LONDON, ENGLAND – For grain traders trying to map out their 2024 shipping costs, there are generally two interlinked equations to consider: the supply of bulk carrier ships and the demand for cargo loaded on them, and the extent to which that supply-demand balance will be disrupted by various grain-related and external factors.

The first part of that equation is relatively simple to forecast. The latter is not, or it certainly isn’t in late 2023 when the world appears to be somewhat on fire, or at the very least, gripped by war, supply chain disruption and drought.

Starting with the tangibles first. What is clear is that as the new year approaches, the cost of shipping has risen. The IGC Grains and Oilseeds Freight Index was up 19% year-on-year on Dec. 12. The Argentina, Australia, Canada Europe, United States, Black Sea and Brazil sub-indices also reported increases in the range of 14% to 34% over the same period.

Much of these gains came in the fourth quarter. The IGC Grains and Oilseeds Freight Index hit 177 on Dec. 12 after sinking to a 52-week low of 117 in July.

“The freight market has enjoyed rising earnings in the past several weeks, with the larger vessels leading the way,” Dr. Plamen Natzkoff, associate director at MSI, told World Grain. “To illustrate the extent of the rally, Capesize spot rates almost trebled through the month of November and Panamax rates rose 50%.”

Natzkoff said that while trade volumes had been seasonally strong, by far the most important factors for the recent strength in freight rates were delays associated with rising port congestion, and disruptions to trading patterns associated with the restrictions at the Panama Canal. The canal, a key artery for global shipping, has been suffering from record low water levels in recent months, which has restricted capacity, although the surrounding region did start receiving some rain in late November and early December.

“As Panama Canal authorities have restricted transit capacity due to prolonged drought conditions, a range of dry bulk trades have had to re-direct via the Suez Canal or the Cape of Good Hop.” - Dr. Plamen Natzkoff

“As Panama Canal authorities have restricted transit capacity due to prolonged drought conditions, a range of dry bulk trades have had to re-direct via the Suez Canal or the Cape of Good Hope,” Natzkoff said. “This is most critical for the US Gulf to Asia trades, which are also currently at their seasonal peak. The effect has been to drastically reduce the capacity of the fleet serving those trades, by approximately 30%.”

Of course, shipping via the Suez Canal also is becoming more difficult due to Yemen-based Houthi rebels launching missiles and drones at vessels sailing to and from the canal.

In terms of port delays, Natzkoff, speaking before the breakdown of shipping via Suez, told World Grain that MSI is “currently observing significant levels of congestion at loading ports in many of the world’s major exporters, equaling the worst periods of the COVID-impacted 2021.”

He added that port delays were especially pronounced in the Panamax sector and at ports in Brazil, Indonesia and East Coast Australia.

Bimco expects the global bulk carrier fleet to grow by around 1% to 2% in both 2024 and 2025. Overall, its analysis predicts that bulk carrier demand growth of 2.5% to 3.5% in 2023 to slow to around 1% to 2% in 2024 and 1.5% to 2.5% in 2025.

For its part, Drewry predicts dry bulk shipping demand will grow by 4% in 2024, while supply will grow by approximately 2.6%, meaning that upside pressure should be applied to freight and charter rates.

On the demand side, the economic picture is looking average at best. In October, the International Monetary Fund (IMF) forecast global GDP to grow by 2.9% in 2024 and by 3.2% in 2025. For the dry bulk sector, much depends on whether Chinese government stimulus, which is forecast to increase GDP growth there to around the 5% mark in 2023 and 2024, boosts confidence in a property sector. The latter is enduring a prolonged crisis but is a key determinant of the overall supply-demand balance of bulk carriers because of its ability to suck in commodities, including steel inputs such as iron ore.

Drewry analyst Carolyne Rosangliani, also speaking before the Suez crisis started, said “it is safe to say that the bulk shipping story will be quite synonymous with Chinese demand in 2024.”

“China’s coal imports were at a record high this year, while its domestic production had also risen substantially,” she added. “This robust appetite for coal should most likely remain firm in 2024. However, due to some mining accidents that have occurred of late in China, activity could be halted in several mines next year due to safety concerns. This is expected to push up coal import demand generating more employment, eventually pushing rates up for Panamax and smaller vessels in the region.”

On the supply side, Rosangliani said that for less-than-Capesize vessels in 2024, the low orderbook-to-fleet ratio will be the key to the supply-side of the bulk carrier equation.

“As vessels being ordered now or ordered in 2024 will not be joining the fleet anytime soon, the tonnage supply in the market will not expand much in 2024.” - Carolyne Rosangliani

“As vessels being ordered now or ordered in 2024 will not be joining the fleet anytime soon, the tonnage supply in the market will not expand much in 2024,” she said. “This is going to result in freight rates moving upwards for all size segments.

“A downside to this, however, is that high rates could curb demolition activity in the bulker market, which will ease some of the supply constraints. This will be a downside risk from an owner’s perspective but an upside for exporters.”

However, although demand is likely to outstrip supply due to a small orderbook across the bulk carrier classes, including the Panamax-and-below bulk carrier fleets used to ship grain, other factors will come into play.

“In 2024, we expect low bulk carrier supply growth, due to a small orderbook and lower sailing speeds,” Filipe Gouveia, Shipping Analyst at BIMCO, told World Grain. “Bulk demand for non-grain cargoes could grow slightly, but we believe coal shipments may begin to fall.”

