Shipping costs likely to fall further

by Michael King
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Back in 2008, the high cost of freight and a spike in commodity prices made exports on some traditional grain routes prohibitive. By contrast, despite rising commodity prices in late 2010, the landed cost of soybeans and corn (maize) from the U.S. in Japan and China was far lower than two years earlier. With the dollar less than bullish and ocean shipping costs looking more likely to fall further in 2011 than recover, the market looks bright for those with crops available for overseas shipment.

Overall grain demand is set to soar in 2011, but the supply situation will look very different to previous years. Total seaborne exports of major grains are forecast to rise to 247.1 million tonnes in 2010 and increase again in 2011 to 265.5 million tonnes, according to Drewry’s third quarter Dry Bulk Forecaster. This compares to volumes of just 209.2 million tonnes in 2009.

The impact of severe weather patterns in various producer countries looks set to vastly alter grain trade flows in 2011, according to leading analysts. Soaring temperatures in Russia and the Ukraine over the northern hemisphere summer and a sustained drought are expected to see significantly less grains make it to market from the Former Soviet Union (FSU) countries, for example.

“The wheat trade among the Former Soviet Union countries is forecast to be down 21.3 million tonnes, or nearly 60%, from last year’s trade levels to 14.5 million in 2010-11,” said Ken Eriksen, senior vice-president for Transportation Services at Informa Economics.

Other exporters — primarily the U.S., given that producers in Canada and Australia have suffered droughts or floods recently — are expected to step in.

“Picking up the smaller trade level among the major trading countries from the FSU will be the U.S., sending 9.4 million tonnes more than last year, Australia 2.4 million and Argentina 2.1 million. Other countries will drawn down stocks or substitute with other grains,” said Eriksen.

“The shift in trade patterns will be most noticeable among the North African countries that traditionally source wheat supplies from Russia and the Ukraine, and will instead seek supplies from the U.S., Argentina and Australia.”

David Bull, senior market analyst at Lloyd’s List Intelligence, said the impact of the ban could have unforeseen impacts on trade. “While Russia has banned grain exports, it hasn’t banned the export of wheat or rye flour. Could we see exports of flour from Russia increase?” he asked.

And Bull was quick to point out that flooding in Pakistan earlier in the year could impact rice exports significantly. “The International Grains Council has suggested that rice exports from Pakistan could be down by as much as 35% traders in 2011. Kunal Kapoor, head of global freight research at Louis Dreyfus Commodities, told World Grain at the Mc-Closkey Asia Pacific coal conference in Indonesia in December that rising inflation in China had prompted China to draw down heavily on its soybean, corn and other grain reserves.

“If they fall below set levels, then we could see a major return to the market for China with the U.S. and South America the major beneficiaries,” he added.

Drewry went further, suggesting that if reports were correct that China had started to buy U.S. wheat and planned to import large quantities to address its food security issues, its vast appetite “could eat up the entire grain trade and put severe pressure on grain prices.”

Informa Economics forecasts that U.S. grain and soybean exports for 2010-11 will be 10%, or 450 million bushels, higher than 2009-10. Corn exports are forecast at 1.95 billion bushels, down 36.6 million, or 2%, from last year, while soybean exports are expected to total 1.65 billion, 10% more than last year.

“Soybean exports are propelled by strong Chinese purchasing to accommodate demand and build inventories. Exports of to 2.5 million tonnes,” he said. “This will obviously have an impact.”

Chinese demand could also be a game-changer for grain wheat in the September-August shipping year are forecast to reach 1.277 billion, which will be 343 million, or 37%, more than last year,” said the analyst in its latest export focus report.

“The U.S. wheat export forecast will be a 15-year high, resulting from global crop problems rather than an increase in demand. Like the 2007-08 export surge, this year’s wheat forecast is more of an aberration than a new trend.”

The analyst said that the composition of exports had been altered over the past few years now that soybeans were playing a more prominent role in the export equation.

“For a number of years it was corn and wheat that represented about three-quarters of total exports. Now soybeans represent one-third of total exports, up from averaging less than one-fifth about a decade ago,” said the report.

Looking forward, Eriksen said the key supply and demand factors for U.S. exports included the rising price of crude, improved ethanol margins, crop shortages globally, and higher input costs.

“This year’s crop harvest struggled through high heat, leading to a smaller-than-expected crop,” he said. “Grain and oilseed prices are highly volatile, moving with any perceived demand story, weather event out of South America — for example, the potential for a La Nina — and changes to renewable fuel policy to name a few.

“The acreage battle for next year is well under way with corn finding a bit of an upper hand. But with fertilizer prices strengthening, this takes some of the enthusiasm away from corn.

“Historically high cotton prices have attracted some inter- est, but for many they will plant soybeans. Despite the relatively high grain prices, not too much rationing has taken place, but options are being considered.”

The good news for grain shippers looking to reach new markets is that there is little upside risk on freight rates to fear. The Baltic Exchange Dry Index was down to 2168 in early December, half the level of its peak in May (see charts). The downward spiral was equally harsh in the supramax, handy and panamax indices. As reported by World Grain earlier this year, much of the downturn in the markets — led by the capesize sector — was due to lower levels of demand growth from China for iron ore from the second quarter onward.

However, while demand for iron ore and coal into China is predicted to grow substantially next year, and coal into India and other parts of Asia will also be another strong demand factor, the overall supply-demand balance in bulk carrier markets looks decidedly bearish for rates, at least for the first half of 2011.

Michael Bodouroglou, chairman and chief executive officer of dry bulk operator Paragon Shipping, told Capital Markets in December that although the dry bulk market was set to grow 7% in 2011, demand growth was only half the picture.

“This growth in 2011 will be mitigated by the current orderbook of drybulk vessels, which stands at 53% of the existing fleet, and during 2011 it is suggested that the available tonnage will grow by approximately 23% of what it is today,” he said.

“The pattern that we have witnessed in 2009 of only 60% to 70% of the scheduled deliveries actually being delivered appears to be continuing during the first nine months of 2010 as well. Despite this trend, actual deliveries are still significant and are a concern for the dry bulk industry.”

Eriksen said that in the next four years the dry bulk fleet would grow by some 2,900 new vessels, for a net gain of about 30% to 40%.

“I am bearish and see the BDI trending more range bound with a weaker tone. With so much capacity still to be delivered and demand not keeping pace, it is hard to see a strong BDI through the first half of next year,” he said.

Kapoor was far more downbeat in his analysis of the supply-demand balance for bulk carriers. He predicted that freight rates would not bounce back significantly in 2011 and any upturn would almost certainly require owners to hit “cost” level returns on their vessels at which point they would be forced to scrap tonnage which would take some supply out of the equation.

On the plus side for operators of smaller vessels, which are expected to see steadier markets next year than their cape cousins, the grain trade will provide some succor. Drewry said that more volumes moving on U.S.-Asia and South America routes would continue to see grain’s contribution to global ton-mile demand grow. In 2009, ton-mile demand totaled 1,109 billion ton-miles. This was forecast to have risen to 1,310 in 2010 and is expected to climb again in 2011 to 1,407 billion ton-miles.

Unfortunately for ship owners outside specialist trades, this is unlikely to make much of a dent except perhaps during peak loading seasons in the Gulf and South America — the grain trade contributes less than 10% to total annual global ton-mile demand for bulk carriers.

“I don’t think changes in grain trade flows will be massively significant to the bulk carrier sector next year,” concluded Bull.