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Lost dry bulk volumes will outweigh increased distances, says Arrow

There are bearish vibes for the dry bulk market, which has been thrown into disarray by the events taking place in in Ukraine. Replacement volumes may be hard to come by

As trade flows are shaken up, the increase in sailing distances will not be enough to offset the loss in actual volumes from the Russia-Ukraine fallout, in the short-term, according to Arrow Shipbroking research

A SHAKE-UP in trade flows as a result of the Russia-Ukraine fallout will not be as bullish as it might seem. 

If Russia and Ukraine’s grain exports fall by 50% this year, the average voyage distance of all other grain trades will have to rise by 9% to offset the decline in tonne-miles, according to  Arrow Shipbroking.

That is potentially feasible, but world grain reserves have fallen for five consecutive years to 596m tonnes, with little exportable surplus. 

“In the short term, we believe that lost dry cargo volumes will outweigh any increasing voyage distances from trade-route changes,” the brokerage said in a research note. “Smaller vessel classes will likely feel the hit from lower Black Sea grain volumes while capesizes could be dented by iron ore.”

Most wheat ended up in the Mediterranean and the Middle East, which could turn to Australia or Argentina but prompt supplies may be limited due to port capacity issues, and protectionist measures due to domestic food inflation, respectively. The only viable options could be France, Germany and India. 

Ukrainian corn could be replaced by South America and the US, but again, immediate relief may be difficult from those regions, given drought conditions affecting the crop in Brazil last year.

While the Black Sea is not big on soyabeans, it does account for the bulk of the world's sunflower oil trade, which is tightening the vegetable oil market, with palm oil and soy oil prices rallying.

Meanwhile, lower fertiliser exports could affect future grains production, not just in Ukraine, where labour shortages may also affect yields by up to 40%, but elsewhere in the world, according to Arrow. 

If Europe shuns Russian coal cargoes, more volumes would head to the east, at the expense of other Atlantic coal which would sail to closer destinations in Europe, it said.

While the capesize exposure to the region is muted with only small amounts of Ukrainian iron ore exports, at 0.8% of capesize tonne-miles last year, panamaxes will suffer immediately from the lower grain volumes, but longer-term, may benefit from increasing Baltic coal volumes moving to the Pacific. 

India’s steel-maker ArcelorMittal halted production at its Ukrainian operations in the past week to ensure the safety of its people and assets, while Russia’s Rusal reportedly halted alumina shipments from Ukraine.

More pellets may move to Europe from Brazil, lowering tonne-miles, while lax air pollution controls in China may dent demand for higher-quality grades in the coming months, keeping more volume in the Atlantic, Arrow said. Indian pellets may also head west rather than east, providing backhaul opportunities to the sub-capesize segments.  

Supramaxes and handysizes will likely suffer from lower grains, steel products and fertilisers from the inflicted region in the short-term, but longer-term, could see benefits too.

In the past year, Black Sea steel exports moved to the Mediterranean, Brazil and the US. Replacement volumes could come from Asia, which would help supramaxes, if the conflict is prolonged.

“Longer-term, it is possible that re-routing trade flows will increase average voyage distances, however across the whole market, this effect will likely be small.”  

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