Natzkoff said port congestion also would fluctuate and that although recent rains might ease drought conditions on the Panama Canal, this key artery for the grains trade was another intangible factor in any analysis of shipping costs in 2024.

“We expect delays due to port congestion to begin easing into Q1 as we roll off seasonally strong trade volumes, and this will start to put pressure on freight rates again,” he added. “Indeed, we have seen Capesize and Panamax rates retrace by over 20% in the past week. The restrictions on Panama Canal transits will likely be more persistent, however, which could portend further short-term spikes in rates through 2024.”

Gouveia said restrictions on the Panama Canal would push shipping costs up across the Panamax, Supramax and Handysize segments.

“Grain shipments from northern Brazil and the US Gulf to the Far East must either sail through the Panama Canal and wait for a slot or sail around Africa/through the Suez, a much greater distance,” he said. “Both options constrain the supply of ships and support rates overall. Since rainfall in Panama has not yet significantly improved, we will likely continue to see these limitations through at least part of 2024.”

John Kartsonas, managing partner, Breakwave Advisors, said water levels will be critical in the year ahead.

“I think 2024 will depend a lot on what happens with the ongoing issues around the Panama Canal, when it relates to ships able to carry grains — Panamax, Supramax etc.,” he said. “Although by itself the delays due to the low water levels might not be enough to propel rates much higher, any other issues that cause disruptions, such as weather, South America port congestion, etc., might push freight rates higher.”

Events in the Middle East are also likely to be important for grain shippers. On March 23, 2021, the container ship Ever Given rammed its bow into the eastern bank of the Suez Canal. The waterway remained blocked for six days. The closure held up trade valued at over $10 billion per day, and the domino impact on trade was felt for months afterwards.

But the missile and drone attacks underway on international shipping threaten far more disruption to global trade, not least because the Suez Canal offers the best alternative for shippers between Asia and the Americas while the Panama Canal is short on capacity.

To recap, the part of Yemen controlled by the Houthis is on the Bab al-Mandab Strait, which is a narrow strait between Africa and the Arabian Peninsula that forms the southern entrance to the Red Sea and the Suez Canal, a thousand miles away. Ships passing through it are highly vulnerable.

Indeed, in recent days ships have been attacked by the Houthis in Yemen with powerful missiles supplied by Iran, prompting many owners and operators to pause transits or re-route vessels around the Cape of Good Hope, adding as much as four weeks to each voyage between Asia and Europe, for example.

The attacks are linked to Israel’s war against Hamas. The Houthis say they will continue the attacks until more aid is given to Palestinians in Gaza, although given that only 5% of Israeli trade goes via its Red Sea Port of Eilat, and many of the ships attacked have neither Israeli ownership, nor were scheduled to call at its ports, it’s difficult to make sense of this action.

The most immediate loser is Egypt. Although it operates the Suez Canal, until the waterway is safe, the diversions have the potential to cause chaos. In fact, The Economist already has called events on the Red Sea a “new Suez Crisis.” The longer the attacks last, the more shipping will be disrupted, and this likely will provide upward pressure on all shipping that uses the Suez Canal.

Events in the Middle East add to shipping disruptions already apparent on the Panama Canal and in the Black Sea where Russia’s invasion of Ukraine continues to cast a long shadow over grain supplies and the safety of shipping.

“The port congestion in the Panama Canal caused by the low water levels has led to increased costs and longer wait days,” explained Drewry’s Rosangliani. “As being able to get a berthing slot itself would incur additional costs, many ships have rerouted to pass through either the Suez Canal, the Cape of Good Hope or Cape Horn, which in turn has resulted in longer voyages pushing up the market rates. As we see, this could stretch a bit longer in 2024.

“The Russia-Ukraine war continues to restrict the movement of vessels in the Black Sea, especially after Russia called off the grain corridor deal. Some respite will be seen in the region only if Russia agrees to another deal.”

For demand specific to Panamax and below, Gouveia said that in 2023, dry bulk shipping was affected by a reduction in total grain shipments, but its impact was softened by higher coal volumes.

“Even as soybean shipments surged, it was not sufficient to cover weaker maize shipments from Argentina, Ukraine and the US,” he added. “In 2024, maize shipments could recover, led by Argentina and the US, but shipments from Ukraine are expected to remain low.”

Nonetheless, Gouveia sees some positive trends in the market this year, which could continue in 2024.

“Brazil’s rising export volumes of soybeans and maize helped not only compensate for some losses in other export markets, but also contributed to longer average sailing distances,” he said. “If in 2024, Brazil’s harvests of soybean and maize are of a comparable size to this year’s, dry bulk shipping could continue to benefit from these developments. However, we are aware that unfavorable weather (including drought conditions in the fourth quarter of 2023), could limit the size of the upcoming harvests.”

Natzkoff said continued strong exports of grain from Brazil is a factor that is contributing to elevated congestion at Brazilian ports. While US exports are not at historical highs, the seasonal impact of that trade on sub-Cape markets has been accentuated by the restrictions at the Panama Canal.

Rosangliani added that a mix of demand outstripping bulk carrier supply and shipping disruption should see rising annual average freight rates in 2024.

“The orderbook-to-fleet ratio for bulkers is currently very low, which is why the tonnage supply will be capped in 2024, resulting in higher utilization of dry bulk vessels,” she said.

Michael King is a multi-award-winning journalist as well as a shipping and logistics consultant who has written for World Grain since 2008. He supplies an array of corporate services at mikekingassociates.com.