Is the US-China trade war dead? It certainly is for US agricultural exporters, although renewed demand is bringing with it the specter of soaring bulk shipping costs. Indeed, ship owners are enjoying something of a commodities supercycle that is driving up both the prices of raw materials and ship owner profits.
Overall demand for bulk shipping in the first four months of 2021 reached a record 1.69 billion tonnes, up 6.1% compared with the same period last year, according to shipping association Bimco. It is not hard to identify what has been firing demand: commodity prices are approaching, and in some cases exceeding, historical peaks. China’s iron ore import price, for example, recently passed $200 per tonne for the first time, while prices for Australian coal topped over $100 per tonne earlier this year — still below the peak of $180 per tonne enjoyed by miners in mid-2008 but more than double the lows of mid-2020. US corn and soybean prices in spring neared the record highs reached during the vicious drought of 2012 that devastated production.
“Demand has been buoyed by government stimulus packages and the continued, albeit unsteady, recovery of the global economy from the worst effects of COVID-19 lockdowns,” noted shipping analyst MSI.
The upshot of all this has been far higher rates for shippers and healthy bottom lines for ship owners. Capesize earnings in May were running at a daily average of $36,536, more than nine times higher than in May 2020. The rest of the market also was delivering strong profits to owners and operators, noted Bimco, with panamax earnings standing at $24,903 per day and supramaxes $27,430 per day on May 26.
“Just as freight rates are up for all ship sizes, the appetite for cargo transport has increased across the board,” said Peter Sand, chief shipping analyst at Bimco. “Supramaxes are the biggest winners, with demand for these soaring by 10.6% in the first four months of this year, compared with 2020.”
Over the same period, capesize demand rose by 6% and panamax demand edged up 1.5%.
Grain trade surging
Grain shipments are more than playing their part in the commodities supercycle with demand for bulk carrier capacity out of the United States and Brazil driving up freight and charter rates in sub-capesize shipping markets.
“A surge in grain trade has been a key reason for the current continuous rally in the dry bulk market, especially among the small bulkers,” said Rahul Sharan, lead analyst, Drewry.
All of which is clearly reflected in the IGC Grains and Oilseeds Freight Index, which was pushing 200 at the end of the first week in June compared to just 80 at the same point of 2020. On June 8 this year, the IGC’s sub-indices for the United States, Black Sea, Australia and Brazil were up 115%, 168%, 143% and 140%, respectively, compared to a year before.
The same trends were apparent on the Baltic Exchange’s dry bulk indices. The BDI was just 520 at the start of June 2020; a year later it was 2568. Over the same period the BPI and BHSI rose from 777 and 274 to 2801 and 1339, respectively.
Sharan believes there are two key elements to the grain shipping story. First, an increase in grain tonne-miles this year due to geographical procurement patterns has sucked up sub-capesize capacity.
“There has been more trade on the long hauls, especially from the US Gulf to the Far East and also between South America and Asia,” he told World Grain.
Second, a significant increase in congestion at grain ports in South America, particularly in Brazil, added additional gusto to freight rate increases in the initial months of this year.
“On a similar note, port calls and waiting days at the discharge ports in China have increased recently, which is squeezing the supply in the Pacific, restricting any sharp fall in the freight rates,” Sharan said.
He predicted rates will remain strong through the third quarter.
“Soybean is a winter crop, and it is already winter in Brazil,” he said. “The soybean season will remain active over the next two to three months. However, we are anticipating that the rates should soften in the fourth quarter of this year.”
Sand told World Grain there was ample reason to believe that global grains traffic would remain strong into the third quarter.
“Brazilian soybean exports tend to peak in May, though exports remain high in June, before declining throughout the second half of the year,” he said. “So, this will continue to provide some support in the coming weeks but will then start declining, leaving a slight lull in the summer months before the US season then kicks in.”
The United States, of course, is set for a bumper year of agricultural sales, not least because the US-China trade war has lost some of its venom after a trade deal was struck in early 2020. This is expected to help US farmers to ship a record $37.2 billion worth of farm goods to China this year, according to the US Department of Agriculture (USDA). Sales of soybeans, corn and wheat and poultry lead the way.
Sand is also bullish on the outlook for US agricultural exports.
“The International Grains Council forecasts that next season the United States will export 56.8 million tonnes of soybeans, an 8.5% drop from the current season when they expect exports to total 62.1 million tonnes,” he said. “By the end of May, 57.5 million tonnes had been exported. Excluding the current season, if exports do reach 56.8 million tonnes next season, that would be the highest export total since the 2017-18 season.”
Demand from China also looks healthy.
“It seems the pig herd has been rebuilt to pre-culling levels,” Sand said. “The culling provided an opportunity for the Chinese to move pig farming away from individual farmers with a couple of pigs in their backyards toward huge pig herds in multi-story buildings. These seem to have a more grains-heavy diet as food waste has been cut out.”
However, while demand for shipping out of the United States and South America remains strong, it has been a different picture in the Black Sea.
“Black Sea grains exports have actually fallen in the first five months of this year compared to 2020, down to 24.1 million tonnes from 36.2 million tonnes,” Sand said. “In fact, exports so far this year have been the lowest since the start of 2016.”
Australia, on the other hand, has seen strong growth in its grains exports, up 83.5% in the January-April period this year compared to 2020, with exports totaling 14.9 million tonnes. This is despite an almost 40% fall in grains exports to China, which went from 1.6 million tonnes in January-April 2020 to just under 1 million tonnes in the first four months of this year.
“Compensating for that loss there has been strong growth in exports to Indonesia (up 154.7% to 1.7 million tonnes), and seemingly out of nowhere Australia has gone from not exporting any grains to Saudi Arabia in the first four months of the year since 2018, to suddenly exporting 2 million tonnes, making Saudi Arabia the largest destination for Australian grains so far this year,” Sand said.
There is little on the ship supply side of the equation to suggest freight rates will soften any time soon. While there has been brisk trade in secondhand ships this year as owners and operators rush to cash in on the boom in demand, Bimco noted in May that in the year to date just 92 ships have been ordered, versus 111 in the same period of 2020. Panamax ships were the most popular option with 44 ordered. Of the 30.1 million DWT expected to be delivered this year, just 16 million DWT had arrived in late May, compared to demolitions of 4.2 million DWT.
“This leaves the fleet at 923.9 million DWT, 1.3% up from the start of the year,” Sand said. “In the full year, Bimco expects the fleet to grow by 2.4%, with demolitions likely to reach around 9 million DWT. This will be the slowest fleet growth since 2016.”
For shippers hoping for lower shipping costs, there are some optimistic signs, however. On top of high demand for bulk carriers and more need for long-haul deliveries, logistics bottlenecks have prevented the optimal deployment of the global fleet in recent months. This is mostly due to a geographically uneven economic recovery, port congestion and COVID-19 outbreaks among crew, which are forcing some vessels to quarantine.
However, as some of those disrupting factors are removed, MSI believes markets could soften.
“There is growing evidence that port congestion is falling, particularly in Brazil and China, after absorbing significant amounts of tonnage during the first quarter of the year,” Sand said. “This would remove an important support for the market. Meanwhile, the direction of trade will closely depend on China’s responses to rising inflation and potential overheating of economic growth.”