U.S. x Iran Conflict: what could be the impacts for coffee?

• In the past few days, the market has been swept by the escalation of the conflict between the U.S. (and its allies) and Iran, with major impacts in the oil sector and macroeconomic landscape. The size of the damage, however, will highly depends on the duration of the combat.
  
  
• The coffee market will also not escape unharmed from the increased tensions in the Middle East, as it is subjected to indirect (e.g increase in production costs, higher fuel prices and dollar fluctuation) in addition to the direct effects, such as the interruption of logistics routes.
  
  
• With the Strait of Hormuz closed by Iran and the ongoing conflicts, vessels are either anchored in the Persian Gulf or redirected to other routes, while also avoiding the Suez Canal, a key point for coffee maritime trade.
  
  
• This can directly affect the shipments of coffee from African and Southeast Asia, through the red sea, especially with destination to the European Union, and could also affect global trade – such as higher freight costs and fewer containers – if the war extends for longer periods.

For the coffee market, the Iranian conflict could have indirect and direct effects. Firstly, the rise in fuel prices and dollar instability could lead to an increase in production costs, not only due to the direct use of fuel on the farms, but higher energetic costs are likely to increase input prices, such as fertilizers and defensives. On the other hand, the escalation of the tension could also bring challenges to the global coffee trade.

As of now, hundreds of ships, including tankers (for oil and liquefied natural gas transport) and even cargo ships remain anchored in the open sea or outside the Strait of Hormuz, unable to reach any ports. This will already impact coffee beans reaching Gulf roasters, especially UAE, and could reduce the availability of vessels globally.

In addition, there has also been a crescent attack on oil tankers, which has increased the risks of trade routes in the Gulf and even in the Suez Canal, with the fears of a return to Yemen attacks, leading many companies to suspend and redirect their services away from the region.

It is important to highlight that the Suez Canal is a key bottleneck for coffee trade, as it is the main and most efficient route for East African (e.g Uganda and Ethiopia) and Asian coffees to reach the European markets.

Therefore, these logistical issues have the potential to directly affect trade flows and differentials prices for coffee, as Europe is the biggest market for coffee in the world. In the past months, the EU has also increased its share in the use of coffee beans from Asian (especially from Vietnam) and continues to import more from East Africa, especially since Brazilian farmers remain more withdrew for the market.

As for now, traders in Vietnam reported that the routes are unaffected, but freight prices have increased heavily. Shipments for Europe have already halted in the country and are likely to continue muted until there is a clear view of the risks of the maritime route through Suez. Many freight companies have also suspended booking for the Gulf region redirecting ships to the Cape of Good Hope route, which implies not only rise in costs but also increase in shipping time.

While Europe could source its coffee from other countries, natural Arabica and Robusta beans are majorly exported from Asia, Uganda and Brazil. Brazilian farmers, however, are still reluctant to sell their remained beans, while the bulk of the country’s 26/27 harvest is expected to hit the market only from Jully on. This could impact differentials in Brazil but also on the import figures for the EU and potentially impact on the coffee stocks of the bloc, especially if the war extends itself.

laleska.moda@hedgepointglobal.com