Grain shipping costs on the rise

by Michael King
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Ocean shipping costs paid by grain shippers surged in the latter part of 2017 as bulk freight demand spiked and vessel supply growth slowed. While a traditional seasonal slowdown could be in the cards in the first quarter, analysts believe freight rates likely will remain buoyant — at least compared to recent years — for much of 2018.

The Baltic Dry Index dropped to below 700 points in February 2017 but was resurgent later in the year, climbing to 1,578 points by the end of November as capesize freight rate increases, boosted by strong Chinese steelmaking demand, dragged up rates for smaller vessel classes.

Fluctuations in the BDI during 2017 were largely replicated in grain shipping prices, although not with the same violent variability witnessed, for example, in capesize indexes. According to the International Grains Council (IGC), on Dec. 5 the price of shipping one tonne of grain from the U.S. Gulf to the E.U. was $30, up from the 52-week low of $22 recorded earlier in the year, but marginally lower than the 52-week high of $31 recorded in October. At the start of December, the cost of shipping a tonne of grain from the U.S. Gulf to Japan was at a 52-week high of $43. On the Brazil-E.U. route the price was $26, compared to a 52-week low of $22 and a 52-week high of $27.

The freight rate gains of late 2017 finally enabled beleaguered operators and owners of capesize, panamax, supramax and ultramax ships to enjoy rates that covered operational expenditures and capital expenditures, as well as providing a slim return on investment — a rare occurrence in recent years.

“This has only happened three times for more than two days in a row in the past two years,” said Peter Sand, chief shipping analyst for Bimco.

Baltic Capex Chart
Dry bulk rate indices
 

Freight drivers

Iron ore and coal shipped on capesize vessels drove the swell in freight rates in the second half of last year, but higher levels of grain buttressed global bulk carrier demand as well as playing a seasonal role in key regions. The IGC now forecasts the global wheat and coarse grain trade will total 359 tonnes in the 2017-18 season, up from an estimated 353 tonnes in 2016-17, 346 tonnes in 2015-16 and 322 tonnes in 2014-15.

Higher Black Sea exports were one of the standout features of dry bulk markets in 2017. UkrAgroConsult told World Grain the rise in freight rates in the second half of the year and, indeed, from the start of 2016, had not yet dampened exporter vigor.

“We cannot say that the sharp increase in freight rates substantially affected the volume of grain shipments from Black Sea countries,” said Liza Malyshko, a UkrAgroConsult grain market expert. “Despite the jump of freight tariffs, grain exports remained at a high level for all destinations. Ukraine and Russia exported a combined 40.3 million tonnes of grain from July-November 2017 against 35.9 million tonnes at the same time last marketing year.”

Further illustrating the point, Malyshko said freight rates for Black Sea grains shipped to Egypt had been gradually growing over the last two years and had not negatively affected volumes. However, she warned higher freight rates could become a factor in more distant markets, particularly if shipping costs increased further.

“We have not found any direct dependence of grain supplies on freight cost changes, but the further growth of freight rates may produce an adverse effect on the competitiveness of Black Sea grains in distant end markets, in particular in South and Southeast Asia,” she added. “In turn, such developments, along with the region’s steadily higher export potential, will boost competition between Black Sea countries for nearby end markets such as Europe and North Africa.”

Black sea outreach

Black Sea producers have certainly made impressive inroads into new markets in the last 12 months irrespective of shipping rate fluctuations. Marina Sych, grain market analyst at UkrAgroConsult, said Egypt had become a leading buyer this season.

“In the first five months of the current season, Ukraine supplied 15% more wheat to Egypt — 1.1 million tonnes — than at the same time a year ago,” she said. “Russia stepped up exports by more than 30% to almost 3.2 million tonnes.”

Various other African destinations have also proven attractive markets for Black Sea grains, with exporters benefitting from good logistics connections into markets such as Nigeria, Kenya, Congo, Uganda, Tanzania, Mozambique and South Africa.

However, Sych said this season’s breakthrough market was Indonesia. Ukraine exported some 1.5 million tonnes of wheat to Southeast Asia’s largest economy from July-November 2017-18, up from 1.61 million tonnes for the whole of the 2016-17 season.

“Russia also doubled wheat supplies to Indonesia in the period under review,” she explained. “So regardless of freight rate behavior, Black Sea grain remains competitive in the Asian market along with offers from Australia, Canada or the U.S.”

Looking ahead

Rahul Sharan lead analyst for Drewry
Rahul Sharan, lead research analyst at Drewry.

Rahul Sharan, lead research analyst at Drewry, said that during 2018 Australian wheat exports might dwindle due to lower production.

