Longer Routes, Higher Prices: War in Ukraine Roils Commodity Markets
The invasion of Ukraine is likely to have deep and lasting impacts on commodity prices and shipping patterns, the World Bank warned in a new report released Wednesday. This will likely drive further inflation and drag on economic growth.
“Commodity markets are experiencing one of the largest supply shocks in decades because of the war in Ukraine,” said Ayhan Kose, Director of the World Bank’s Prospects Group. “The resulting increase in food and energy prices is taking a significant human and economic toll - and it will likely stall progress in reducing poverty."
Because of the disruptions related to the war, Brent crude is expected to average $100 per barrel for the full year in 2022 and decline only slightly to $92 in 2023. European gas prices are expected to be twice as high as last year (if not more) and coal will likely average 80 percent higher than last year.
More expensive gas means more expensive fertilizer, which means lower crop production and higher food costs. Since Ukraine is a leading agricultural commodity exporter, and its ports are closed by blockade, the war is also directly constraining the supply of wheat and vegetable oils. Wheat is expected to jump by 40 percent for the year.
The impact of sanctions will also tend to increase ton-mile distances for shipping of key commodities, according to the World Bank's outlook. As the countries that have sanctioned Russia look for alternatives to Russian energy, they will pull in cargoes from further away, adding transport cost. For example, Germany has almost fully ceased buying oil from its Russian neighbors, but far-flung Indonesia is considering whether to buy discounted cargoes.
The same pattern is true with coal, as EU consumers of Russian coal seek non-Russian alternatives from as far away as Australia and Colombia. In turn, neutral buyers in India, China or elsewhere may begin buying unwanted Russian coal at a discount, shipping it thousands of miles from the port of origin. This is great news for operators of tankers and bulkers, but in this case, cautions the World Bank, the extra ton-mile revenues are also an added cost for the global economy.