NEW PATTERNS AND PRIORITIES
Grain trade volumes are increasing, prices are climbing and larger vessels are wanted. Andrew Penfold considers the implications for port investment.
World trade in grain has accelerated rapidly in the past few years. In addition to underlying demand growth, there has been a far-reaching change in the direction of trade. This, together with rising grain prices and freight rates, seems certain to have a significant impact on the bulk port sector.
As always with the grain trades we are seeing a combination of economic and political factors driving demand, with the role of China – and its sourcing policies – set to further complicate the outlook.
‘Grain’ covers a diverse range of commodities from wheat – mostly for human consumption – to the various feedgrain and oilseed commodities driven by meat production. In poorer parts of the world with rapidly expanding populations, wheat has been the primary driver of demand growth, whilst higher living standards have driven increased feedgrain (and oilseed) demand.
Total volumes for these commodities over the past five years are detailed in Figures 1 and 2. According to the US Department of Agriculture (USDA), total volumes will exceed 900 million tonnes in the current 2020-21 crop year – this representing a 13 per cent increase in demand over a five-year period. Some further expansion can be anticipated in the immediate future, with this superimposed on the basic driving forces of increased population and improved living standards.
While, however, demand is steadily increasing, this market is the most volatile of the dry bulks with short term climatic factors shaping import demand and export availability respectively with the major importers and suppliers. There has been some reduction in wheat supply estimates, with smaller crops in Argentina and China more than offsetting a larger crop in Russia. Global consumption has been boosted by higher demand for lower quality wheat for the feedstuff sector.
The outlook for global trade is higher with this driven by increasing exports from Canada, the EU and India. This has more than reciprocated lower exports from both Argentina and Russia. On the demand side, China continues to fund much higher volumes. These developments have seen firming prices across the board.
In the coarse grain sector, there has been some lower production of maize (corn) in the major suppliers – especially in the US – and this has more than offset increased output in both China and India. Lower production in Argentina and the US will hit trade volumes in this sector in the next few months, with this rebalancing reflected in higher price levels.
Underlying global demand remains very strong. Global 2020-21 oilseed production is forecast at 594 million tons. This sector has also been hit by declining availability in both the US and Argentina. Global oilseed exports are placed at some 193 million tonnes for 2020-21 with additional strong demand noted in the oilseed meal sectors.
WHERE IS THE GROWTH COMING FROM?
Within an expanding demand profile for wheat there have been some significant shifts in market shares. For wheat, Canada has continued to increase production and exports, with this primarily driving demand via the British Columbia elevators.
The EU is a highly volatile swing supplier given the widespread use of marginal croplands. The real driver continues to be Russia and the Ukraine. Both markets are continuing to benefit from the reorganisation of the agriculture sector, with this being manifested in increased yields and much higher export availability.
Indeed, in the medium term the Ukraine’s exports will be constrained by port capacity as much as production levels – this is a key area of port interest. On the demand side, China is continuing to account for the larger part of growth, with import demand more than doubling to nearly nine million tonnes this year and strong demand growth has also been noted for Turkey. In both cases, the addition of new grain elevators in the ports is a pressing issue.
A similar broad trend is noted for coarse grains, with China dominating growth in this sector. Total import volumes will reach over 32m tonnes this year – a 100 per cent increase in five years. Demand for coarse grains is broadly-based with many major markets recording significant incremental growth. Overall world trade has grown by some 23.2 per cent in five years, with this being the most dynamic sector.
On the supply side, the USA remains by far the largest aggregate supplier, but recent trends also show strong expansion in exports from both Argentina and Brazil. This is also placing pressure on the export capabilities of the linked ports – especially with regard to the introduction of larger vessels into the trades.
The overall situation is one of increased global demand with this focused on China and some other significant markets. As always, supply is volatile but there has been a significant increase in haul lengths in the grain trades as a whole and this has driven increased market shares for larger vessels – especially Panamax and Supramax types.
In many cases this trend has run ahead of port capabilities and resulting higher CIF costs have distorted market shares for some exporters. These issues will be at the centre of developments.
POLITICS: ALWAYS A KEY ISSUE
Political tensions and changed production patterns will alter trading patterns in 2020-21, with Australia recording a strong wheat crop and South American producers struggling with adverse weather conditions. The Black Sea exporters are playing an ever-increasing role in the trades. Uncertainties continue following the trade war conditions imposed by the USA on grain exports to China.
Although some equilibrium is returning, this episode significantly impacted trade patterns and resulted in new export and import patterns from the USA and China. The outlook is unclear, but the following short-term trends are apparent:
- Australia is recording a very good harvest and shipments will increase market share – placing some pressure on exporting capacity at the ports. Worsening political tensions with China indicate that barley and wheat shipments on these trades will be under pressure, thus opening opportunities for other suppliers.
- Argentine wheat production is down, as is the case in Brazil. Given the importance of Brazil as a market for Argentina this is resulting in smaller exports to other markets and increased global sourcing from Brazilian importers.
- The Ukraine continues to record underlying demand growth – although some year-on-year volatility is noted as the role of these suppliers matures. Although production costs are competitive delivering to world markets remains a challenge given dependency on limited port facilities.
- Canada’s supply remains focused on wheat and has continued to benefit from competitive CIF costs into China from Pacific elevators.
- The USA is, of course, the major supplier to all of these markets and it continues to have the ability to meet any swing demand. Baseload volumes are high, but it is interesting to note that there has been increased containerisation of exports – at least until the surge in general container demand noted over the past six months.
PORT DEVELOPMENT IMPLICATIONS
Port capacity planning for grain exports is always highly problematic given the short-term volatility of export grain availability with many suppliers. However, it is apparent that with global demand increasing a few major hotspots are noted:
- The Ukraine needs to provide not just additional export capacity but also allow for much larger vessel sizes as the reach of their exports is further extended.
- Ship size issues have dogged the Argentine export sector for many years and the need to introduce larger vessels remains acute.
- For the USA and Canada, the shift to the Pacific markets continues to drive demand. Increased use of export elevators in the Pacific Northwest has been a major trend, but the larger locks on the Panama Canal have revitalised USA Gulf export elevators – further investment is required to load the larger vessels now possible on these trades.
By contrast, the implications for importers are simpler, with incremental provision of capacity the order of the day. China remains dominant but increased demand in ASEAN markers and in North Africa will also drive future port investments.
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