* Cost of commodity trade finance steadily rising
* Threat of EU sanctions adds to uncertainty
* Traders study contracts for fear of defaults
By Polina Devitt and Sarah McFarlane
MOSCOW/LONDON, Feb 20 Ukrainian steel, grain and
other commodity export deals have virtually ground to a halt as
violence in Kiev that has killed dozens this week triggered
fears of port closures and defaults, driving up risk premiums on
prices for future shipments.
Ports were operating on Thursday, allowing goods to leave
the country, but traders said new deals were proving difficult
on concerns that violence may spread beyond the capital to
Ukraine's Black Sea ports in the south.
Banks are reluctant to finance new deals while traders are
worried about meeting existing contract deadlines, sources say.
Demonstrations erupted in November after President Viktor
Yanukovich bowed to Russian pressure and pulled out of a planned
trade and cooperation deal with Brussels. Ukraine is the world's
No. 2 grain exporter and about No. 7 in steel.
"Since it became more violent I haven't seen any trade.
People are working from home, our office is closed," said a
grain trader at an international commodities trade house.
"We already have commitments and you don't want to add to
the current commitments," he said.
One Ukraine-based coal trader said that demand for his
products had been weak recently, while a steel-products trader
said that he had done much less business than usual.
The effects of the escalating violence were also filtering
through to prices. Traders said that weather-related logistical
problems were supporting grain prices but that they expected a
risk premium to be built into corn and wheat.
TRADE FINANCE COSTS
Banking sources said that the cost of financing exports was
rising as the situation deteriorated.
"The most recent deals were done with an interest margin of
around 5.25 to 5.5 percent per annum, whereas earlier in 2013
the best rates were around 3.25 percent," a source involved with
Ukrainian commodity trade finance said.
"Soft commodities companies have been asking about when they
can get more financing but in the short term banks are taking a
wait-and-see approach. The worrying thing might be if the EU
come up with sanctions."
EU foreign ministers will hold an emergency meeting in
Brussels later on Thursday to decide whether to impose sanctions
on Ukrainian officials for the deadly violence.
Diplomats said those discussed as possible targets for
sanctions included oligarchs, as well as some ministers -
possibly defence, justice or interior - but no decision had been
"If the EU put in sanctions against individuals who own
Ukrainian industry, which is a possibility, the Russian banks
would love to leap up and say they will provide Ukrainian
companies with commodity financing. The only people it would
hurt is the European banks," the commodity finance source said.
Lawyers said they were receiving a surge of queries from
commodities clients studying their contracts trying to
anticipate what it would mean if the situation deteriorated.
"People are very concerned about potential defaults and
delays in performance in the Ukraine so they're looking at their
contracts for force majeure, prohibition and even sanctions
clauses. It's a concern for those buying from the Ukraine,"
Chris Swart, senior partner in the commodities team at law firm
Holman Fenwick Willan, said.
"If there is a widespread breakdown of authority in the
Ukraine and if it spreads to the export areas and ports of the
Black Sea you will see force majeure being claimed to excuse or
delay performance of contracts."
The lack of trading activity was also caused by the hryvnia,
trading near its lowest levels since the global financial crisis
began five years ago, weakening again on Thursday.
Two Germany-based traders said Ukraine's maize prices for
March 1-15 shipment rose $11 to $228 a tonne on a free-on-board
(FOB) basis on Thursday compared to a week ago due to the lack
of selling. The price was confirmed by a France-based trader.
Farmers see their stock as a security against the unclear
future, the second Germany-based trader said.
The turmoil has also hit wheat offers, a France-based trader
said, and if Egypt, the world's largest wheat buyer, was to hold
a tender today, there would be no offers of Ukrainian wheat.
"Traders would not take the risk," he said.
A steel trader focused on the sale of Russian and Ukrainian
steel said, "Supplies are still moving and loading operations
are still going on... but if the problems extend to other
regions, then definitely there will be big problems."
(Additional reporting by Svetlana Burmistrova in Moscow,
Michael Hogan in Hamburg, Valerie Parent in Paris, and Silvia
Antonioli in London; Editing by Louise Ireland and Veronica