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Grain pain in the Black Sea

While the world observes the unfortunate escalation of the Russian invasion of Ukraine and the ripple effect that it is causing in the supply chain of key commodities, this report examines how the disturbing events in Ukraine can affect grain cargo flows and the dry bulk freight market.

The Ukraine crisis is still unfolding and at this stage it is somewhat daring for one to attempt any speculation as to when (and at what established geopolitical status quo) this ordeal will end. What is certain, however, is that exports from all ports in the Black Sea have come to a halt. Various international grain houses that had commercial activities in Ukraine have suspended their operations and shipowners avoid sending their vessels in the region whose risk matrix has been designated as “active” by the Joint War Committee.

Russia and Ukraine are two of the world’s largest wheat exporters (they account for a combined 29% of global wheat exports), while Ukraine’s share in global corn exports stands at 17%. In the wake of the war outbreak, corn and wheat futures followed an upward trajectory reflecting concerns about significant disruptions in the global grain supply chain. By the same token, higher inflation is to be expected.

And while the Russia-Ukraine conflict is very likely to grind the global wheat supply, French wheat will probably be in more demand and same goes for Australia which expects a bumper crop this year (some 39m tonnes) and we should therefore see some elevated grain shipments from Down Under. That being said, the peak season for Black Sea is usually during the summer months (July onwards) and so one could argue that at the moment disruptions in grain cargo flows do not yet pose significant risk in actual volumes transported. It goes without saying that should the conflict gets prolonged, this will change drastically.

For the moment, we are seeing vessels, primarily the medium-sized Panamax types that tend to carry the bulk of the grain exports from Black Sea, being diverted towards the Atlantic basin. This can lead to a build up of tonnage in South America and the US Gulf and can potentially pressure rates downward. Much will of course depend on the actual cargo volume that these regions will produce and hence how much tonnage can be absorbed.

A positive note is that grain demand from the word’s largest importer remains strong. As we have stressed plenty of times in the past, the feed needs of the most populous nation in the world are relatively inelastic and the Ukraine war has, if anything, amplified those needs. Amid the overall uncertainty, food security has become again a top priority for China and in the light of the absent grain trade ex Black Sea, the Asian nation is turning to Brazil and the United States to make up for the loss.

It’s been reported that in the recent days Chinese crushers are aggressively buying Brazilian beans for April and May, while they also book forward US soybean cargoes that offer profitable crush margins from the new crop (which commences later in September). The longer fronthaul grain trade routes are adding to the tonne-mile demand improving fleet utilization and it’s been proven time and time again that they can have a major positive effect on the freight returns for the Panamax and Supramax bulkers.

Indicative of China’s concerns about a potential grain shortage is the fact that the Chinese authorities are releasing some state-owned soybean reserves, while they are also upping their domestic soy output in an effort to partly offset the restricted grain supply they might encounter later in the year. However, we don’t view this as having a critical impact on China’s importing grain capacity, which we expect to remain buoyant.

Another development one has to factor in is the surging oil prices. The crude oil has passed the US$100 a barrel threshold, for the first time since 2014, sending bunker costs soaring. This increases the freight cost and it also benefits owners of scrubber-fitted vessels which gain from the wider VLSFO/HSFO price spread.

Finally, a question we feel is worth asking is whether, in the event that Russia eventually takes over Ukraine, the existing Russian grain export tax would be expanded to Ukrainian grain as well. If so, this could further limit exports from the Black Sea. Further, amid the strict sanctions and the exclusion from the SWIFT banking system already imposed to Russia, would it be prudent (and profitable) for international grain companies to maintain their facilities in Ukraine? The situation is still unclear and offers ground for much speculation which in principle we try to avoid. But it does highlight the market’s increased uncertainty and it also adds more fuel to the already highly volatile environment which industry stakeholders are required to operate in.

We would like to end this note by wishing the conflict to end soonest possible and for humanity to return to its fundamental humanitarian principles which we all strive to uphold.
Source: Eastgate Shipping Inc.

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