Just as the world had started to emerge from Covid-19-related supply chain disruptions, the Russian-Ukrainian conflict has exacerbated production and shipping costs

The year 2022 was seen, in terms of economy, as a time to pick up pieces from the Covid-19 pandemic, with rising global vaccination rates, easing of restriction measures, and declining unemployment. According to the IMF’s April update, for 2022, global economic growth has been downgraded from 4.9 percent in the October 2021 update and is now estimated at 3.6 percent year-on-year primarily as a knockoff impact of the Russia-Ukraine conflict.

At the beginning of March, Goldman Sachs released its economic outlook, revising global growth downward to 3.4 percent this year, mostly due to the Russia-Ukraine conflict, which is expected to exacerbate the supply-demand imbalances and surging inflation rates.

The bank expects the global impact to be sizable, with Europe and other commodity importing regions being more affected, due to the surging inflation from a sharp increase in commodity prices.

Meanwhile, S&P Global expects the global economy to grow 3.3 percent in its latest report, released on March 22, which was revised downward from 4.1 percent due to the sharp contractions in Russia and Ukraine, and Western Europe. Almost all regions are expected to be affected by conflict-related supply disruption, with the exception of the Middle East and North Africa, where oil and gas exporters are likely to benefit from higher energy prices.

Amid this scenario, freight rates are expected to continue to see an upward trend, either because of the Russia-Ukraine conflict, which is impacting drastically fuel prices or due to supply-chain disruptions aggravating port congestion.

 

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Container freight rates have seen a surge for the past couple of months, especially on the Asia-West Coast US trade route, due to a series of factors including China’s zero-covid strategy, which has been impacting economic activity, leading to further port congestion and delays in deliveries of goods, with the port of Shanghai being the most recently hit by a lockdown.

Container vessels will also have to be taken to dry docks to refit to IMO regulations, which is likely to keep this upward trend ongoing. Additionally, negotiations between the Pacific Maritime Association and the ILWU, which are expected later this year, could create an even bigger impact on the congestion times in West Coast ports if an agreement is not reached.

All these remarks can be found in CW Research’s 1Q 2022 update of the Global Cement Trade Price Report.

 

The Russia-Ukraine conflict takes a toll on the shipping market

The Russia-Ukraine conflict has taken a heavy toll on the shipping market. The conflict, which started in late February, is by far one of the worst conflicts on European soil since WWII. The economic impact of this conflict has already negatively weighed on the global economy. Additionally, the outcome of this conflict, whenever it sees an end, will be economically catastrophic for both Ukraine and Russia, not to mention the sheer scale of the humanitarian crisis.

The Russian economy is expected to see a significant contraction this year due to the sanctions imposed by many developed economies including the EU, UK, US, and Japan, resulting in the freezing of Russian central bank assets, targeting of wealthy Russian individuals and some state-owned banks, partial access restriction to the international payments system SWIFT and the freeze on the Nord Stream 2 project by Germany. Freight rates in the short-term are also likely to see a change, as a shift in trade patterns is expected due to the ongoing conflict as traders seek different sources of major commodities previously acquired from Russia and Ukraine.

 

Seaborne freight rates

 

The Baltic Exchange's main sea freight index, which tracks rates for ships carrying dry bulk commodities, settled at 2,939 points on May 10, reaching a near five-month high as rates rose for all vessel segments.

In April, the Capesize sector saw a steep fall in its Atlantic market activity amidst geopolitical tensions and its effect on trade. Furthermore, lockdowns imposed in China due to the resurgence of Covid-19 cases have hit iron ore demand.

 

Skyrocketing energy prices weigh on downstream supply chains

But the most severe effect of the Russia-Ukraine conflict has been felt in energy prices, which have a major impact on production costs and transportation.

Bunker fuel prices, which were already witnessing a surge on major trade routes, are being aggravated by the Russia-Ukraine conflict leading to higher transportation costs, increasing the traded and final prices of products and commodities, including cement.

The Russia-Ukraine conflict has also impacted coal and natural gas prices, increasing industrial production costs across the globe, more specifically in Europe. In terms of industrial electricity prices, an increase has been seen since the beginning of the conflict, directly affecting the production of commodities.

 

Skyrocketing energy prices

 

European cement industry sees closures and losses

In the case of the cement industry, production stoppages or reductions are happening in a number of cement plants in Spain.

For example, Cementos Portland Valderrivas in mid-March announced the temporary closure of all kilns at its seven main cement plants, due to the spike in energy prices. This measure was taken by the company because they have not been able to continue with viable production. The company also reported that, currently, energy and fuel represent 70 percent of production costs when they used to represent only 35 percent. Additionally, manufacturers have already reached out to the Spanish government to address this issue.

The short-term outcome is hard to predict, and we will all likely still experience the after-effects of the conflict, even if it ends soon, for quite some time.

 

 

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