be positive effects on ton miles for supramaxes and handysizes that serve a lot of the trade.
33 mill. t of corn per year
The other major type of grain ex Ukraine is corn, with shipping volume originally estimated to reach over 33 mill. t for the marketing year ending in May – the largest chunk of it going to China. Alternative shipping sources in this case would be the US and Brazil depending on availability. The ton mile impact would be rather neutral in this case.
Further, steel product shipments from Russia and Ukraine are a vital business for smaller geared bulkers, amounting to 28.6 mill. t (Russia) and 15.2 mill. t (Ukraine) in 2020 with Turkey, the EU and also Taiwan as important destinations. If deliveries to buyers in the Mediterranean and the Atlantic got substituted for by increased volumes from the Far East, from countries like Korea, China or Japan, then tonnage demand would even benefit.
Deep impact on crude oil shipping
Changes in the tanker markets are perhaps the hardest to call. Russia is the world’s number one oil exporter supplying around 4.6 mill. b/d of crude plus 1.8 mill. b/d of refined products seaborne only. Over 2.3 mill. b/d of crude and 1 mill. b/d of clean products are heading to EU countries and the UK from Russian Baltic and Black Sea ports. In the extreme scenario of a total outage of Russian trade to the West, crude and product flows »would be completely redefined«, warned tanker broker Gibson. Presently, it is impossible to project how much Russian oil will be locked out of Europe, the US and OECD Asia economies, it says.
The most obvious shifts in trade to be expected would result in longer voyage distances: China and India buying more barrels from Russia, Europe increasing its shipments from the Middle East Gulf. However, the bigger risk right now is that total volume trade will contract because of tight supplies and demand destruction by high oil prices, says Gibson. Even before the invasion, the global crude oil market was estimated to be 0.7 mill. b/d short of supply. Movements in tanker rates offered little hope for shipowners. A brief spike in spot earnings following the invasion which might have been partly due to extra shipments from the Middle East to Europe was soon over. By 24 March average spot earnings for VLCC were back in negative territory at -400 $/day. ?
Commodity markets – already suffering from shortages – were immediately thrown into turmoil as supplies from Ukraine were shut off while cargo flows from Russia got pressured by sanctions
