There is much talk in the grain and shipping sectors about how new technology is creating up-start “disruptors” eager to secure their own piece of the trading or transaction pie from incumbents. But as World Grain went to press, it was traditional disruptions in the shape of industrial action and trade wars that were causing supply chain mayhem.
The rumbling “Trade War” between China and the United States was an open question as summer approached with new U.S. trade policy pronouncements — often contradictory — creating fresh challenges on an almost daily basis for those charged with supply chain and freight procurement and planning.
The “Will They, Won’t They” negotiation narrative was certainly still alive and kicking in early June.
This left U.S. farmers in a strange kind of limbo. On balance, it seemed most likely that a range of tariffs would be imposed on China by the United States and this would result in threatened retaliation against U.S. farmers being realized. But as World Grain went to press, both sides still had opportunities to pull back from the brink.
A second front
The standoff meant the situation for shippers and shipowners was consistent only in its random volatility. Bulk shipping markets faced further uncertainty as the United States decided one trade war was not enough and raised the stakes in negotiations with its European Union, Canada and Mexican allies over steel and aluminum tariffs, using national security as justification for its actions. If a compromise is not reached, on June 20 the E.U. will reveal new tariffs on U.S. goods in response.
This second front in Trump’s War could have major implications for bulk markets and grain traders. The United States imported a total of 32 million tonnes of aluminum and steel products due to be tariffed via the sea in 2017, while the E.U., Canada and Mexico were responsible for exporting 8 million tonnes, equivalent to 160 Handymax loads, according to shipping association Bimco. Any change in these cargo flows will affect vessel availability — positively, negatively and perhaps both — later in the year.
“The U.S. is now firing shots against long-term allies in something that could soon become a full-blown trade war,” commented Peter Sand, chief shipping analyst at Bimco. “Not only is this affecting the seaborne shipment of steel and aluminum, but the retaliation from the E.U. will also affect the Transatlantic container trade.”
When the prospective U.S.-China trade war is added to the mix, which, as previously reported in World Grain, could put U.S. exports of soybeans at risk, Sand said protectionism now threatened to ruin the best year for shipping since 2011.
“From a wider perspective, the effect of an escalating trade war may derail the current global upswing, which is at its highest point since 2011 and expected to continue,” he said. “This will have cascading effects on shipping demand as a whole. Free trade provides prosperity and is a fundamental principle to cherish and safeguard.”
Industrial action in Brazil
Which brings us back to the other great disruptor to grain trades in late spring. It was widely assumed that China would import as much of Brazil’s soybean crop as possible this year as tensions with the United States grew. And early indicators suggest this was happening in the first months of the year.
Terry Gidlow, chief executive officer, WaterFront Maritime Services, told World Grain that Brazilian soybean exports on a volume basis were up 9% in the first quarter of this year, compared to 2017, with the ports of Rio Grande seeing first-quarter volumes up 52% year-on-year, Vila Do Conde rise by 32% and Santarem up by 33%.
“This was before the Chinese government announced a planned trade tariff of 25% on all soybean exports from the United States, Brazil’s main competitor for soybean production and export,” he said. “If the 25% tariff is implemented on U.S. soybean exports, this will increase the price of U.S. soybeans in China by about $100 per tonne. The drought affecting harvests in Argentina is also an important influencing factor, as is the recent weakening of the Brazilian real versus the U.S. dollar.”
To what extent that will continue through summer most likely will be defined by Brazil’s disruptive unions, which brought supply into doubt just as the peak soybean season was hitting its stride.
Brazil’s transport system was brought to a shuddering halt in late May by mass industrial action. A 10-day trucker strike over fuel prices saw 600,000 drivers block highways across the country. At one point in late May almost every leading export port was closed to trucks, leaving import cargo stuck on vessels and some cargoes caught in transit and at risk of rotting.
This was combined with “go slow” industrial action by auditors at Customs, which was affecting cargo inspections, and further action in late May by oil workers that further disrupted national fuel deliveries. The result was a state of emergency being declared in São Paulo and logistics chaos across the country. The picture was easing in early June as the highway blockade was lifted and port operations began, but shipping companies were predicting backlogs would take at least two weeks to clear and queues at the port of Santos had reached over 50 vessels by the start of June.
David Ross, national manager of Brazilian bulk cargo port, and agency specialist Alphamar Agencia Maritima, said in late May that clearing dry bulk export backlogs as the soybean export season gave way to corn exports would take some time, and predicted vessel delays at southern ports reliant on trucks would rise quickly if delays to soybean exports ran into the start of the export corn crop in July.
