KANSAS CITY, MISSOURI, US — COVID-19 lockdowns and the invasion of Ukraine by Russia have created uncertainty across shipping trade lanes. Indeed, perhaps not since the Cold War have supply chain resilience and geopolitical turmoil loomed so large in global trade. The disruptions have arguably impacted the grain shipping trade more than any other, with grain prices and shipping costs soaring.
The war in Europe has resulted in Ukraine’s exports of wheat and other agricultural products being largely shut off from the world due to the ongoing Russian blockade and/or its control of export facilities in the Black Sea. This is inflating global food prices and threatening social disintegration in some of the poorest countries of Africa and the Middle East, which depend on Black Sea exports and are struggling to find replacements.
The price of China’s lockdowns
In China, meanwhile, President Xi’s commitment to his strict zero-COVID policy continues to rock global trade. While China’s ports have remained open, hinterland operations have been periodically shut down, delaying vessels at terminals and creating supply chain confusion.
The focus largely has been on the lockdown of Shanghai for the best part of two months since early April, but more than 40 cities in China have been affected.
This has created an uneven and volatile freight picture.
“Increased congestion at Chinese ports following COVID-19 lockdowns has been one of the issues for the dry bulk sector,” said Darren Cooper, senior economist at the International Grains Council (IGC). “The restrictions disrupted China’s inland logistics and led to increased backlogs at port warehouses, while also contributing to reduced vessel turnaround rates and tight tonnage availability in Asia.”
Over the first nine months of the year China’s dry bulk imports were down 9% year-on-year with grain imports “flattish,” according to Breakwave consultancy.
As May turned to June, there were signs that the Greater Shanghai region was finally seeing a relaxation of lockdown rules. However, there have been false dawns before.
“We believe this reopening announcement is more real than the previous ones, and the reopening, though still to be phased in, will be positive for a much-needed growth recovery in Shanghai, the Yangtze River Delta and the whole of China’s economy,” Nomura said. “However, lockdowns have also been escalated in some districts in Beijing, and the central government clearly intends to stick to its zero-COVID strategy (ZCS). Shanghai’s phased-in reopening may only represent a respite rather than a turning point, as the real turning point will be marked by a shift in China’s stance on its ZCS rather than headline COVID caseloads, the easing of some lockdowns or monthly activity data.”
The volatile nature of the world over the last two years has been reflected in shipping prices. The Baltic Dry Index in mid-May 2020 was below 500 as COVID-19 began its global spread. A year later it had passed the 3,000-mark before further spiking to hit a peak of 5,647 in October last year. It then slumped before climbing once more when Russia invaded Ukraine in late February, passing over 3,000 points from May onwards.
On May 24, the IGC’s Grains and Oilseed Freight Index (GOFI) had climbed to 237 points, up 31% year-on-year and from just 109 points in November 2020.
Volatile and inflationary bulk carrier shipping rates have reflected the forces bucking the commodity markets and the grain trade. With little sign of this disruption dissipating, but many economic indicators turning bearish, analysts are divided on what happens next.
“Although there is some downside potential amid risks of a slowdown in global economic growth — or a recession — freight prices are expected to remain at an elevated level due to potentially inflated bunker and crude oil prices." - Alex Karavaytsev, senior economist at the IGC
“Although there is some downside potential amid risks of a slowdown in global economic growth — or a recession — freight prices are expected to remain at an elevated level due to potentially inflated bunker and crude oil prices,” Alex Karavaytsev, senior economist at the IGC, told World Grain. “Generally increasing tonne-mile vessel demand, including in the grains and coal markets, should contribute to overall supply tightness in the dry bulk sector, which may also continue to face congestion issues in some areas. In addition, the new emissions regulation by the International Maritime Organization (IMO), which will come into force on Nov. 1, is seen potentially leading to a surge in ship retirement and increased costs of compliance, which could then be passed on to the market.”
Breakwave, too, expects dry bulk shipping costs to remain elevated.
“Although the high level of volatility of 2021 might slow down, the dry bulk sector remains in an upcycle driven by relatively low growth in supply, strong demand for bulk commodities, and continuing infrastructure bottlenecks and supply chain constraints that affect the whole shipping universe,” noted the analyst. “We anticipate government actions as it relates to energy security combined with geopolitical developments to drive the flows of commodities transported by dry bulk, and thus, indirectly determine the path of freight rates.”
Slowing economic growth and high commodity prices might, however, put some downward pressure on dry bulk carrier costs, according to shipping analyst MSI.
“MSI’s freight market outlook is more pessimistic than the FFA (Forward Freight Agreement) market for the remainder of this year,” said Will Fray, an MSI director. “This is most likely down to a difference of view on the demand outlook — MSI’s short-term fleet growth forecast is benign for the sector, with only marginal growth in capacity expected from now until the end of the year.”
This, he said, was linked to very low anticipated ship deliveries this year, with less than 9 million deadweight of vessel capacity scheduled to be delivered before 2023.
“MSI’s weak demand outlook stems from a combination of factors, the key drivers being strong domestic production of bulk commodities in major importers such as China and India due to high import prices, coal in particular, and weaker demand linked to rising inflation, lower investment and COVID lockdowns in China,” Fray added.
