As we have been discussing in recent updates, one of the biggest potential issues with the Russia/Ukraine conflict is if trade volumes will experience any significant losses over time. This remains to be seen. Just a few days ago, Ukraine's Ministry of Infrastructure celebrated "an absolutely normal situation in shipping", but of course much has changed. An overall brief conflict would help the dry bulk shipping market with some increases in port congestion, shipping delays, and longer ton miles, but a longer-term conflict would lead to a loss of cargo volume.
Of note regarding annual trade volumes is that Russia this year was expected to export 35 million tons of wheat and 9 million tons of coarse grain, and at least 145 million tons of coal and at least 15 million tons of iron ore. Ukraine this year was expected to export 24 million tons of wheat and 40 million tons of coarse grain, and at least 35 million tons of iron ore. If the conflict is prolonged (several weeks/months), the overall dry bulk market would be unlikely to be able to fully offset a loss of Russian/Ukrainian cargoes from other nations (a loss of Ukrainian cargoes are most at risk). The world has already been facing commodity shortages, and a prolonged conflict would very likely further exacerbate this issue.
For now the hope globally is that the conflict will be brief and as peaceful as possible. Global energy prices are receiving support as expected while global dry bulk spot freight rates have so far been mixed. Forward-looking sentiment in the dry bulk market has weakened significantly today (Thursday February 24th). FFA values fell today by about 10%. US-listed dry bulk stocks also came under pressure today, but most declined by only 1 to 5%. Interestingly, the overall US equity market -- while falling sharply at the start of the day -- ended up rallying today. The NASDAQ Composite finished up today by 3.3% and the Dow Jones Industrial Average finished up by 0.3%.
New sanctions were announced today, including from the US government, but the US equity market's response was bullish. US equity markets surged after President Biden gave a speech and announced new sanctions. Our view is that the market is relieved that Russia has not been cut off from the SWIFT (Society for Worldwide Interbank Financial Telecommunication) banking system. SWIFT is used by over 10,000 financial institutions to send payment orders and is key to the movement of funds to Russia’s oil and gas sector. It is widely believed that removing Russia from the system would make it nearly impossible for financial institutions to send money in or out of Russia, and that this would have grave consequences for Russia's oil and gas sector and its largely European customers. Russia would also likely lash out globally if it was removed from the system.
Two of the very best case scenarios to allow status quo to largely return to the financial and commodity markets is if Russia gives up (which is unlikely), or if the conflict ends very quickly with Russia taking two territories (Donetsk and Luhansk) as peacefully as possible. Years ago when Russia invaded and annexed Crimea in 2014, the annexation was at first shocking but the world moved on. NATO, the United States, the United Nations etc. did not intervene militarily -- and so far it appears that this will also be the case with Donetsk and Luhansk. It is a bit of a deja vu to see Russia again forcibly working to expand territory, and there being intense global outcry (and sanctions) but little else. Mockingly, some are again referring to NATO as "No Action Talk Only".
The world remains in the midst of a global energy crisis, and Europe definitely still needs Russia for energy. In particular, 55% of Germany's gas reportedly comes from Russia, 50% of Germany's coal comes from Russia, and 35% of Germany's oil comes from Russia. If wondering why Germany and the European Union at large are not taking more of a hard line approach with Russia, then we need not wonder much more. Today's actions have been tragic and any further loss of life will be tragic -- but if Russia can again take territory and again then have the world largely move on, then Russia's actions can be looked upon in a different light. Of course, if more/all of Ukraine becomes at play, the situation is a bit different. We will be continuing to monitor developments and will be continuing to publish updates. The world is waiting to see what Russia does next, and for now some shipping operations are still being affected (in addition to much more significant ramifications including many deaths). An end to the conflict one way or the other will hopefully restore shipping operations and more importantly normal daily life.