“That’s the big worry at the moment,” he added. “We’re a little bit away from that happening, but we really need to start getting this moving, or in July and August waiting times could reach more than 40 days at some ports.”’
Corn threat to logistics
He said the timing of the strike was particularly painful for many soybean exporters because of the collapse of the Brazilian real from R$3.30 per $1 on March 26 to R$3.65 per $1 on May 26 at a time when output from Argentina is making Brazilian soybeans even more popular than usual.
“Even though the U.S. might come back in full force, buyers, particularly from China, are going to need pretty much all of the Brazilian cargo to make up for the loss of Argentina,” he said.
Emily French, managing director of ConsiliAgra, told World Grain that August would be the key time for Brazilian logistics to get its house in order, as this is when the big outflows of corn starts.
“Regarding soybean exports — as well as soy meal — certainly Brazilian logistics is an issue,” she said. “However, the market is working through it, and it still has the backstop of its U.S. ownership. So it’s not mission critical as of yet — especially with China in-port stocks sitting at 4-year highs and more concerns and issues about downstream soymeal demand, and what that growth for actual soybean imports may or may not be in 2018-19 (given the) government, there is talk about a contraction of imports from this year to next year.”
Fortunately, the day-to-day fundamentals of the bulk carrier sector are far easier to read than the world’s Great Power pronunciations on trade policy or, indeed, industrial relations in South America.
As is usual outside seasonal fluctuations, for most of the last 12 months Chinese demand for high volume cargoes such as iron ore and coal have dictated, for the most part at least, movements in the key vessel indices (see Baltic charts, page 50) with spikes in demand from China producing large variations in capesize earnings in late 2017 and early 2018, which also were reflected in the other categories, albeit with less violence.
Higher shipping prices have continued into 2018, with rates for handysize, supramax and panamax vessels up by 25% to 27% in the first four months of the year compared to a year earlier as first-quarter seasonal volumes proved stronger than usual, according to Sand. The International Grains Council’s IGC Grains and Oilseeds Freight Index rose from 100.89 points on June 6, 2017 — its lowest point all year — to 125.94 on May 29 this year.
Unless owners drastically speed up ships, an unlikely scenario given the current spike in oil and therefore ship bunker prices, higher freight rates are set to last through the rest of the year and, indeed, beyond should recent demand and supply projections hold.
Bimco, for example, notes that new vessel orders are at historically low levels in 2018 and net fleet growth is not expected to rise above 2% before 2021.
“As Bimco sees 2% demand growth as the long-run average, a fleet growth of 2% or less is required to avoid a worsening of the fundamental freight market conditions,” Sand said. “Considering the current orderbook and our assumptions for actual delivery dates, the dry bulk shipping industry remains on the road to recovery, as demand continues to keep its nose just ahead of fleet growth, while scrapping and ordering remains subdued.”
A thawing of global tensions and avoidance of trade wars could even see ocean freight costs rise further, said Rahul Kapoor, Asia Pacific transportation analyst at Bloomberg Intelligence.
“Shipping will be a big winner if tensions thaw and demand risks fall significantly,” he told World Grain. “It will come as a boost for dry-bulk shipping demand if China increases U.S. agriculture imports. U.S.-China dialing back on a trade war will also be a positive sentiment for global trade, with investor focus returning to the ongoing recovery in shipping.
“Soybean imports, which have bolstered demand for small- and medium-sized dry-bulk vessels in recent years, will likely increase as the U.S. sends more of its agricultural exports to China. China will further establish itself as a key importer for U.S. grain and other agricultural products. Dry bulk shippers will be key beneficiaries of rising agriculture shipping demand. Feed supply has boosted China’s demand for U.S. soybeans, with 2016 imports at a record. As trade tensions reverse, exports out of the U.S. could climb in 2018.”
Like Sand, Kapoor was also positive on the vessel supply side of the equation, claiming the recovery of dry bulk shipping after turning a corner in 2017 was now “fully under way” and built on firm foundations.
“Dry bulk pricing recovery will continue over the next three years, with supply growth expected to crawl at low single-digit rates for several years after a decade in the double digits,” he added. “Fleet growth averaged close to double-digits in 2008-15, leading to rapid fleet expansion and severely depressing earnings. Fleet growth at decade lows will propel earnings for owners.”