With the soaring freight rate of commodities and the increasing risk of trade interruption, emerging market economies are likely to suffer ＂multiple blows＂
With the continuation of the Ukrainian crisis and the escalation of European and American sanctions against Russia, the transportation cost of oil, gas and grain in the Black Sea continues to soar, and the rise of commodities is amazing.
In this context, some analysts have warned that some emerging market economies, especially those that are highly dependent on energy imports, may encounter a "triple blow"-higher oil prices, a headwind of monetary policy and a slowdown in global trade.
The chaos continues, and investors are worried about trade disruption.
After entering this week, more and more international buyers suspended the purchase of Russian LNG, waiting for the restrictions on related industries and companies to be clear, and some Russian LNG freighters have been diverted; Financing related to Russian-Ukrainian raw material trade has gradually dried up; The transportation of all kinds of raw materials, from palladium to wheat, has been disturbed more and more, which has caused the transportation cost of raw materials to soar.
According to foreign media reports, Russian oil buyers are facing difficulties in payment and supply of transport vessels, and it is difficult to find vessels that can load in the Baltic Sea after March 10th. The freight for transporting Russian oil on the Black Sea has soared fivefold in the past week. Halvor Ellefsen, an oil tanker broker of Fearnley A/S Company, said, "I have been a ship broker for more than 30 years, and I have never seen such a chaotic situation. I just hope that the local situation can be resolved as peacefully as possible."
As the chaos escalates, the market is increasingly worried about the interruption of trade in the Black Sea.The Black Sea region is the main export region of many important commodities, such as crude oil, refined oil, LNG, steel and many agricultural products, and the Black Sea is the main commodity transportation artery at the crossroads of Asia and Europe.Russia mainly exports coal, grain, steel products and fertilizers, while Ukraine exports grain, iron ore and steel products. Together, Ukraine and Russia account for 29% of global wheat exports and 19% of corn trade, and are also the major exporters of sunflower oil.
According to the data of research institute UkrAgroConsult, the ports of Odessa, Pi Fu Denny, Mykolayev and Cherno Moske in southwestern Ukraine handle nearly 80% of the country’s grain exports, and the disturbance of maritime transportation will undoubtedly affect the import and export of various commodities in this region.
In terms of crude oil, Jeff Currie, head of commodity research at Goldman Sachs, pointed out in an interview with foreign media that "at present, it is extremely difficult to start and operate the maritime trade of crude oil. At the same time, the unexpected follow-up risk, that is, the possibility of interruption of (crude oil) transportation pipelines or similar situations is also very high, which means that there may be extreme situations in which huge crude oil transportation volume is interrupted for several weeks. "
In addition to the soaring transportation costs and the risk of trade disruption, some institutions stopped financing Russian commodity transactions as early as last weekend before the escalation of sanctions in Europe and the United States.
According to informed sources, Societe Generale and Credit Suisse Group stopped providing financing for Russian raw material trade last week. Dutch banking giants ING and ABN amro also began to restrict loans involving Russian and Ukrainian commodity transactions. This means that even without the escalation of sanctions last weekend, the export of bulk commodities with a large market share in Russia and Ukraine will be affected, which in turn will affect related trade.
What is more worth mentioning is that the risk of escalating sanctions from Europe and the United States is becoming more and more serious. According to foreign media reports, some EU countries said that EU sanctions against Russia may be extended to prohibit cargo ships carrying Russian natural gas from entering Europe. White House spokeswoman Jane Psaki said that the United States will further impose economic sanctions on Russia and "does not rule out the sanctions plan for Russian oil exports."
Affected by these chaos, the prices of various commodities continue to rise. On Tuesday, Chicago wheat futures rose 8.6%, the biggest one-day increase in more than 11 years. CBOT soft red winter wheat futures price once rose 4% to $10.23/bushel, the highest since March 2008. Corn futures also rose by 5.3%.Marko Kolanovic, an analyst in JPMorgan Chase, said earlier that wheat and corn are the most vulnerable agricultural products to the escalation of the Ukrainian situation.
On Wednesday, the European benchmark Dutch natural gas futures closed up more than 30%, and once rose 55% to a record high. Even if the International Energy Agency (IEA) releases 60 million barrels of oil reserves urgently, it can’t resist the rise in oil prices. In addition, OPEC+ decided at Wednesday’s meeting to keep the current pace of increasing production by 400,000 barrels per day in one month. Overnight oil distribution continued to refresh the high level in more than seven years, and US oil closed above $110 for the first time in the past decade. This morning, the oil distribution was once close to the $120/barrel mark.
