Russia-Ukraine war to crash dry bulk crates
Over the past few years, Russia and Ukraine have become major exporters of dry bulk commodities, with Russia mainly exporting coal, grain, steel products and fertilisers, while Ukraine exports grain, iron ore and steel products. The ongoing tension between the two countries could turn into a full-scale war, which has the potential of hampering exports of these commodities.
Additionally, more than 700 dry bulk vessels are loaded at Russian and Ukrainian ports every month, and if the war disrupts shipments even for a month, these vessels might look for alternate cargoes elsewhere, increasing effective supply by more than 4%. Hence, the dry bulk market will face a double whammy – a sharp decline in trade and a surge in supply that has the potential to bring rates down to historical levels.
The majority of Europe has shunned nuclear power over the years and has shifted to gas-fired power generation for domestic electricity demand. Russia supplies one-third of the EU’s gas requirements and a substantial part of the gas comes through the pipeline passing via Ukraine. In case of a war, the gas supply will also get affected, increasing gas prices that will put pressure on coal as the EU will be forced to switch to coal-fired power generation. Additionally, the EU has already said that the Nordstream 2 pipeline will not get approval if Russia invades Ukraine.
Meanwhile, Russia supplied 42% of the EU’s total coal imports in 2021 and 16% of the global coal requirements. If the impending war halts Russia’s coal exports, the global supply will be insufficient to counterbalance Russia’s share. Consequently, coal prices will soar, limiting the demand from many Asian countries, further affecting coal trade and shipping demand.
China has recently increased its coal (coking and non-coking) imports from Russia amid the former’s trade tension with Australia. In case Russia is unable to supply coal to China, the latter might be forced to buy Australian coal, further increasing tonne miles.
Furthermore, Ukraine exports around 40% of its grain to the Middle East and North Africa. These countries are heavily dependent on the Black Sea’s corn and wheat supply. If the crisis worsens, the Handysize, Supramax and Panamax markets will be severely impacted.
Lastly, Ukraine exported 36.5 million tonnes of iron ore in 2021, of which more than 60% was destined to China. As Brazil continues to struggle to operate at its full capacity, the deficit created by Ukraine will have to be met by increasing exports from Australia. Even if Australia increases its exports to meet the additional demand, there will be a substantial impact on the average haulage length. However, we believe that Australia would be unable to make up for Ukraine’s share, which would decelerate global iron ore trade.
Hence, a war between Russia and Ukraine will deter vessels to sail to Russian and Ukrainian ports. As a result, demand for dry bulk vessels will be hit, rendering many dry bulk vessels unemployed.