The Ukraine-Russia war could result in the cost of global supply-chain logistics being pushed up by higher oil prices. Since 2020, Brent and container freight prices have shown a 90% correlation, suggesting a potential record-high peak of $14,000/FEU for freight rates.
Historically, oil prices and container rates were not correlated. In previous business cycles, in times of “normal” demand and high oil prices, shippers have mostly adjusted speed and fleet size rather than prices. For instance, reducing the cruising speed of a vessel by 20% can reduce daily bunker oil consumption by up to 50%. However, the post-COVID environment has led to an exceptional change. With pent-up demand and supply chain disruptions, firms have been willing to pay a premium to shorten delivery times and shipping companies have been able to reprice rates more aggressively.
As such, since 2020, Brent and container freight prices have shown a 90% correlation (see Exhibit 1), suggesting that oil prices hovering around $120/ barrel could theoretically lead to a new record-high peak for freight rates of $14,000/FEU (a 40% increase from the previous peak reached in September 2021). Actual freight rates may in the end not increase this much as global demand in 2022 is likely to be softer than in 2021, but shippers still benefit from strong pricing power and should be able to pass on at least part of the higher oil prices. Container freight prices will thus remain more elevated in 2022 than we had previously expected.
In the current context of high oil prices, the global economy is also facing a tense diesel/gasoline market. Inventories are decreasing globally, refining capacities are stretched and producers such as Nigeria, which supply low-sulphur crude oil (that is easier to refine), are struggling to provide more volume to the market. In case of a diesel crunch, the road transport sector could further disrupt global supply chains. Estimated inventories could provide over 200 days of consumption for countries such as Finland, about three months for France, Spain or Hungary but as low as two months in the case of Germany, Italy or even close to one month for the UK or the US.
Exhibit 1: Oil prices (USD/bbl) and container freight prices (USD/FEU)
Higher commodity prices are also hitting countries’ terms of trade: All else equal, we find that Qatar, the UAE and Saudi Arabia are likely to see the largest increase in their trade balance-to-GDP ratio, while Tunisia, Morocco and South Korea could see the largest declines.
Net exporters of commodities are likely to benefit from higher prices and potential substitution effects away from Russia. To quantify more precisely the impact on trade balances, all else equal (see Exhibit 2), we assume that prices in the energy, metals and agrifood sectors remain at current levels for the rest of the year (implying respectively a +70%, +50% and +50% rise compared to 2021). As such, countries in the Middle East, Norway and some in Latin America are likely to see the largest gains in trade balance as a share of GDP. In Europe, Germany’s trade surplus would be reduced by 1.4 percentage points of GDP (or one-third in absolute terms) and France’s trade deficit could rise by 1.3 percentage points of GDP (or by more than-two thirds in absolute terms).
Exhibit 2: Impact of higher commodity prices on trade balances (in percentage of GDP), all else equal
Trade financing may become a headwind for some exporters in 2022 in a context of higher USD funding costs, higher commodity prices and sanctions against Russia. Despite ongoing shocks to the global economy, the Fed will not deviate from its plans of monetary tightening. We thus expect five more rate hikes in 2022 (and four in 2023), while the reduction of the Fed’s balance sheet would start as early as mid-2022. In this context, the US dollar is likely to appreciate (we expect 8% against the euro on average in 2022), and funding in US dollars will become more expensive. Data and research literature show that such a mix tends to weigh on global trade: As the US dollar is the major invoicing currency for trade, a 1% appreciation against all other currencies is associated with a 0.6 to 0.8% decline in total trade volume among the rest of the world.
The current context is already pushing up financing needs for commodity trading and squeezing funding for other types of international trade operations. As short-term futures contracts are trading at a high premium compared to longer-term ones, commodity traders who usually buy physical materials and sell futures to hedge themselves from price risk have been facing increased margin calls. This has led to several major commodity powerhouses calling on banks to supply the required liquidity to comply with the margin calls. Some have even lobbied central banks in order to get direct liquidity support.
Finally, sanctions and rules are putting pressure on trade flows with Russia. The EU put in place an export ban covering goods and technology in the aviation and space industry, as well as a prohibition on the provision of insurance and reinsurance and maintenance services related to those goods and technologies. This will hit Russian airlines, one of the key sectors of the economy.
Furthermore, the blocking of the biggest Russian financial institutions and the removal of seven Russian banks from SWIFT jeopardises the possibility of transactions with Russia and is thus drastically reducing G7 exports to Russia.
On the Russian side, strict capital controls have been implemented, along with the obligation for Russian legal entities and citizens to resell 80% of foreign exchange (FX) received in business transactions. This means that FX funding for Russia is a limited risk at the moment, but in an adverse scenario where the West completely stops importing oil and gas from Russia, the country could become bankrupt with respect to its imports and short-term external debt-payment needs.
The first part of this article focuses on demand and price shocks caused by the ongoing Russia-Ukraine conflict, and can be read here.
Ana Boata is global head of Economic Research at Allianz Trade. Ana started her career in the banking sector before joining Euler Hermes in November 2012 as Eurozone economist. In 2018 she received the Best Forecaster Award for the Eurozone by Consensus Forecast. In 2019, she became head of Macroeconomic Research of Euler Hermes Group and led its thematic research on SMEs. Ana also teaches macroeconomics at the University of Paris Dauphine and Sciences Po Paris.
Françoise joined Allianz Trade in 2019 as a senior economist for Asia-Pacific. Prior to this, Françoise worked as an Economist for over five years at the equity broker Exane BNP Paribas in London. There, she was in charge of the macroeconomic analysis of the Chinese economy and Emerging Markets. She also worked on global and European topical themes. Her other work experiences include the ACPR, the French supervisor for the banking and insurance sectors.
Ano Kuhanathan has held various positions in the financial industry in trading, research and consulting. He was the Eurozone economist at Axa Investment Managers from 2016 to 2018. Before joining Allianz Trade in 2020, he was the head of economic advisory and advanced analytics at EY Advisory. Ano regularly teaches economics, sustainable finance and applied data science at Neoma Business School.