Indirect cost of war
Grain supply chains are not just being affected by the direct impact of war on grain exports from the Black Sea. Tight availabilities of fertilizers amid sanctions on Russia and Belarus have been a major issue for some countries, especially in South America and Africa, Cooper said.
“Some countries are trying to resolve supply disruptions via switching to other producers, for example, Nigeria’s purchase of potash from Canada,” he said.
Additionally, logistics in the container sector remains difficult, which especially hampers the rice trade between India and Africa and also has been hampering US containerized exports of agricultural products.
“Shipments from Argentina and Brazil also remain vulnerable to occasional strike action — truckers and port workers — which appear to have had a very pronounced impact on exports of agricultural commodities and products in the past,” Cooper said.
All eyes on the Black Sea
But, of course, the grains trade and how it plays out for dry bulk demand and pricing largely will be tied to events in the Black Sea, not least after UN Secretary General António Guterres warned in May of a “global food shortage” that could “tip tens of millions of people over the edge into food insecurity” and “famine” as global agricultural commodity prices surged following the war and other market disruptions in addition to poor harvests.
According to S&P Global Market Intelligence, total seaborne agri-bulk shipments from the Black Sea region during April 2022 declined 35% year-on-year to 4 million tonnes. The analyst expects seaborne shipments from the region to decline 37% year-on-year to 11.2 million tonnes in the second quarter of 2022, and 20% year-on-year to 83.9 million tonnes in the full year, with reductions from Ukraine accounting for a large part of the loss.
“There could also be further significant downside risks to the Black Sea agri-bulk forecast for this year depending on how long the war extends and if Ukraine can manage its exports from Romania and Poland, while upside risks could arise from Russian wheat exports on expected strong domestic wheat harvest,” said Pranay Shukla, associate director at S&P Global Market Intelligence.
Ukraine wheat tumbles
For its part, the IGC is now forecasting that Ukraine’s wheat production in 2022-23 will total 19.4 million tonnes, down from 33 million tonnes last year, due to difficulties accessing fields in conflict-affected eastern and southern regions, and reduced access to fertilizer, 2022-23 maize output is forecast at 18.6 million tonnes compared with 42.1 million tonnes a year earlier.
“With deep-sea port operations effectively halted since late February, Ukraine’s 2021-22 export (July/June) forecasts have been cut,” Karavaytsev said. “Wheat is revised down, from 24.5 million tonnes in February to 18.8 million in March, while maize export forecasts are down from 31.9 million tonnes in February to 20.7 million in May, compared to 23.1 million tonnes in the previous year.”
Further declines are expected as a result of the invasion and because capacity on alternative road and rail routes and on barge via the Danube River is limited. For 2022-23, the IGC expects wheat and maize exports to each total at 10 million tonnes.
“Should ports remain closed for the entire season, wheat shipments may not even reach the current IGC projection of 10 million tonnes, because traders are likely to prioritize maize shipments amid limited export channels,” Karavaytsev said.
As a result of reduced exports, Ukraine is expected to accumulate heavy grains stocks by the end of 2021-22 season, with storage capacity limitations forecast to be a serious issue during the harvest period of July-November.
Exporter stocks slump
“Reduced wheat shipments from Ukraine are set to shift additional demand to other origins, notably the EU and Russia, although shipments from the latter are likely to continue facing logistical and financial difficulties due to international sanctions,” Karavaytsev said. “Even with an assumed accumulation in Ukraine, wheat stocks in the main exporters by the end of 2022-23 are expected to be the lowest in nine years.”
Tonne-mile demand for bulk carriers smaller than capesize vessels could rise as buyers look to source grains from alternative sources, which could put upward pressure on seasonal shipping rates for sub-capesize vessels later in the year.
“One of the examples is Egypt, which has started to source wheat from India, a more distant origin compared to Russia/Ukraine,” Karavaytsev said. “It should be noted though that while freight prices from India may be higher than from the Black Sea, this has likely been compensated by relatively low Indian wheat FOB (Free On Board) prices.
“Given recent relatively slow tender activity, many importers appear to be postponing their purchases until the arrival of new crops in the EU and Russia and in the meantime either rely on procurement from domestic harvests or draw down local reserves. However, with EU elevation capacity likely to be tight early in the 2022-23 season, and with some importers facing difficulties making transactions with Russia, certain MENA importers will have to source from more distant origins. Since the outbreak of the conflict, a number of countries in Africa and the Middle East signaled intentions to expand their supplier base.”
Brazil trans-Atlantic wheat boost
In other examples of shifting grain flows, Brazil has been supplying increased wheat volumes to Africa this season, particularly to Sudan, South Africa Angola and Morocco, as well as to Pakistan, Indonesia, Saudi Arabia in Asia, said Cooper. This shift will increase seasonal demand for shipping on trans-Atlantic routes and suck capacity out of the shipping market.
“In most of these cases, a switch to Brazil implies an increase in tonne-mile equivalent,” he said. In the maize market, China is expected to switch its purchases from Ukraine to Brazil, while also sourcing more from the United States.
“The EU will also likely source more maize from Brazil and the US amid reduced deliveries from Ukraine,” Cooper said.