Shipping to developing countries

by Emily Buckley
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Capturing the complex, international business of grain trading

"Trade in agricultural commodities is the most important trade known," said Tom Sewell in the introduction to his first edition of Grain — Carriage by Sea, published in 1998. Sewell’s second edition of that book, published earlier this year, has been acclaimed as an essential publication for both the novice and veteran of the grain industry.

The second edition provides an updated review of the global grain situation and manages to capture nearly every aspect involved with trading grain, cereals, rice and derivatives. Coverage of the complex industry is contained in 27 in-depth chapters broken down into five sections: the importance of grain in world trade; world production, consumption and trade; carriage of grain by sea; main claims from grain carriage; and current developments and conclusions.

Whether you are just curious about or want a refresher course on the role of the WTO on grain trade, grain uses, freight rates, grain cleaning standards, ag subsidies, major grain trading houses, ports and inland waterways, shipping contracts, or world trade patterns, Grain — Carriage by Sea will likely answer your question about these and many other related topics.

Lord Plumb, the former president of the European Parliament said in his forward to the second edition, "This is the first book in which so many aspects including the vital conditions of seaborne trade have been brought together and analyzed concisely, yet in sufficient detail to enable the reader to form a balanced opinion on the many issues which confront us."

The following article is an excerpt from one of the most valuable new resources available for anyone interested in the international grain industry. ­

As developing countries’ demand for grain grows, so do the grain trade costs due to underdeveloped port facilities and an aging shipping fleet

The developing world markets are strategically important to replacing the diminishing outlets for international grain trade in Russia and Eastern Europe.

The FAO in Rome has made a special study of factors that will seriously affect seaborne trade to the developing world in the next 20 years and beyond. Based mainly on a comprehensive report supplied by the firm of Ocean Shipping Consultants, some far-reaching trends have emerged which will have considerable implications for the stability and security of supply to meet demand specifically in the developing world grain markets.

Trends in seaborne trade demand over the last 25 years are shown in Table 1. In the mid-1970s the largest market was located in the OECD, with the structure of world trade dominated by demand for wheat and feed grain imports into Western Europe and Japan. At this time, there was heavy investment in shipping and port/terminal capacity, coupled with a search for scale economies by the increased use of larger bulk carriers.

Throughout the 1980s overall grain demand stagnated, but there were considerable structural changes. The Common Agricultural Policy of the EEC first cut grain imports and then expanded grain exports, accompanied by increased grain output. Demand boomed in the then Centrally Planned Economies, with imports into the Soviet Union outstripping the loss of EEC markets. Transport investment was expanded to meet this situation.

The position since the 1980s has completely changed. The restructuring of the former Centrally Planned Economies has reduced grain import demand, while Russia has changed from a large importer to a (small) exporter. At the same time demand from the developing world has accelerated sharply. In 1975 the developing world accounted for about 35.6% of world seaborne grain demand, and by 1995 this figure had increased to 76.2%, or 146 million tonnes. Detailed consideration of the developing world is contained in Table 2, showing major sub-regions. The strongest growth has been in East Asia (including China), and by 1996 it was apparent that many of these markets were recording levels of wealth comparable with the OECD countries. In these cases port investment proceeded apace and grain transport systems and costs became highly efficient. But already by 1998 there was a question mark over the availability of the further investment needed to keep up progress.

Table 1: Long-term trends in seaborne grain demand, 1975-1995

Million tonnes

1975

1980

1985

1990

1995

OECD markets

71.5

75.7

65.3

43.3

39.2

Centrally planned*

17.1

39.1

41

40.3

6.5

Developing markets**

48.9

83.5

81.9

116

146.3

Total

137.5

198.3

188.3

199.6

192

Percentage

OECD markets

52

38.2

34.7

21.7

20.4

Centrally planned*

12.4

19.7

21.8

20.2

3.4

Developing markets**

35.6

42.1

43.5

58.1

76.2

Total

100

100

100

100

100

* Economies in transition; ** Includes China

Source: Ocean Shipping Consultants Ltd.

Table 2: Developing world seaborne grain demand, 1980-1995 (million tonnes)

1980

1985

1990

1991

1992

1993

1994

1995

Africa

14.7

19.8

19.8

20

28.2

26.1

25.3

29.3

Latin America

24.3

21.5

21.4

23.8

27

27.3

33.8

36.9

Middle East

3.4

10.8

4.6

5.3

4.6

5.3

4.7

6.5

Indian Sub-Continent

8.4

8.9

19.5

16.6

17.8

14.5

17.5

19.2

East Asia*

32.7

20.9

50.7

45

41.3

39.9

44.5

54.3

Total

83.5

81.9

116

110.7

118.9

113.1

125.8

146.3

*Includes China

 

In the poorer countries grain demand will increase sharply and investment in infrastructure — not simply in ports but in the wider sphere of distribution — cannot be regarded as certain. Leaving aside for the moment the East Asian countries, trade to the "poorer countries" sector increased between 1985 and 1995 by 50.8%, to a total of 92 million tonnes.

The consequent fragmentation of a large portion of world demand is underlined by the development of the market share of the major world grain trades, summarized in Table 3. Demand in the major trades to Europe has declined while the Far East has increased in importance.

Naturally these developments have exerted their influence on the overall development of bulk shipping demand. As far as grain is concerned, and in contrast to the situation in the other major bulk commodity trades, in the last ten years there have been no real moves in favor of larger vessels. In the iron ore and coal trades, the drive for further scale economies has seen average ship sizes increase dramatically. This is a change from the preceding ten years (1975-1985) when the increased use of Panamax and larger bulk carriers was most noticeable.

