05 April 2022

The seasonal low lasted for a short time only this year, bulker earnings started to rise again at the end of January. The war in Ukraine seems to have given an additional boost to charter rates. However, the medium- to long-term perspective is much more uncertain as the expected increase in tonne-miles could be compensated by lower volumes. 

The ongoing conflict between Russia and Ukraine has thoroughly upset the shipping markets. Not only the shipping markets for oil, oil products, and gas from Russia are affected, but also the bulker markets with coal and agricultural products from Ukrainian sources.

While deliveries from Russia are limited by Western sanctions, shipments from Ukraine are restricted due to the actual unavailability. The grain harvest in the Ukraine will probably fail this year. And should there be a significant harvest for export, the transport via Black Sea ports may be blocked.

The customers for Ukrainian wheat are mainly Middle Eastern and Mediterranean countries which now have to look globally for replacements. Australia is a large wheat producer, but port infrastructure to move the extra volume will be challenging, especially in the short term. Wheat is available for export from South America, particularly Argentina, but probably not to the extent actually needed as possibly increasing domestic demand could limit export volumes at present. Likewise, France, Germany or India could provide some replacement, but may not be able to compensate for the lost volume. In the end, the former customers of Ukrainian wheat will most likely have to tap different sources to satisfy their demand, if this is even possible in view of the sharp rise in prices. 

Wheat is just an example of the dramatic situation regarding the world market for agricultural products, the loss of corn exports from Ukraine shows a similar picture.

At first sight, strangely, the price of soy has also risen sharply in recent weeks, although Ukraine hardly exports soy. The reason for this lies in the overall market for vegetable oil. Ukraine and Russia provide about 30% of the world market share of sunflower oil. As a substitute for sunflower oil, the demand for other vegetable oils such as palm oil and soybean oil has risen sharply. This is a good example of how the world agricultural market not only locally, but also across different products, is interdependent. 

Similar scenarios can also be observed for other bulk goods, above all coal, but also fertilizers, steel products, etc.

Overall, the loss of a major exporter of agricultural products has led to major disruptions in transport, especially in shipping. The increased tonne-mile effect that we are seeing in tankers means that delivery routes for bulk carriers can also be expected to be longer.

However, whether the increasing tonne-miles will lead to a sustainable increase in charter rates for bulk carriers seems very uncertain to predict, as the trade patterns are very complex. Possibly, the additional miles may be compensated by the lack of replacement transport for some deliveries, since it is not so easy to increase the production volume of agricultural products. For example, one could increase the use of fertilizers, but as the available quantity is also negatively affected, this can actually be ruled out. The availability of previously unused space is even more limited, and this is why an increase in production will most likely fail.

Dry bulk earnings have started to fall since Q4/2021 in accordance with the typical seasonal path. Since the end of January, earnings for the small and medium-sized vessel segments have picked up again as these enjoy higher grain exports ex South America and presumably some other form of replacement trade. Earnings for Capesizes rose at first and only turned downwards recently. This may result from a combination of lower Chinese iron ore demand and less cargo into/from Ukraine and Russia. Thus, dry bulk markets have fared not too badly until now. The longer-lasting effects are very complex and much more difficult to evaluate and may be more challenging due to the possible lack of volumes. But the markets can definitely be expected to be more volatile.

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