Russia slows exports as war in Ukraine enters fifth week

FIn the weeks following Russia’s invasion of Ukraine, some things have become clearer, but many uncertainties remain.

New sanctions have been imposed on Russia, including the United States banning Russian energy imports, and more are on the way. Ahead of US President Joe Biden’s departure for meetings with European partners in Brussels and Poland, the White House indicated that Biden planned to announce further sanctions while in Europe.

It is also becoming clear that Russian military forces failed to quickly overwhelm Ukrainian defenses. How long Ukraine will resist is uncertain, however, as is the outcome of the ongoing ceasefire and peace talks. In any case, we continue to believe that the sanctions currently crippling the Russian economy will remain in place long after the war is over.
The full impact of the war on the global economy naturally remains unknown, however, energy and agricultural commodity prices remain high and a global food crisis seems inevitable. Hunger is to be expected to increase in fragile developing economies that have yet to recover from the effects of COVID.

“Around the world, we will see discretionary spending decline as businesses and consumers try to cope with rising food and energy prices. It is therefore to be expected that global economic growth will be significantly lower than the pre-war forecast of 4.0 to 4.5%,” says Niels Rasmussen, chief shipping analyst at BIMCO and adds: “ Europe in particular is expected to experience weaker growth than previously expected.”

A widespread recovery in bulk freight rates
Immediately after the Russian invasion of Ukraine, the Baltic Exchange indices for bulk carriers fell, but two weeks after the start of the war, the Baltic Dry Index (BDI) had recouped the losses and increased, as had the size-specific cues. Since then, there has been a downward correction as the Capesize Index (BCI) has returned to a level below its pre-war level. Not included in the BDI calculation, the Handysize Index (BHSI) saw the biggest rise of all at around 400 points above the pre-war level.
In terms of volume, Russian exports have unsurprisingly been down week on week since the eighth week invasion, and were in week 11 around 25% below the 2022 pre-war average. Reductions appear to be evenly distributed across ports, ship size and commodities, although coal from the Russian Far East appears generally unaffected.

“Ukraine’s exports remain at a standstill as global volumes increased only slightly from the average at the start of 2022. The increase is about 5 percentage points lower than what we have seen during the same period in previous years. In particular, iron ore and grain shipments are abnormally low while coal shipments appear to be spared by rising commodity prices so far,” Rasmussen says.

Oil tanker fortunes improve on high rates from Russia
The volumes of crude oil and products exported from Russia have fallen sharply since the start of the war. Compared to the three weeks before the war, volumes are down 30%.
Still, Baltic exchange rate indices for most ship types and sizes are up due to soaring rates from Russia. Although not involved in trading with Russia, VLCCs also initially saw much-needed improvements, but profits have since returned to pre-war levels. The mainstay of Russian commerce, the Aframaxes, have naturally been the main beneficiary of the events and profits are, according to Clarkson, now five times higher than at the start of the year.

“The fundamentals of the tanker market however have not changed. In fact, the current high prices are discouraging buyers and unless prices go down and global production increases, we do not see much change in the market. short-term supply and demand situation,” says Rasmussen.

OPEC, however, is sticking to previously established plans to increase production, but has so far failed to meet even those targets. If successful, ongoing negotiations with Venezuela and Iran could deliver new barrels to the market, but that remains uncertain. On the other hand, there is a lingering risk that Russian exports to Europe will also be sanctioned.

Reduced economic growth is the biggest risk to the container market
So far, the biggest direct consequence of the war in the container market has been the sanctioning of Russian Railways and past China-Europe rail volumes turning to liner operators for transportation.

On the other hand, factory closures during China’s recent COVID shutdowns will reduce Chinese exports in the short term and have again wreaked havoc on liner operators’ sailing schedules. In the short term, this has reduced the number of ships waiting off the southern California coast, but this could quickly reverse when full ships start sailing again from China.
China’s export container rate indices, as measured by the Shanghai Shipping Exchange, have recently shown some weakness, particularly for shipments to Europe.

“The main concern for the container market, however, remains slower economic growth and in particular a decline in trade in goods as consumer uncertainty increases and discretionary spending declines,” Rasmussen says while adding “ fleet growth, however, will be weak in 2022, which is more than likely to ensure that container rates will remain at very profitable levels in any case.
Source: By Niels Rasmusse, BIMCO Chief Shipping Analyst