Logistics problems hindering Black Sea trade

by Michael King
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Port of Odessa
More grain designated for export than the transportation system can handle.

To compete in international grain markets highly attuned to quality and price variables, traders need to get a lot of things right. It goes without saying that high yields and low input costs at the farm are a priority. Good weather, affordable labor and equipment, precise market information and reliable buyers are also critical to success. The other key component is the multiple potential choke points that together make up the supply chain: the means of getting grain to a cost-effective load port as cheaply, safely and economically as possible, thereby minimizing the loaded cost per tonne.

As reported in World Grain in May, Black Sea exporters have been tremendously successful in recent years in expanding production and exports. Russia, for example, increased its exports from 16.3 million tonnes in 2012 to 37.2 million tonnes last year, according to UkrAgroConsult, while Ukraine increased exports from 21.9 million tonnes to 40.3 million tonnes over the same period. Both countries are now looking to further expand exports but to do so they must first improve supply chain competitiveness through investment in ports and hinterland capacity.

Supply chain kinks

Of the two Black Sea countries, Ukraine has suffered most difficulties when it comes to the supply chain. At the end of last year multiple sources reported that logistical difficulties limited 2016-17 exports, with some traders forced to redirect shipments via third-party countries.

Volodymyr Klymenko, the head of Ukrainian grain traders union UZA, said there was a current lack of railway grain wagons and those in service were mostly built in the 1990s, or even earlier. He said only around 7,000 wagons were currently in service when the industry needed twice that.

Moreover, new rules governing truck weights have further tightened supply of capacity from farm to port. Last summer, in a bid to reduce damage to roads, Ukrainian transport authorities banned truckers from transporting cargo weighing over 20 tonnes — half the level it was previously. Not only has this hugely increased transport costs, it also limited capacity during the peak export season.

Speaking at April’s “Black Sea Grain 2017 – Wind of Change Conference” hosted by UkrAgroConsult in Kiev, Ukraine, which attracted 550 delegates representing 407 companies from 55 countries, Vladimir Osadchuk, general manager of Cofco Agri Ltd., said logistics problems were undermining Ukrainian exporters’ competitiveness.

“Logistics is killing us,” he said. “The problem is quite simple. In the summer last year, the government introduced limits on truck weight and our rail system can’t cope. About 30% to 35% of grain was taken to port by trucks before, but now it’s down to 20%. So we are relying more on rail but the condition of the railways in Ukraine is not good. The cars are obsolete and producers have no protection from logistics problems.”

Despite Ukraine’s extensive river system, switching shipments to barge in any substantial volumes is also not possible due to decades of under-investment.

“Our rivers are not really used, at the moment only taking about 1.2 million to 1.5 million tonnes, which I think could be enlarged,” Osadchuk said. “We don’t have enough barges. But this has potential if we build more barges. But at the moment there is no certainty about the laws so it’s hard to design new barges and attract investment in the river fleet either under the Ukraine flag or another flag.

“For Ukrainian exporters, each region has different needs by mode, but all need amendments to the truck law. We think it should be about the number of axles on the truck, not the weight. Also, the industry would be happy to pay a fee to repair the roads.

train tracks
"It’s more than 15 years since railroads were self-sufficient," said Vladimir Osadchuk, general manager of Cofco Agri Ltd.
“We could grow exports to 80 million tonnes, but this expansion needs to be supported by logistics. And the industry needs to know that any money it spends on transport fees will be spent on transport upgrades. We’d like more private rail grain operators — it’s more than 15 years since railroads were self-sufficient. Private business should be able to buy cars and wagons for its own use. But if the state also constructed new wagons that would also be good.

“Our ministries and agencies should be taking decisions instead of quarrelling. Today we don’t have people in our ministries that make decisions. They need to move from words to actions to help our industry, and if new rules are adopted, they should be the same for all. Not so some stick to rules and others get away with not.”

Speaking to World Grain after the event, Maksym Kharchenko, logistics market analyst at UkrAgroConsult, the conference host and organizer company, said Ukraine’s grain export supply chain would continue to rely on its railways.

“Sixty-seven percent of Ukrainian grain is delivered to the ports by rail,” he explained. “Thus, the worst bottleneck in grain logistics is the availability of grain-carrying railcars. This year the Ukrainian Railways has announced a plan to add 1,000 more grain cars to its rolling stock by refitting mineral-carrying railcars. However, this measure will evidently not be enough. Grain shipping down the Dnipro River could be an alternative in the future, but this requires carrying out a number of political reforms.”

Like Osadchuk, he said the new truck weight controls in Ukraine had been unhelpful.

“Trucking of grain became more costly, and the distance of economically rational delivery by trucks is now less than 150 kilometers,” he added.

Turning to ports, Kharchenko said the main ports for Ukraine’s grain exports were Mykolaiv, Chornomorsk, Yuzhny and Odessa. UkrAgroConsult estimates grain-handling capacities in the ports at some 64 million tonnes as of early 2017. The total includes Crimea’s ports, which are currently under Russian control following the region’s annexation by Russia in 2014.

“As many as three large grain terminals were launched in 2016: COFCO in Mykolaiv with a capacity of 2.5 million tonnes; Bunge with 1 million tonnes; and Risoil in Chornomorsk with a 2.2-million-tonne capacity,” he said. “So the problem of grain-handling capacities in the ports is not so acute now as it was 5 to 10 years ago.”

He said there were also more investments in the pipeline.

“A few companies, including Allseeds, Cargill, Soufflé, NHC, Kernel, SFGCU, Mariupol and Berdyansk commercial sea ports, have declared intent to build new grain-handling facilities in Ukraine’s sea ports,” he said. “This year, Novotech-Terminal Company kicks off the implementation of its 3-million-tonne grain terminal project in Odesa and MetalsUkraine Company is also planning to construct a 4-million-tonne grain terminal in the same port.

“If all are implemented, the declared projects may add 29.6 million tonnes to the theoretical grain-handling capacity of the Ukrainian ports by 2020. Some of these projects have not yet left the ‘paper stage,’ but it can be stated already now that if the projects under construction are realized, there will be enough capacities toward 2020 for servicing the highest forecast grain export volumes.”

He also called for a national blueprint to enable exports to reach market more efficiently.

“There is no consensus on measures that would reduce logistics costs for grain delivery to ports,” he told World Grain. “The adoption of the law ‘On inland water transport’ must become an impetus for developing navigation and building new grain barges. With regard to railroad transportation, at the moment the purchase of hoppers may fall short of solving the issue fundamentally because the Ukrainian Railways is facing problems with haulage of cars.”