COMMERCIAL flows out of the Black Sea region, particularly from Ukrainian ports, were severely disrupted by Russia’s invasion of its western neighbor on February 24. The region’s exports are a vital part of the global food supply, and a prolonged disruption will have huge ramifications across the world. However, it would be unrealistic to expect the demand for Black Sea wheat to disappear completely at this stage of the procedure.
Russia is said to have mined major shipping lanes from Odessa and other Ukrainian ports to the Bosphorus, making shipping extremely dangerous. In addition, the Russian Navy continues to restrict the movements of ships wishing to leave the Black Sea which have loaded in Ukrainian ports. The exact number of vessels involved is unclear, but according to one report it could be as high as 200 to 300, many of which carry grains 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 kilometers, or about 75% the size of Ukraine. It is bordered by Bulgaria, Georgia, Romania, Russia, Turkey and Ukraine. Ships sailing in the Black Sea have only one entrance and one exit, the Bosphorus. It is a narrow strait that bisects Istanbul and forms part of the continental border between Asia and Europe. The Bosphorus connects the Black Sea to the Sea of Marmara, itself connected to the Aegean Sea and then to the Mediterranean Sea via the Dardanelles.
Russian ships pull away
This makes it very easy for the Russian Navy to control the flow of ships leaving the Black Sea. On Friday last week, at least six tankers carrying around 300,000 tons of Russian oil crossed the Bosphorus unhindered and proceeded to their destination. This followed the passage of 800,000 t, 400,000 t, 400,000 t and 600,000 t of Russian oil over the previous four days. An interesting analogy from the Black Sea News suggests that the US$200 million value of Friday’s shipments equals the cost of about 30 Russian Kalibr cruise missiles.
And it’s not just tankers leaving the Black Sea. According to leading Russian agricultural consultancy SovEcon, the pace of Russian wheat shipments is returning to normal. SovEcon said 520,000 metric tons were shipped last week and 410,000 metric tons the previous week via Black Sea ports. This despite indications that the war had interrupted Russian exports and that shipping lines no longer served Russian ports.
While Ukrainian ports will likely remain closed until the end of the war, Russian ports are open for business and very busy, according to SovEcon. Russian private consultancy IKAR reported that export vessels were being loaded at all five Black Sea grain terminals after a 7-10 day break at the start of the conflict.
However, it is likely that much of the grain loaded since February 24 was for sales made before the invasion of Ukraine. Many of the ships loaded in the first half of March may have already been in the Black Sea at the start of the war, either en route to their port of loading, anchored in Russian ports awaiting docking, or already in loading.
The pace of exports is so fast that SovEcon recently raised its forecast for the country’s wheat shipments in March from 1.3 million tonnes (Mt) to 2 Mt due to strong export demand. This expectation was supported by IKAR last week, which announced that it now expects March wheat exports to exceed 2Mt. While freight rates are noticeably higher, so are world prices, and it seems some consumers still want Russian wheat.
Meanwhile, Egypt, the world’s largest wheat importer, has continued to receive imports from the Black Sea region since the start of the war in Ukraine. Cargoes of around 63,000 t from Ukraine, Russia and Romania all successfully left the Black Sea and were due to dock last week. A ship carrying approximately 65,000 t of Romanian wheat was unloaded the previous week.
The United States Department of Agriculture has listed Egypt for 12.5 million tons of wheat imports in the 2021-22 season. It typically sources around 80% of its import requirements from Russia and Ukraine. Putin’s invasion of Ukraine 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 fava beans.
The Ministry of Supply and Internal Trade expects the country to have about eight months of wheat reserves once the national harvest is completed in April. However, the General Authority for Supply Commodities (GASC) is said to be working on importing wheat from other origins, including Argentina, Canada, France, Kazakhstan, Romania and the United States, in case the conflict would be prolonged.
India in the mix
Over the weekend, India’s Ministry of Trade and Industry surprisingly announced that it was in final talks to start wheat exports to Egypt for the first time. A string of record harvests and an environment of high world prices have seen India emerge as a standout exporter in 2021-22.
The USDA puts Indian wheat exports at a record 8.5 Mt, but last week the International Grains Council raised its forecast from 8.9 Mt to 11.6 Mt. The Indian government is also questioning several other countries, including Turkey, China, Bosnia, Sudan, Nigeria and Iran, regarding potential wheat exports. There’s nothing like striking while the iron is hot!
Logistical challenges and quality issues have thwarted India’s attempts to sell large volumes to the global market in the past. However, the government is implementing a plan to facilitate an increased export campaign. It provides additional rail cars for transporting grain, ensures that wheat for export is tested in government-approved laboratories, and works with various port authorities to prioritize the export program of wheat.
Global financial sanctions on Russia may well strangle its economy, but it continues to ship wheat, ably aided by a significantly weaker rouble. Russia is presumably being paid for its goods and earning some of the US dollars the sanctions are so desperately trying to curtail.
Countries like India and Australia are raising their hands to fill the wheat supply gap resulting from the disruption of Ukraine’s export schedule. But the longer the war lasts, the bigger the hole gets. And the bigger the hole gets, the greater the upward pressure on prices until the war ends and/or demand is rationed.