A beer products crisis could drive up shipping costs even further

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A provocative report from Credit Suisse’s Zoltan Pozsar that made the rounds of certain corners of Twitter last week suggests that the Russian-Ukrainian dispute could be a powerful tailwind for ocean freight rates.

The report contains many important thoughts, shipping rates being just one of them, so I’ll try to keep things as simple as possible.

According to Pozsar, head of short-term rates strategy at Credit Suisse, the global commodities market is facing a crisis due to the conflict in Eastern Europe and the international sanctions that have been imposed on Russia, l one of the world’s largest suppliers of everything from natural gas to nickel to wheat. The price of commodities traded outside from Russia are now rushing into a sanctions-triggered supply shock; meanwhile, those exchanged inside Russia has stagnated in many cases and collapsed in others, as many of these materials have effectively become disconnected from the rest of the global economy.

Here is an example. Historically, the spread between a barrel of Brent crude oil (the global benchmark) and Russian Urals crude has been very tight, often not differing by more than a few dollars a day. Since Russia invaded Ukraine, however, the gap has widened as Brent has soared much more dramatically than the price of Urals.

price of Brent crude and oil from the Urals since the beginning of the year

Gap between Russian oil and world benchmark widens (Bloomberg)

As Pozsar points out, a buyer must come to support cratering prices and bridge the gap between Russian and non-Russian products. The problem, however, is that Western nations are unable to do so since it was their own sanctions that created this crisis. Despite attractive prices, no less than 70% of Russian oil currently lacks buyers, according to Lloyd’s List.

So who is the buyer? Pozsar thinks the most likely response is the People’s Bank of China (PBoC), which is committed to continuing normal trade relations with Russia and may be interested in gobbling up cheap Russian commodities to prop up its currency, the yuan. (Recall that China, like Russia, has gradually moved away from the US dollar as a reserve currency.)

What does this have to do with shipping rates? China may not have enough onshore storage capacity for all Russian products bought at a steep discount, which could force the country to store them on floating vessels. As Pozsar writes, “the price the PBoC will pay to lease ships to fill them with Russian raw materials can in theory rise as much as the collapse in the price of Russian raw materials: a lot.”

ship's capacity in thousands of deadweight tons

Ship Classes by Capacity (EIA, London Oil Brokers Panel)

One-time earnings are already climbing

Now, you might think there are too many “ifs” and “maybes” in Pozsar’s thesis, but the actual events seem to unfold as described.

For one thing, Bloomberg reports that China is already considering buying big stakes in struggling Russian energy and commodities companies, including oil producer Gazprom and aluminum producer United Company RUSAL. The two countries have strengthened their ties, “with President Xi Jinping and Vladmir Putin signing a series of agreements last month to boost Russian supplies of gas and oil, as well as wheat,” the article said.

In addition, the average daily earnings of crude oil tankers and “product” tankers, which transport gasoline and other refined petroleum products, have jumped since the Russian invasion. In a report dated March 9, analysts Drewry Nikesh Shukla and Santosh Gupta write that spot revenues rose due to a shortage of ships as traders rushed to lock down carriers and some operators failed to were unwilling to sail in the Black Sea region. Revenues from smaller class vessels – which, unlike very large crude oil carriers (VLCCs), can access canals and ports of all sizes – saw some of the biggest jumps on February 18, before the invasion, to March 4.

bar charts of average tanker cash earnings

Shipping companies‘ profits soared following the Russian-Ukrainian conflict (Dretry)

Remember that ocean freight rates are already very high due to supply chain imbalances related to the pandemic. Spot prices are up 83% on average from the same week last year, according to Drewry. Shipping a container from Shanghai to Los Angeles costs exporters 158% more than a year ago; the Rotterdam-New York route is up to 175% more expensive.

bar graph of high spot freight rates

Spot freight rates remain high (Drewry’s Supply Chain Advisors)

Investors took note. Compared to the broader market, which has fallen into correction or even bearish territory since the conflict began, stocks of many transportation and logistics companies have surged.

Among the biggest movers between February 24 and March 10 are Japanese carriers, including Mitsui OSK Lines (up 26.7%), Kawasaki Kisen Kaisha (up 20.9%) and Nippon Yusen Kabushiki Kaisha ( up 20.0%). Taiwan’s Evergreen Marine (+10.3%) and Yang Ming Marine Transport (+10.2%) also surged.

Investors may consider exploring which stocks, mutual funds or ETFs invest in these ship names as the geopolitical dispute continues.