Currie also pointed out that "the commodity market not only needs to reflect the current trade difficulties of Russian-Ukrainian related commodities, but also needs to reflect the risks that Russian commodities will eventually be included in the scope of European and American sanctions when there are no sanctions in this field for the time being. This has further strengthened the long-term structural bull market of commodities. "
Highly dependent on oil and gas imports, Turkey suffers
Since the escalation of the Ukrainian crisis, the decline of various assets in Turkey is almost second only to that in Russia.
Despite spending billions of dollars to protect the lira from the impact of soaring energy prices, after the situation in Ukraine escalated, the lira continued its decline and became the weakest emerging market currency except the Russian ruble and the Ukrainian Grivner. In the five days up to last Friday, the yield of two-year Turkish government bonds jumped by more than 210 basis points, second only to Russian government bonds.
Although Turkey’s long-term ultra-loose monetary policy has contributed to the runaway inflation and intensified the selling of Turkish assets, analysts pointed out that the radical repricing of Turkish assets after the Ukrainian crisis highlighted how risky it is for a country that relies entirely on imports of oil and natural gas in the face of geopolitical soaring oil prices. Analysts also pointed out that India, South Africa and other economies that are also highly dependent on energy imports will face similar resistance.
Piccoli, co-chairman of Teneo, said that for every $10/barrel increase in oil prices, Turkey needs to pay an additional $4 billion for oil imports, which will further widen its current account deficit. Last December, despite the sharp depreciation of the lira, Turkey’s foreign trade gap widened for the second consecutive month due to the rising cost of energy imports.
Citigroup further reduced its position in lira in its portfolio, saying that the country’s net energy imports as a percentage of its economy are second only to Ukraine in developing economies. Previously, the lira plummeted in turn, and Turkey’s monetary policy of not playing cards according to the cards scared overseas investors. Overseas investors held less than 5% of Turkish local currency bonds.
Piotr Matys, strategist of InTouch Capital, said: "In the face of another inflation shock caused by soaring global commodity prices and weakening lira, it may be more difficult for the Turkish government to implement its economic plan. The Turkish economy may face another difficult chapter next. "
Emerging market economies fear a "triple blow"
Not only Turkey, but also some other emerging market economies may face a "triple blow" due to the Ukrainian crisis.
Witold bulke, a senior macro strategist at Nordea Investment in Copenhagen, described the "triple whammy" as higher oil prices, a strong headwind of monetary policy and a slowdown in global trade.
Brendan McKenna, strategist of Wells Fargo in new york, said: "Before the Ukrainian crisis, many emerging market economies were still trying to recover from the epidemic. Nowadays, the commodity shock has aggravated the economic problems they face. With the deterioration of growth prospects, soaring inflation and widening current account deficit, emerging market currencies may face tremendous pressure. "
Last week, the MSCI Emerging Markets Currency Index fell for the first time in a month, and recorded the second largest decline this year.
Citigroup believes that other vulnerable emerging market economies include Chile and Hungary, which have just raised key interest rates.BarnabasVirag, deputy governor of the Hungarian central bank, said that since last month, the inflation risk has been "significantly enhanced" and all interest rate policymakers support the need to continue the interest rate hike cycle.
Valma, chief economist of Nomura Asia (excluding Japan), said that India, the Philippines and Thailand may become the most affected emerging economies in Asia as oil prices continue to rise, economic growth slows down and their currencies depreciate. Central banks in these countries have signaled that they will keep monetary easing for a long time as long as it is to support economic growth. Even without the soaring oil price caused by the Ukrainian crisis, its monetary policy would have pushed up consumer prices.
For India, Valma said that a 10% increase in oil price may reduce India’s GDP growth rate by 0.2 percentage points, and at the same time, because Indian enterprises can’t pass on the rising input costs, the increase in oil price will also affect their profit margins. After the epidemic for two consecutive years severely hit the income of Indian families, the private consumption, which contributed nearly 55% to India’s GDP, is still lower than the pre-epidemic level. In addition, India has experienced three rounds of epidemic impact, catering, tourism, education and retail industries have all been affected, and the unemployment rate has soared.
Shilan Shah, an economist at Capital Economics in Singapore, said: "The shortage of supply is still a disadvantage in the short term. Only when the supply shortage eases can the Indian economy really begin to recover. "
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