Trade flows out of the Black Sea region, particularly from Ukraine ports, have been severely disrupted by Russia’s invasion of its western neighbour on February 24. Exports from the region are a vital component of the globe’s food supply, and a prolonged disruption will have huge ramifications across the world. Nonetheless, it would be unrealistic to expect demand for Black Sea wheat to completely vanish at this point in proceedings.
Russia has reportedly mined the key shipping lanes from Odesa, and other Ukraine ports, to the Bosphorus, making navigation extremely hazardous. Additionally, the Russian navy continues to restrict the movement of vessels wishing to leave the Black Sea that have loaded at Ukraine ports. The exact number of ships in question is unclear, but according to one report, it could be as high as 200-300, many of which are carrying grain such as wheat and corn. Another report suggested it was around 100.
The Black Sea is a marginal sea of the Atlantic Ocean with an area of 436,402 square kilometres, around 75 per cent the size of Ukraine. It is bordered by Bulgaria, Georgia, Romania, Russia, Turkey and Ukraine. Vessels navigating the Black Sea have just one entrance and one exit, the Bosphorus. It is a narrow strait that bisects Istanbul and forms part of the continental boundary between Asia and Europe. The Bosphorus connects the Black Sea to the Sea of Marmara, which in turn is connected to the Aegean Sea and then the Mediterranean Sea via the Dardanelles.
This makes it very easy for the Russian navy to control the flow of vessels out of the Black Sea. On Friday of last week, at least six oil tankers carrying around 300,000 tonnes of Russian oil passed through the Bosphorus unimpeded and onto their destination. This followed passage of 800,000, 400,000, 400,000 and 600,000 tonne of Russian oil in the preceding four days. An interesting analogy from the Black Sea News suggested the US$200 million value of Friday’s shipments was equivalent to the cost of about 30 Russian Kalibr cruise missiles.
And it is not only oil tankers that are departing the Black Sea. According to leading Russian agricultural consultancy SovEcon, the pace of Russian wheat shipments is returning to normal. SovEcon reported that 520,000 metric tonne was shipped last week and 410,000 metric tonne in the previous week via Black Sea ports. This is despite indications that the war had shut down Russian exports and that shipping lines are no longer servicing Russian ports.
While Ukraine ports will likely remain closed until the war ends, Russian ports are open for business and are very busy, according to SovEcon. Private Russian consultancy IKAR reported that export vessels were being loaded at all five Black Sea grain terminals after a pause of a week to ten days at the beginning of the conflict.
However, it is likely that much of the grain loaded since February 24 was for sales made prior to the invasion of Ukraine. Many of the vessels loaded in the first half of March could well have already been in the Black Sea when the war began, either en route to their loadport, anchored at Russian ports waiting to berth, or already loading.
The export pace is so hot that SovEcon recently upped its forecast for the country’s March wheat shipments from 1.3 million metric tonne to 2MMT due to the strong export demand. That expectation was supported by IKAR last week, who announced that they now expected March wheat exports to exceed 2MMT. While freight rates are substantially higher, so too are global prices, and some consumers still desire Russian wheat it seems.
Meanwhile, Egypt, the world’s largest wheat importer, has continued to receive imports for the Black Sea region since the Ukraine war began. Shipments of around 63,000 metric tonne from each of Ukraine, Russia and Romania have all successfully exited the Black Sea and were expected to berth sometime last week. A vessel carrying around 65,000 metric tonne of Romanian wheat was discharged the previous week.
The United States Department of Agriculture has Egypt pencilled in for 12.5MMT of wheat imports in the 2021/22 season. It typically purchases around 80 per cent of its import requirements from Russia and Ukraine. Putin’s invasion of Ukraine has prompted Egyptian authorities to take action to protect domestic food supplies. On March 12, the government banned exports of wheat, cooking oil, corn, lentils, pasta, flour and faba beans.
The Ministry of Supply and Internal Trade expects the country to have around eight months of wheat reserves once the domestic harvest concludes in April. However, the General Authority for Supply Commodities (GASC) is reportedly working on importing wheat from alternative origins, including Argentina, Canada, France, Kazakhstan, Romania and the United States, in case the conflict is protracted.
Over the weekend, India’s Ministry of Commerce and Industry surprisingly announced that it was in final talks to commence wheat exports to Egypt for the very first time. A string of record crops and an elevated global price environment has seen India emerge as an exporter of note in 2021/22.
The USDA puts Indian wheat exports at a record 8.5MMT, but last week the International Grains Council raised its forecast from 8.9MMT to 11.6MMT. The government is also canvassing several other countries, including Turkey, China, Bosnia, Sudan, Nigeria, and Iran, regarding potential wheat exports. Nothing like striking while the iron is hot!
Logistical challenges and quality issues have thwarted India’s attempts to sell significant volumes into the world market in the past. However, the government is implementing a plan to facilitate an increased export campaign. It is making additional rail wagons available for grain transport, ensuring wheat destined for export is tested at government-approved laboratories and working with various port authorities to prioritise the wheat export program.
The global financial sanctions placed on Russia may well be strangling its economy, but it is still shipping wheat, ably assisted by a significantly weaker ruble. Russia is presumably being paid for their wares and earning some of the US dollars that the sanctions are so desperately trying to restrict.
Countries such as India and Australia are putting their hand up to fill the wheat supply gap resulting from the disruption to Ukraine’s export program. But the longer the war goes on the bigger the hole becomes. And the bigger the hole becomes the greater the upward pressure to prices until the war ends and/or demand is rationed.
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