The ongoing conflict between Russia and Ukraine is likely to underpin freight rates in the vegoil market in the short term as it will lead to a shift in trade pattern boosting tonne-mile demand in the vegoil market.

The ongoing war will likely squeeze sunflower oil exports from Russia and Ukraine, forcing their trade partners to fill the void created by these two countries with other distant sources. Russia and Ukraine are the two largest exporters of sunflower oil, accounting for 79% of the global trade volume in 2021.

Ukraine is the largest producer of sunflower oil globally, exported 5.1 million tonnes of sunflower oil in 2021, of which 31%, 15%, and 10% were shipped to India, China, and the Netherlands, respectively.

Similarly, Russia is the second-largest exporter of sunflower oil globally, exporting 3.1 million tonnes of sunflower oil in 2021. Turkey, China, and India are major trade partners accounting for 29%, 9%, and 8% of Russia’s sunflower exports in 2021, respectively.

The Joint War Committee (JWC) has added Russian and Ukrainian territorial waters in the Black Sea and the Sea of Azov to its influential list of high-risk areas. As a result, insurance premiums for vessels entering disputed regions have increased. Accordingly, ship owners will be reluctant to deploy their vessels in the Black Sea and the Sea of Azov. As a result, vessels supply will be tight in the Black Sea region, which in conjunction with a high premium of insurance will push freight rates higher in these regions.

Moreover, if the war hampers sunflower oil exports from Russia and Ukraine, it will be difficult for the importers to find alternative suppliers of sunflower oil. The third and fourth biggest exporters of sunflower oil, Argentina and Turkey, account for only 7% and 5% of the global trade, respectively. In such a scenario, the sunflower oil demand will shift towards soybean oil, increasing long-haul vegetable oil exports from South America to India, China, and Europe. The resultant higher tonne-mile demand will thus underpin freight rates for IMO-class MR tankers in the short term.

However, suppose the war halts sunflower oil exports from Russia and Ukraine for an extended period. In that case, it will be difficult for the sunflower oil importers to find an alternative supply of vegetable oil as sunflower oil exports from these two countries account for about 9% of the global vegetable oil trade. The global vegetable oil trade thus will eventually start declining, hurting tonnage demand and freight rates in the IMO-class MR tanker market. However, Russian shipowners have 146 chemical tankers (1.84 mdwt), accounting for about 1.5% of the global fleet of IMO-class tankers. If the ongoing financial sanctions on Russia hampers the employability of the Russian vessels, it will curb the tonnage supply in the market, capping the likely decline in rates to some extent.
Source: Drewry