Shipping Isn’t Waiting For Sanctions. It’s Already Refusing To Move Russian Cargo

By Greg Miller of FreightWaves,

In September 2019, the U.S. sanctioned tanker company Cosco Dalian, a division of Chinese shipping giant Cosco, for carrying Iranian crude. The sanctions only covered the 20 tankers owned by Cosco Dalian, but that didn’t matter. As a precaution, charterers shunned the entire 150-tanker fleet of the Cosco parent, causing tanker spot rates to spike.

Shipping execs don’t just refuse vessels or cargoes based on what’s definitely sanctionable. They do so based on what they believe might possibly be sanctioned now or later. Sanctions are written in precise language, but they’re messy in practice.

That precept is now on full display. Sanctions have yet to specifically target Russian energy exports or (non-dual-use, i.e., non-military) containerized goods, but that doesn’t matter. Many tanker owners and container liner operators are preemptively pulling out of Russia.

On Tuesday, MSC, Maersk and CMA CGM — the top three liner companies in the world — temporarily suspended Russian bookings. Yang Ming, the ninth largest, suspended Russian bookings on Wednesday; ONE, the sixth largest, on Sunday; and Hapag-Lloyd, fifth largest, on Thursday. These six carriers control 62% of global capacity, according to Alphaliner data.

The world’s largest container lines are dropping Russia “to manage sanctions risk but also perhaps manage reputational risk,” said Michelle Linderman, partner of law firm Crowell & Moring, during a panel presented by shipping association BIMCO on Tuesday. “Do they want to be seen as supporting Russia? Or are they going to say at this moment, while this is going on, we don’t want to go anywhere near there.”

The tanker sector is seeing the same pattern of behavior among shipowners and operators. Many are refusing to load Russian oil cargoes even though sanctions don’t bar them from doing so.

“Few owners are now willing to transport Russian oil, resulting in an undersupply of ships [at Russian export terminals],” said Clarksons Platou Securities.

Why shipping companies ‘say no to Russia’

“This is the most comprehensive and coordinated sanctions regime we have ever seen before, let alone one including a former G8 member … and it is rapidly evolving,” said Crowell & Moring partner Dj Wolff during the BIMCO event.

He explained: “Not only do you have to make sure [a shipment] is legally permissible, you’ve got to make sure every other party to the transaction thinks so: your banks, insurer, shipper, receiver, charterer, owner, etc. Otherwise, you won’t get paid, you won’t have a completed shipment or you’ll lose your insurance.”

Linderman added: “Even if you do all of those checks and you are comfortable at this precise moment in time that you can take a ship and go and load cargo or do a transaction with some Russian connection, and you get comfortable with all the parties — that’s just for now. Things are shifting so quickly. What happens if the counterparty that you just signed a charter party with or shipped cargo for gets sanctioned tomorrow, or in the next hour, or in the next 20 minutes?”

Practically speaking, this is convincing shipping companies to “say no to Russia” because it’s not worth the risk, said Wolff.  

“We have seen an enormous number of our clients ask: Should we pause or withdraw from Russia? They say: If you, the outside counsel, are telling me you haven’t been able to digest these 1,200 pages of regulations, then how the heck are we as a company supposed to ensure compliance with them? We should just press pause and wait for some sort of stable state to emerge.

“Some companies have also decided, maybe for legal reasons, maybe for a practical reason, maybe for a reputational reason, to say: I am withdrawing from Russia. You’ve seen some really big energy companies under pressure to do that, and there are a whole lot of companies that we’ve seen who are making this decision off the radar.”

How cargo refusals effect rates

Companies pulling out of the Russia will impact all shipping segments, from containers and tankers to dry bulk and gas transport. There will be market consequences. 

In container shipping, diversions of Russia-bound cargo and intensified inspections for dual-use cargo could exacerbate congestion and network inefficiencies in European trades.

In tanker shipping, there has already been a large upward move in freight rates. As more shipowners refuse to load Russian crude exports, and more importers abstain from buying them, Urals crude trades at a $20 per barrel discount and tanker owners that do agree to carry cargoes can charge dramatically higher rates.

Aframax tankers (with capacity of 750,000 barrels) have obtained rates of $130,000 per day on this route, up from $5,000 per day last week, said Clarksons.

Evercore ISI transportation analyst Jon Chappell told American Shipper: “Russian producers are still making money because the [crude] price is so high, and shipping costs are irrelevant because there’s a massive discount on [Russian] Urals crude right now, so for whoever’s buying it, who cares what you’re paying for shipping? You could pay $200,000 per day, $300,000 per day, and it wouldn’t matter.”

Six-figure-per-day rates are only being earned now by a small number of tankers loading in Northern Europe. Yet the upward rate momentum that began with shipowners’ reluctance to load Russian oil cargoes is spreading globally.

Clarksons estimated on Tuesday that rates for very large crude carriers (VLCCs; tankers that carry 2 million barrels) built in 2015 or later are $27,500 per day, up 591% week on week. It put rates for newer Suezmaxes (capacity: 1 million barrels) at $28,000 per day, up 285% week on week, and rates for newer Aframaxes at $41,800 per day, up 157% week on week. Product tanker rates are up double digits from last week.

According to Chappell: “The midsized crude carriers that operate in these regions — the Baltic, Black Sea, the Med — will see an outsized impact, but it will be a rising tide, as we’ve seen with V’s [VLCC tankers]. The TD3 [the Middle East-to-Japan index that tracks VLCC rates] jumped last week despite the fact that there’s no change in anything out of the Middle East to the Far East.”

Chappell believes broader pricing action shows that the tanker market “was a little bit tighter than people thought, in two regards. One, there’s probably not as much oversupply of tonnage as people thought, and two, the inventory situation we’ve been talking about for nine months is coming a bit more to the fore.

“You can’t really have [inventory] days of demand cover this low and have a geopolitical conflict involving one of the world’s biggest producers of oil and think that it’s not going to have a meaningful impact on commodity prices and the freight market.”

Read further at ZeroHedge

Leave a Reply

Your email address will not be published.