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Shipfix's Weekly Market Blog #4 - India Key to Changing Trade Flows

By Ulf Bergman on March, 18 2022

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Ulf Bergman

Senior Economist and Market Research Analyst @ Shipfix 25 years XP in finance, shipping and commodities

The unprecedented move by some of the world's largest economies to remove Russia's status as "Most Favoured Nation" through the World Trade Organization adds to the disruptions that global trade is facing in the wake of the war in Ukraine.
 
The three words making up the MFN abbreviation may not seem like a big deal. However, as the US and a raft of other allied nations remove the accreditation, Russian exports will be treated the same way as other pariah states, such as North Korea and Cuba, and face increasing hurdles and price increases. Notably, tariffs on Russian goods and commodities are likely to see steep increases in the countries revoking the rights. For some countries, such as the US, the move is primarily political with only limited effects on trade flows, but the impact will be noticeable for others, mainly found in Europe. Germany, greatly dependent on Russian energy imports, will see nearly 30 billion dollars of imports from Russia affected. As a whole, the European Union will see just shy of six per cent of its trade affected by the initiative.

Nevertheless, a substantial number of countries are not joining the initiative, with relative heavy-weights such as China and India choosing to maintain their commercial ties with Russia. Both countries have refrained from criticising Russia directly over its military action in Ukraine, while not providing direct support either and abstaining from votes in the United Nations. They attempt a balancing act in terms of geopolitics and the supply of commodities without being seen as complicit and targeted by sanctions.

In recent days it has become increasingly likely that India will be the key to how the new trade flows will develop in the wake of the war and sanctions. A few days ago, India caused quite a stir in the global news flow when officials stated that they would be happy to purchase discounted Russian commodities. The development has since become more substantial, with the Indian central bank reportedly drawing up plans for a direct rupee-rouble trade mechanism that will side-step western sanctions on Russian financial transactions.

Traditionally, India is dependent on arms imports from Russia, and any sanctions could jeopardise those supplies and put India at a disadvantage in its geopolitical competition with China. Hence, the Indian leadership is likely to seek to maintain a good relationship with Moscow. In addition, the prospect of being able to purchase commodities at a discount must be tempting for Indian leaders and utilities alike, as the recent surge in commodity prices threatens to dent the country's economic expansion.

Following the Chinese import ban on Australian coal, the flow of the commodity from down-under has been increasingly directed to India, replacing much of the volumes previously received from Indonesia. At the same time, China made Indonesia its primary provider of seaborne coal imports. As a result of this shift in trade flows, India has been sourcing most of its coal from Australia, followed by Indonesia and South Africa. While India historically has imported coal from Russia, the quantities fail to make any material impact. However, should India increase purchases of discounted Russian coal substantially, the recently developed trade pattern will change considerably. If Russian supplies were to be shipped from ports in the western parts of the country, e.g. Ust-Luga or Murmansk, there would be a considerable increase in the tonne-mile demand related to Indian coal imports.
 
Indian coal imports
Source: Shipfix
 
If Indian utilities were to rely on Russian supplies increasingly, it would free up capacity at its current suppliers for alternative destinations and make it easier for countries wishing to avoid importing Russian coal. European buyers have also been reported to show an increasing interest in Australian supplies to replace Russian sourced coal and unreliable natural gas deliveries.
 
As Shipfix has previously reported, cargo orders for coal destined for Europe surged in recent weeks. During the week before last, they reached the highest weekly volumes recorded in our data. While the new orders subsided somewhat last week, total volumes were still substantial enough to qualify for the runner up position. So far this week, orders remain robust but perhaps not in record-breaking territory. Order numbers have not increased to the same extent as volumes, highlighting the shift from Russian coal shipped in smaller vessels to larger tonnage for longer distances.
 
Cargo orders coal deliveries europe
Source: Shipfix
 
It is not only coal that India is considering buying at discounted rates from Russia. The Indian officials also suggested increasing imports of fertilisers from Russia if discounts are available. Greater access to fertilisers also has the potential to boost Indian crop production and fuelling increasing exports from India should global food prices remain high. After five years of good harvests, inventories have been building up, allowing the South Asian nation to take advantage of high wheat prices and boost its exports. Earlier in the month, it was announced that India had agreed to export 500,000 tonnes of wheat and that annual exports of the crop were expected to reach seven million tonnes. The month’s announcement has already translated into an increasing cargo order activity, with recent weeks substantially above what has been seen in the past.
 
Cargo orders india wheat (2)
Source: Shipfix
 
The crude oil trade flows are also likely to see a change as a result of India’s willingness to buy from Russia. Typically, India purchases only a few per cent of its oil imports from Russia and most is coming from the nearby Middle East. Hence, a partial shift towards Russian supplies would have considerable ramifications for the tonne-mile demand in the wet cargo sector and help freight rates to recover.

The freight rates for the dry bulk sector are also likely to benefit from an Indian pivot towards Russian supplied commodities, as it looks set to contribute to an increasingly sub-optimal global flow of cargoes. The changing flow of dry bulk commodities has also led to some traditional relationships between front and back-haul freight rates breaking down. The outbreak of war closed the trade out of the Black Sea, and the Atlantic basin became less attractive for Supramax shipowners. Hence, the traditional back-haul route from North China to West Africa (S3_58) has risen substantially above its front-haul peers for the first time.
 
Supramaxes Front haul back haul
Source: Shipfix/The Baltic Exchange
 
 

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