Freights surge as bunker prices spurt globally

The Russia-Ukraine war is having a direct fallout on freight, putting trade participants in a bind. Bunker charges spiralled to dizzying heights as benchmark crude oil spurted to seven-year highs of more than $105/barrel. Oil prices zoomed by more than 30% since the start of the war while bunker costs, which comprise 30-35% of shipping operations, are up 16%. Bunkers are the fuels consumed by vessels during operation.

For instance, a coking coal shipment on Panamax from Australia to India consumes around 1,000 tonnes of bunker. Two weeks back, prices of bunkers were at $725/tonne. The same has now escalated to $905/tonne, which means an increase of more than $175/tonne and translates into $175,000 extra on this route. "This immediately adds $2.5-3/t to the freight cost," a source informed SteelMint.

Similarly, $350,000 of additional costs have been added to the bunker charges for 2,000 tonnes required for carrying iron ore on the China-Brazil route, again inflating freight by $2-5-3/t.

"Higher bunker costs have inflated freight rates by 10-15% across commodities," a source told SteelMint.

Indian iron ore and pellets exporters informed that the freight from India to China on a Supramax has increased from around $19/t to $25-26/dry metric tonne (dmt).

A pig iron source said, though a deal had been closed at a very favourable price, the charter company did not confirm the vessel and charged "astronomical freight".

Yet another source informed that freight for a billets parcel booked to an east African port from Kandla Port, west coast India, which was at $50-55/t a month back is now upwards of $75/t.

Factors supporting high freight

• Increase in tonne per mile: Iron ore supply is being disrupted from Ukraine and oil from Russia. The EU, highly dependent on both, will have to look at other sourcing destinations. "EU and others were availing the Black Sea route because it was cheaper in terms of FOB and freight," reminded a source.
  
  

In a change in trading pattern, the EU will now have to explore Brazil for iron ore, a move that will increase the tonne per mile for tonnages across the world, and prop up freight.

• Scramble for commodities: There will be a scramble for commodities, especially for coal from the EU, to keep its winter heating on and it would perhaps be willing to shell out more to secure material. This would also support higher freight.
  
  
• Congestion: If sudden routes changes are initiated and countries flock to Brazil for iron ore, there would be vessel congestion and the turnaround time will increase, spurring vessel hire charges, which have already zoomed 50% on the Persian Gulf and West Coast India belts and 100% in the Indonesia region.
  
  
• Lack of immediate replacement cargo: No new ships are going into the Black Sea area and the ones stalled will have to seek new cargoes. But it will be difficult to find immediate business to fill up the vacuum created by the war, informed a shipping source. Moreover, as uncertainty prevails, ships that are not a party to these geo-political events are seen backing off, leading to vessels crunch.
  
  

The China factor

China's demand for coal has risen sharply after it returned from the Lunar holidays. Meanwhile, Indonesia lifted its ban on coal exports, slapped from 1 Jan'22, in a staggered manner from mid-January, a move that sent freight northward especially since China was ready to buy in copious volumes. Freights, which had dropped to $17-18/t, during the ban, shot up immediately.

"When China's coal demand resumed post Lunar New year holidays, there was a short supply in vessels as these had switched to carrying other cargo, especially agri goods from India. Freights sped up due to the vessel supply crunch. Soon, these were seen taking diversions by ballasting from India's east coast to Indonesia to pick up coal cargos. Now, East Kalimantan to Navlakhi rates have climbed up to around $30/t from the previous month's $17-18/t," Raajesh Bhojwani, CEO and MD, RBB Ship Chartering Pte Ltd, Singapore, informed SteelMint.

Will Black Sea blockade impact India, China?

Sources SteelMint spoke to say the Black Sea blockade will not have much impact on India or China but definitely on Russia and Ukraine's trade with the European Union (EU).

India: Cargoes going into Europe from India will not be affected by the Black Sea disruptions since these mainly take the Suez route. Only those affected by the insurance boundary may have to factor in war premiums.

A small volume of Indian steel goes to the Back Sea region. Mills will perhaps now look at other regions or divert these to the domestic market. India exported a mere 0.02 mnt of steel to CIS in 2021.

On the other hand, Steel Authority of India was looking to source coking coal from Russia to lessen its reliance on Australia and the first coal cargo was supposed to be shipped in March, sources inform but the war has thrown up doubts on this supply. SteeMint, however, could not confirm this with SAIL.

China: This country, on its part, buys significant volumes of coal from Russia (over 27 mnt of non-coking coal and 9.31 mnt of coking coal in 2021). However, these are not transported via the Black Sea, but the "Russian Pacific coast".

"This route, which lies north of Japan, is very active and requires only three days of steaming," explained a source.

Outlook

Freight rates are likely to remain elevated in the short to medium term against the backdrop of the current geo-political tensions. Russia and Ukraine are highly dependent on commodity exports and hence a super inflation in commodities is expected. Iron ore, steel and coal are heavily China-centric, and as long it buys, freights will stay supported.