The situation in Russia and Ukraine — and its potential effect on global trade flows — is changing fast.
On Friday, the EU released details on its new sanctions package targeting Russia’s crude exports and containerized imports. On Saturday, mutinous mercenaries of the Wagner Group made it to within 125 miles of Moscow, raising questions on Russian President Vladmir Putin’s grip on power. Meanwhile, Ukraine is making gains on the battlefield.
Scenarios on how ocean trades would change postwar, and how and when Ukraine will be rebuilt, remain very hypothetical. But in light of recent events, the perception is growing that Russia could lose the war sooner than previously expected.
End of war would be ‘negative for tanker demand and rates’
Global energy commodity trade flows have changed dramatically over the past year as a result of the EU ban on imports of Russian crude and products, G-7 price-cap sanctions and the sabotage of the Nord Stream natural-gas pipelines.
Russian crude and product exports are now traveling much longer distances, as are EU replacement imports. This has increased tanker demand measured in ton-miles (volume multiplied by distance), supporting rates.
“An end to war and change of leadership, more likely after this weekend’s events … would be negative for tanker demand and rates,” wrote Erik Haavaldsen, Pareto Securities’ head of research, on Monday. “While this does not look like an imminent scenario, the risk has increased.”
According to Clarksons Securities Managing Director Frode Mørkedal, “We estimate that Russian ton-mile expansion since 2021 accounts for 4% to 5% of tanker capacity utilization today. Without this support, Suezmax crude tankers, which have earned $55,000 per day year to date, would most likely have earned only $25,000 per day, and MR [medium range] product tankers, which have earned $34,000 per day, would have earned only $17,000 per day, all else being equal.
“This serves as a stark reminder that continued Russian crude and products exports over longer distances benefit tanker markets,” said Mørkedal.
Could future reconstruction be partly funded by oil sales?
Bob Burke, CEO of Ridgebury Tankers, said during the Capital Link International Shipping Forum in March, “If peace breaks out tomorrow, I don’t think the Russian oil trade will go back to where it was, but I do think it will go back somewhat to where it was between Russia and Europe.”
One postwar scenario involves Europe resuming imports of Russian crude and products, with a portion of payments used to reconstruct Ukraine, akin to the use of Iraqi oil revenues for reparations to Kuwait in the 1990s.
Henry Curra, global head of research at ship brokerage Braemar, outlined this scenario in a May 29 research report. He focused on MR product tankers, but the same logic would apply to crude tankers.
“Any truce, one assumes, would require Russia to finance the reconstruction of its war-torn neighbor. To support Russia’s efforts, Europe would reopen its markets and maritime services to Russian oil,” Curra wrote.
“The longer it takes for peace to return to Ukraine, the less negative a return to optimized routing of Russian oil will be for MR utilization. This is primarily because oil demand is growing and the MR fleet isn’t.” (Other tanker classes are also not growing; newbuild orders are historically low.)
Curra estimated that post-invasion trade changes have increased MR ton-mile demand by 8%. “If the stalemate cannot be broken by 2025 or even 2026, MRs quite probably won’t need the extra 8% of Russian ton-mile demand to maintain strong rates. They’ll be getting it from elsewhere.”
However, if there was a “radical regime change in Russia” and “full diplomatic relations with Russia are restored later this year or early next year, we could expect some weakness to return to MR freight rates in 2024,” Curra said.
End of war should induce tanker scrapping
On the positive side of the ledger for tankers, the eventual end to the war is expected to push a large number of older vessels to the scrapyards.
According to Lloyd’s List Intelligence, the “dark fleet” handling sanctioned oil trades comprises 12% of global crude and product tanker fleet tonnage, with an average age of 23 years. These figures do not include Russian tankers or mainstream tankers carrying crude and products under the G-7 and EU price caps.
Broken down by tanker category, Lloyd’s List Intelligence estimated that dark fleet capacity now comprises 13.2% of the world’s VLCC crude tankers, 18.2% of Suezmax crude tankers, 15.7% of Aframax crude tankers, 8.1% of LR1 product tankers and 4.4% of MR product tankers.
It is widely speculated that most dark-fleet ships will not be acceptable to mainstream charterers after Russian restrictions end, due to both their age and their previous employment in sanctioned activities. If so, their only options would be sanctioned Iranian service, sanctioned Venezuela service or scrapping.
Reconstruction cargo volumes and peace ‘catalysts’
The effect of the war’s future end goes beyond tanker trades. The eventual reconstruction of Ukraine will drive ocean shipping demand for imports of building materials and supplies aboard dry bulk, breakbulk and container vessels.
“Post-war reconstruction in Ukraine may be the largest building effort in modern history,” said the Rand Corp. in a report published this month, likening future Ukrainian reconstruction to the Marshall Plan after World War II, the redevelopment of Eastern Europe after the Cold War and the reconstruction following the breakup of Yugoslavia. The recovery plan developed by Ukraine’s government has a price tag of over $750 billion.
In addition, there could be peace upside that goes beyond reconstruction cargo volumes.
“There could be great catalysts if the war ends and the reconstruction of Ukraine begins,” said Anastasios Aslidis, CFO of container-ship owner Euroseas (NASDAQ: ESEA) and dry bulk carrier owner Eurodry (NASDAQ: EDRY), during the Capital Link forum in March.
“There would be general economic activity that would drive, with it, containerized trades — not directly — but it would drive containerized trades too. A new optimism would be created that could be a great event to boost demand and more easily absorb supply,” said Aslidis.
New EU sanctions on Russian imports, exports
Talk of the war’s aftermath remains highly speculative despite recent negative developments for Russia. The Wagner Group pulled back and Ukraine’s counteroffensive has only made small gains to date.
More immediately, the EU has finalized its 11th package of Russian sanctions. Sanctions were approved after Ukraine removed five Greek tanker companies and their executives from its list of “International Sponsors of the War”: Dynacom, Delta Tankers, Thenamaris, Minerva and TMS Tankers.
The 11th round targets Russian containerized imports of sanctioned goods and technologies exported from the EU to other countries and then re-exported to Russia, mainly by land not sea. “If nothing else works, the only remaining option is to stop exporting to those third countries the very specific goods we are most concerned about,” said the EU on Friday.
In the tanker sector, the new EU package targets ship-to-ship (STS) transfers occurring in international waters off the coasts of EU countries. STS transfers have primarily occurred off Ceuta, Spain, and Kalamata, Greece. Crude is loaded aboard Aframaxes or Suezmaxes at Russian ports, then transferred to larger VLCCs for long-haul runs to China and India via STS operations.
Tankers involved in STS operations are now barred from EU port calls if authorities believe sanctions are being breached or if they do not notify EU authorities at least 48 hours of an STS operation.
If the new EU STS measures spur less participation by European tanker owners in the price-cap system, it could push more Aframaxes and Suezmaxes into mainstream trades and out of the Russian market, which could create downward pressure on rates in mainstream Aframax and Suezmax markets and upward pressure on Russian export freight rates.
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