Researchers see conflict in Ukraine as a bearish sign for dry-bulk trade in the Black Sea in the short term, but it could be positive for tonne-mile demand if sanctions alter commodity trade flows.
Analysts from Braemar ACM Shipbroking and Arrow Shipbroking Group drew contrasts between what could happen to bulker markets in the immediate term and what could happen later, if sanctions and trade restrictions are enforced.
TradeWinds reporters across the globe are covering the shipping implications on the Russia-Ukraine crisis.
“Strict sanctions and protracted fighting could grind seaborne exports to a halt, yet a swift resolution of the conflict and a light Western response could see minimal change,” Arrow Shipbroking Group said in a research note on Thursday.
“So far, the sanctions have avoided key commodity trades as reliance on Russia is so high, this reliance is deepened by already high commodity prices.”
European countries are very dependent on Russia for coal, as well as natural gas and are also short on fertiliser. Arrow said the EU “would be very cautious to slow this trade”.
“The huge flow of grains exported from the Black Sea means any disruption to trade will continue to support the rally in the agricultural complex,” the shipbroker added.
Effects on dry bulk markets are also expected to be shaped by the extent to which operations are impacted by infrastructural damage or blockades.
Attacks have been reported at the Ukrainian ports of Odessa and Mariupol, but it is too early to know the extent of the damage, Arrow said.
Near term
Braemar thinks the conflict is bearish for bulker trade in the Black Sea, but said this could turn around in the longer term.
“Overall, the impact on the dry bulk market will be negative in the short-term, as indicated by the sell-off in the paper market this morning, given the surge in bunker prices, loss of Ukrainian grain volumes and tonnage oversupply in the Black Sea/Med,” the firm said in a research note on Thursday.
“However, if sanctions are sustained for a prolonged period of time, they could be a net-positive for the market as Europe would have to source coal and grains from further afield.”
Dry freight derivatives tumbled in value on Thursday across all vessel segments.
Front-month contracts for capesizes and panamaxes lost more than $3,000 when markets closed. Supramaxes got off more lightly, with 2022 contracts settling as much as $2,000 lower than Wednesday.
“Any disruptions due to sanctions on Russia will initially result in a drop in dry-bulk rates, mainly within the smaller segments. A surge in oil prices will drive bunker costs to new highs,” Braemar said.
The broker's research team pointed to the fact that the price of very low-sulphur fuel oil (VLSFO) in Singapore rose to $768 per tonne on Thursday, up by $15 since Wednesday.
“A double-whammy of lost Ukrainian grain exports and tonnage oversupply in the Black Sea and Med will further weigh on [bulker] earnings,” Braemar said.
Handysizes are the bulker segment that are most exposed to any disruption to Black Sea trade, according to Arrow's research.
Around 16% of trade carried on handysizes either loads or discharges in Russia or Ukraine, and around 10% calls in the Black Sea, the firm said.
A third of this trade is coal and the rest is mainly split across grains, steel and fertilisers, Arrow said.
Panamax bulkers are exposed to trade disruption primarily from Baltic coal exports, as well as some Black Sea grain, the firm said. Capesizes have a limited exposure from coal and iron ore.
Diversions
But is it feasible to divert trade flows of coal and grain that would otherwise have been exported from the Black Sea?
Braemar said the answer is yes — in theory.
“However, the process requires time as suppliers will be initially hesitant to redirect volumes unless it’s determined that sanctions will be strictly implemented and last,” its research team said.
“Fundamentally, it boils down to the premium buyers would be willing to pay for trade patterns to shift, rather than the logistics of trade-flow changes.”
Arrow thinks that potential EU sanctions on Russian exports could push Baltic coal to China, even though the country imports the fuel from Russia's east coast.
If this happens, the EU could soak up other Atlantic coal from the US, Colombia and South Africa, Arrow said.
