By Ulf Bergman
Ever since the beginning of the Russian invasion of Ukraine, the Black Sea has been a dangerous place for commercial shipping. However, recent developments suggest the area is becoming even riskier, with the number of merchant vessels and port installations coming under attack rising. What used to look more like independent or tactical attacks as opportunities arose is now increasingly appearing strategic, as part of economic warfare aiming to disrupt trade and deny the opposite side revenue.
The past ten days may illustrate such a shift in strategy. Ukrainian forces sank the Rosatom-linked containership Yanina and struck the tanker Bourda in early August, while two Turkish-owned vessels, the Yasar and Nadezhda, were hit by drones off Novorossiysk only days later. These events follow a mid-July strike on the shadow-fleet tankers Louise 1 and Banda. Most recently, Thursday morning witnessed a Russian attack against a general cargo vessel in Ukrainian waters. Hence, a pattern is emerging that looks less opportunistic and more like a sustained campaign against maritime traffic.
As a result of the greater risks to vessels and seafarers, insurance premiums for the seaborne Black Sea trade are being revised upwards by brokers. Higher insurance premiums and reluctance to put vessels into harm's way, combined with disruptions to port operations, will put pressure on seaborne export volumes from the region.
Among the commodities affected, oil and grains are the standouts. Still, iron ore, coal and steel also account for meaningful tonnage demand, but the overall effect on global supplies will be limited should exports remain under pressure. In contrast, the region’s importance for the global grains trade is more significant and, with the harvest season upon us, any disruptions are likely to affect global prices and flows.
Black Sea Grains Trade Dominated by Short Distances
The harvest season in the Northern Hemisphere is set to start in earnest, and, beyond the weather, analysts and traders will be keeping a close eye on developments in the Black Sea region. In recent years, shipments of agricultural commodities from ports in the Black Sea have accounted for around a quarter of global volumes in the third and fourth quarters, according to data from Signal Ocean. However, last year saw the share retreating to around a fifth. The aggregate annual wheat exports from Ukraine and Russia have accounted for approximately 30 per cent of the global flows. In comparison, barley shipments fill around a fifth of global supplies and corn just shy of fifteen per cent. Hence, given the significant volumes, any disruptions to the exports from the Black Sea have the potential to contribute to higher global market prices should they materialise.
Still, wheat and corn futures have come under significant pressure over the past two weeks amid lower oil prices, which have a surprisingly large impact, and some improvements to the supply outlook. The volatility for the former has also contributed to significant price swings for the grain futures listed on the CBOT over the past few months. The September wheat contracts are currently trading near the lowest levels since the middle of July, after shedding around eight per cent over the past fortnight. The corn futures for September delivery paint a similar picture, with a decline of nearly six per cent over the past two weeks.
Grains shipped from the Black Sea area typically travel short distances. According to the data from Signal Ocean, over the past four years, ports in the Mediterranean and the Red Sea have received around 55 per cent of cargoes. Among countries, Egypt is the leading destination for Black Sea grains. Given the relatively short distances for most of the trade, smaller vessel segments dominate. The segments smaller than panamaxes have carried around three-quarters of the grain exports from the region, with handysize vessels accounting for the largest share.
Disruption Could Provide Support for Prices and Freight
If attacks on merchant vessels and port installations continue and lead to further pullbacks by shipowners and charterers, the global grains trade may face changes and challenges. The effects of any disruptions would be multi-dimensional, as both supplies and trade flows would be affected.
A major disruption to seaborne grain exports would push market prices higher. This would be particularly true for wheat, with yields under pressure in both the US and Europe amid adverse growing conditions. While some rerouting of Ukrainian and Russian grains via rail to alternative ports may be possible, capacity constraints suggest this would only be a partial solution.
Beyond the effect on prices, a decline in grain cargoes passing through the Bosporus would force traditional buyers to look further afield for replacement supplies. Rising market prices may reduce demand and therefore not translate into a one-for-one substitution. Traditional Black Sea buyers, Egypt foremost among them, would need to draw more heavily on Argentina, Australia, India and the US Gulf, origins considerably further from the main Mediterranean and Red Sea discharge ports than either Odesa or Novorossiysk.
Associated with the longer voyages arising from importers seeking to find alternatives at more distant shores, tonnage demand is likely to shift in favour of larger vessels. The traditional dominance of the handysizes may come to an end, at least temporarily. The shift should benefit freight rates in the supramax and panamax segments at the expense of the handysizes. The benefit will be double as longer distances will be involved in addition to the nominal tonnage demand.
Data source: Ocean Analytics