The above slowdown has been the direct result of secondary trades where port restrictions and lack of investment has made the introduction of larger — and cheaper — vessels of debatable advantage. As the bulk fleet is modernized this is increasingly resulting in a dependence on obsolete and lower quality tonnage for the trade to the developing world.

In East Asian markets, where there has been considerable port investment, there has been a steady increase in the market share of larger vessels. The position is similar in the Middle East. But in the poorest nations of Latin America, Africa and the Indian sub-continent, there has been very little improvement in the use of larger bulk vessels. Indeed the level of demand for inefficient vessels actually increased between 1985 to 1995.

In general, therefore, it may be said that despite the rapid increase in demand there has been no matching improvement in the types and sizes of vessels employed in the trade to the developing world. In fact, these vessels have been aging rapidly and these trades are becoming increasingly dependent on a class of vessel that

is becoming increasingly hard to charter at acceptable rates in the next few years. The net effect is that

shipping investment will continue to be slanted in favor of other commercially more significant trades in the next few years.

The major constraint preventing the introduction of larger vessels into the grain trade with the developing world lies in the port sector. The position has worsened in the last few years as the level of demand has accelerated. Since the freight market began to recover in 1986-1987 the unit freight cost differentials between large and small bulk carriers (and between bulk and bagged operations) has increased dramatically. And furthermore the outlook for rates, although traditionally volatile, is one of generally higher levels, leading to an increase in the difficulties.

Since 1981 there has been a significant increase in the number of grain terminals but most have been designed for Handy and Panamax size vessels, and there has been little investment in larger capacity terminals.

Grain handling rates at major terminals show that ports with capacity for ship sizes of 150,000 dwt and more can load at 2,575 and discharge at 2,000 tonnes per hour, while those with capacity for ships between 50,000 and 80,000 dwt can only load at 1,900 and discharge at 1,650 tonnes per hour. Moreover, there are 146 grain discharge terminals in the developed world and only 64 in the developing world, and practically all the latter only cater for vessels up to 50,000/80,000 dwt capacity. There is a clear bias in favor of the lower ship size capacity terminals in this category. Most new terminal construction in the developing world since the mid-1980s has taken place in China, North Africa and the Middle East. In 1999 there were only 15 terminals operating in the poorest nations.

This gives rise to the observation that the most dynamic aspect of the world grain trade is the most poorly served with efficient ports and terminals. Africa south of the Sahara typically uses intensive labor and slow bagged grain handling, leading to high unit freight rates, port congestion and demurrage payments. In 1986 the general demurrage costs per tonne for a 20,000 dwt general cargo vessel were reckoned at $0.20 per day, so a typical three-week delay would generate a per tonne penalty of approximately $8.80 per cargo tonne, significantly increasing the costs of grain in those markets. As demand increases these penalties seem likely to increase further.

Table 3: The structure of seaborne grain trade, 1986-1994

(percentage of total seaborne trade tonnages)

1986

1988

1990

1992

1994

US - West Europe

7.8

7.1

6.3

6.1

5.7

US - East Europe

5.2

9.2

8.5

8.4

5.1

US - Far East

17.2

24.5

23.4

24

23.5

Australia - Africa/Middle East

4.7

2.9

1

1.4

1.9

Australia - Far East

4.4

2.5

5.8

4.3

5.6

Australia - Europe

2.1

1.1

-

0.5

0.5

Canada - Europe

4.6

3.2

3.3

3.4

3

Canada - Far East

3.2

5.9

6.1

5.4

5.8

Argentina - West Europe

2.2

0.6

4.5

3.4

4.7

Argentina - East Europe

4.8

1.2

1.2

1.1

0.8

Argentina - Latin America

1.9

1.2

1.9

1.2

1.5

Total

58.1

59.4

62

59.2

58.1

Source: Ocean Shipping Consultants

 

SHIPPING AVAILABILITY

General cargo vessels are dominant in the supply of bagged grains and small parcels of bulk grains which are typical of large parts of the developing world grain trades. There has been a steady decline in the capacity of this fleet. In 1982 it totaled 85.47 million dwt, but by 1995 this figure had shrunk to 62.10 million dwt, a decline of 27.3%. This is because these ships are increasingly regarded as obsolete, and most investment is directed towards bulk carriers and cellular container vessels. The decline in the general cargo fleet has slowed somewhat since 1990, since firmer freight rates have delayed scrapping programs. However, the delay in scrapping and the absence of new ordering has meant that the average age of this fleet of vessels has increased, 39.5% of capacity having been constructed before 1979.

The net effect of this will be an increase in freight rates for these increasingly scarce vessels, perhaps by as much as 37% up to 1999 and a further 27% up to 2010. In some cases it may be physically not possible to charter the necessary tonnage. This could put a lot of pressure on the supply chain to the developing world countries.

The conclusions of studies presented to the FAO show that the developing world has increased its share of global seaborne trade demand very rapidly and now accounts for 76% of demand. A distinction has emerged between the East Asian markets and the rest of the developing world, where investment is less available. As a result the more efficient and larger bulk vessels are not being introduced into developing world grain trades. The lack of modern port investment in most developing markets seems likely to continue, daily handling rates are a fraction of those in OECD countries, and in the worst ports they are half of those in the better ports and as far as bagged cargoes are concerned, even worse. The physical capacity to handle existing demand does not exist, and future demand will become increasingly expensive and inefficient. The trade is increasingly dependent on stocks in transit (at-sea), and the demand for further storage will increase. Freight rates for the developing world account for 15% to 20% of landed prices, compared with 6% to 8% for inter-OECD trades, and as a result grain prices are significantly higher in the developing world.

This pessimistic scenario is one to exercise traders and governments alike, but there is no easy solution to it. Ocean Shipping Consultants have suggested that greater reliance be placed on transshipment operations as a means to lower costs, despite the practical difficulties this may involve.

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