Athens, Greece – Western sanctions punishing Russia for its invasion of Ukraine are reorganizing global trade along political lines, defying geography and efficiency.
This new reality is creating a windfall for merchant shipping, but risks creating higher prices for European consumers and hunger for Africa.
The disruption stems from the curbing of Black Sea trade. Ukraine’s ports have been blocked by Russian sieges from land and sea, impeding shipping. Ukrainian officials told the Reuters news agency that about 100 foreign-flagged ships were trapped in ports on March 11.
“They were in the process of loading or unloading when the war began,” shipowner Yiorgos Gourdomichalis told Al Jazeera. “The system simply shut down. There were no customs officers and harbor masters to process the boats out. ”
The United Nation’s body monitoring shipping, the International Maritime Organization, voted to establish a safe corridor for crew evacuation, but the stranded ships crewed by skeleton crews will simply lose money until they can be dislodged.
Active dangers are also driving ship owners away.
Several merchant ships were damaged by missiles or mines at sea and one, the Estonian-owned Helt, sank on March 3. Insurance rates are now sky high.
“I’ve heard of insurance rates of $ 400,000 to $ 600,000 for a week… A normal rate might be closer to $ 80,000- $ 120,000,” said Gourdomichalis, whose dry bulkers are steering clear of the region.
Last year Ukraine produced almost 40 percent of the world’s sunflower seed oil, widely used in the food industry, 15 percent of its barley and 10 percent of its wheat and maize.
The Russian blockade means Ukraine cannot currently export these goods and Europe is forced to look further afield.
Just as war risk is affecting trade with Ukraine, sanctions risks are affecting trade with Russia.
The US embargoed Russian oil on March 10, and Europe is under pressure to follow suit. That is creating both a drop in real demand for Russian oil, and a psychological aversion to it.
“There is a potential stigma associated with Russian trades,” said a financial officer at a Piraeus-based tanker operator on condition of anonymity.
“Despite some of these trades still being legal, owners might not want to associate themselves. They might be asked by American oil companies if their vessels have performed recent Russian trades, and this could create a headache. Owners would rather avoid it. ”
Windfall rates show how desperate Russia is to export its oil, according to Eva Tzima, head of Research & Valuations at Seaborne Shipbrokers, who said: “The rate for the Black Sea-Mediterranean Suezmax route was quoted at about $ 16,000 / day on February 24 [when war broke out]and managed to break above $ 157,000 / day by March 1. ”
The same adverse psychology and political risk associated with Russian oil is lowering demand for its coal and agricultural exports.
“Several importers steer clear of Russian grains and fertilizers despite the fact that these are not sanctioned trades,” said Tzima. “Replacement cargoes in this case would come from France, East Coast South America, and the US, and importers will have to turn to the longer-haul supplies.”
Shifting trade routes
Those longer hauls cross the Pacific and Atlantic – known as the backhaul route.
“What’s playing favorably for us is that Australia is making up the shortfall to Europe, and that’s fantastic for us, because Australia to Europe is a big journey,” said Ziad Nahkleh, CEO at TEO Shipping, which operates dry bulkers.
Backhaul shipping rates rose by as much as 26 percent between February 24 and March 23 across a range of bulk carrier types.
“The backhaul was never used to be $ 25,000,” said Nahkleh. “It used to be $ 5,000 to $ 6,000 a day. Who in his right mind would buy coal from Australia for Europe? ”
Committing ships to this 30 to 40 day journey takes them off the market for long periods, reducing available capacity on other routes and raising hauling prices across the board.
This realignment of trade is advancing by the day. Europe imported about a third of its natural gas from Russia last year, and is keen to find alternative sources.
Germany clinched a political agreement with Qatar on March 20 to buy “long-term LNG supplies”. Separately, European Union leaders reached an agreement with United States President Joe Biden on March 25 to increase deliveries of US Liquefied Natural Gas (LNG) by 15 billion cubic meters this year, and an additional 50bcm within the decade.
If this were achieved, the US would be providing about a fifth of European gas consumption. That will further boost LNG carrier rates, which in the first month of the war have almost tripled to over $ 70,000 a day.
Europe also aims to replace Russian oil and coal by the end of the decade, fueling long-haul trades for years to come.
It is not yet clear what higher shipping rates will mean for consumers.
The astronomical rates being paid for Russian oil are partly offset by the fact that Russia is discounting its oil by more than $ 30 a barrel to move it.
Tzima believes there will be a rebalancing.
“As high consuming nations like China and India are increasingly turning to Russia’s oil that is now more competitively priced, more Middle East supply is becoming available for EU nations, limiting significant disruptions to oil trade,” she said.
This may not be true for all goods.
Research from Braemar Shipbrokers suggests Europe will face shortages of 700,000 barrels a day in marine diesel, partly because of import cuts in refined goods from Russia.
“Russia exports a lot of refined products, which tend to move on smaller ships,” said a Piraeus-based tanker owner on condition of anonymity. “If you have crude oil moving on a big ship you can argue Russia will end up selling to India and China instead of Europe. On the smaller size ships, it’s really expensive to move 20,000 tons of gasoline to Russia or China when the charter was originally meant for, say, Italy, because the cost per tonne-mile becomes un-worthwhile. Diesel will soar this summer. ”
Europe may be wealthy enough to buy its way out of the crisis, but Africa is not, and that is likely to create additional security costs for Europe. The UN World Food Program’s executive director David Beasley recently warned of “famine, destabilization and mass migration” unless the developed world raises billions of dollars to subsidize rising grain costs there.
Backhaul chartering rates for different ship types: 24 February to 23 March
$ 24,204 – $ 29,450 (+ 22%)
$ 16,586 – $ 17,412 (+ 5%)
$ 26,567 – $ 33,171 (+ 25%)
$ 24,912 – $ 31,406 (+ 26%)