“Initially drier weather and now heavy rains have hit wheat cultivation,” he told World Grain in December. “The meteorological department expects further heavy rains in Eastern and Southern regions of the country.

“Nonetheless, we still believe grain trades will continue to be steady in the coming months, where Russia and the U.S. will be the key suppliers.

“Strong harvests in Ukraine and Russia are also facilitating robust exports. Sentiment is also improving for European wheat exports. Even though production in France has improved compared to the last year, exports are unable to keep up the pace. Euro appreciation and intense competition from Russian and Australian wheat are hampering European exports, especially in the Far East region. Lower availability of Australian wheat next year will provide a sigh of relief to the European traders.”

Sharan also said that, apart from lower production this season, Australian exports would be affected by an increase in import duty in India.

“In December 2016, because of lower domestic wheat production, government slashed down the import duty to 0% and the country’s imports increased to 4 million tonnes in the first half of 2017,” he added. “Ukraine and Australia were the main trading partners. Now, as the country’s domestic production has improved, the government has increased the import duty to 20%. Such high duties might render imports economically unviable, hurting demand for smaller vessels.”

Game-changers

The Black Sea region is likely to remain a game-changer in grain exports markets during 2018, according to UkrAgroConsult. In December, the analyst estimated Ukraine would export 41.5 million to 42 million tonnes of grain in the 2017-18 season, while Russian grain exports were heading toward a new record.

“The pace of grain supplies from the country is 30% ahead of last year, up more than 4 million tonnes,” said the consultancy. “This includes a 25% rise in wheat exports against the same time in 2016. Russia may export a record 43 million to 44 million tonnes of grains in the 2017-18 season.”

Rahul Kapoor, analyst at Bloomberg Intelligence, said that barring a major weather event, grain trade flows during 2018 would likely mirror the seasonal trends of the last few years.

“Weather events such as dry seasons in Argentina and Australia are already impacting soymeal and wheat trades,” he added.

Shipping profits

Kapoor predicted steady growth in volumes and higher employment opportunities for dry bulk vessels in 2018.

“Despite grain becoming a key commodity carried, the freight momentum for the overall dry bulk market is still dependent on what happens to the larger capesize and panamax segments driven by the iron ore and coal trades,” he said.

“Shipping’s profitability will hinge on supply growth staying low. Shipping’s fleet growth — already the slowest in decades — will need to stay muted for the industry to return to sustainable profitability. Shipyards, already desperate to cut prices and woo owners for orders amid low visibility and collapsing order books, could potentially stifle shippers’ nascent recovery in pricing power by boosting supply.

“Shipping demand will stay robust as long as the global economy keeps growing, so supply will determine how strong the recovery will be, and how long it will last.

“Capesize rates will likely retain their underlying strength and see renewed momentum in 2018 on higher demand and fleet supply growing at a much more measured pace. The rate of volatility could subside on much-improved fundamentals, but seasonal variations from Chinese demand and weather events in Brazil and Australia could still see price swings. The key risk to demand remains a sharp slowdown in Chinese demand.”

Drewry predicted the handysize fleet would contract 0.4% in 2018 due to higher demolitions and a low orderbook, and said the demand outlook was also positive for the fleet, not least due to optimism over Chinese soybean demand in 2018. However, the analyst warned that growth in U.S. grain exports could be slower this year, albeit still higher than 2016 volumes.

“We expect demolitions to account for 2.7% of the handysize fleet in 2018, compared with 2.1% in 2017,” Drewry said. “Looking further ahead to 2019 and 2020, we expect this trend to continue as owners of older tonnage are likely to scrap vessels rather than invest in scrubbers or ballast water treatment systems, which are required to meet the new regulatory requirements. Furthermore, the orderbook as a percentage of the fleet for the handysize segment is about 6.2% compared with 9.4% for the overall dry bulk fleet. Given the above two factors, we expect the handysize fleet to decline in 2018.” 

A favorable supply-side outlook, accompanied by emerging demand-side catalysts, will therefore likely support the daily earnings for handysize ships through 2018. However, Drewry said handysize freight rates were unlikely to see a sharp spike as rates for smaller vessels generally tended to move up and down at a less violent speed than for larger vessel categories.

Sand, though, warned that rate levels across the dry bulk fleet would depend as much on vessel speed as supply and demand fundamentals.

“The key factor will be operational speed management,” he said. “Freight rates have just recently become profitable for owners and operators, but not by a large margin. Owners better prepare for a difficult market in Q1 and then hope to be positively surprised – rather than expect the rates to keep up and get a really hard time if cargoes are not there.”

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