AGRI-BULK TRADE AND THE COVID-19 RECESSION


2020/1 is not 2008/9

Despite their different origins, the economic fallout of the current pandemic is frequently compared with the recession of 2008/9, with most observers anticipating a more prolonged and severe outcome this time round. But one sector of the world’s trading system that appears relatively unscathed and is cur-rently out-performing its 2008/9 predecessor, which experienced price spikes, shortages and trade re-strictions is trade in agri-bulks. The complex supply chains underpinning trade in foodstuffs have, de-spite worries about panic stockpiling, travel prohibitions on immigrant crop pickers, withdrawal of credit facilities to farmers and mass closures of restaurants and cafes, so far remained robust in the face of mass shut-downs elsewhere in the global economy.

China Coal Market Update

In the first quarter of 2022, China imported only 51.8mt of coal. This figure not only represents a decline of 16.6mt (-24%) vs Q121 but a 41.1mt contraction vs Q421(93mt), the second largest quarterly decline on record (Q419 vs Q319: -46.9mt). All the loss was in thermal coal (-17.6mt) with a combination of factors responsible for this reduction. Indonesia is now overwhelmingly the largest supplier of coal to China with a record 196mt imported last year. So when the Indonesia government abruptly halted coal exports in January, China had no realistic alternative supplier at such short notice with shipments from Indonesia in Q1 consequently down 16.1mt y-o-y at 28.5mt. High international coal prices this year have also reduced the incentive for cheaper imports. With prices currently in the region of $300-350 dependent on its calorific value they are comfortably ahead of the Q421 average price $186/tonne when crucially international coal remained cheaper than the Chinese domestic coal price, thus stimulating such high imports.

Clearly for China energy security is key and as of Q4 of last year China committed itself to a policy of rapidly expanding domestic coal production amidst rapidly rising energy prices. After a record 4.07bt of domestic coal production in 2021, China’s output of almost 1.1 billion tonnes of coal in Q1 is astonishing, representing a 124mt (+13% y-o-y) increase. Putting it into perspective domestic coal production in March hit a monthly record of 396mt, 72mt more than China imported during the entirety of 2021! With coastal coal movement also running at record levels (2021 – 810mt + 60mt yoy) this might also explain why Chinese owners were so active in second hand market for sub-Cape tonnage during 2021. This policy of rapidly expanding domestic coal production looks set to remain in place for the balance of 2022.

By contrast, Q122 met coal imports increased slightly to 12.3mt (+1mt / +9% y-o-y). However, discounting the overland trade with Mongolia as well as the long-held 2mt of Australian met coal recently released by customs, total seaborne shipments stood at 8.2mt in Q122 (+3mt / +58% y-o-y). China’s release of Australian met coal indicates a tightening in its domestic stockpiles rather than a reproachment with Australia, so will China import cheaper Russian coal? At 3.3mt in Q122, Russia has not only increased shipments to China by 133% (+1.9mt) y-o-y but has now displaced USA as the largest seaborne supplier of met coal to China.

A significant cutback in overall Chinese coal imports would of course negatively impact the dry bulk market in the Pacific but with energy usage in China still running at record levels, a shortage of international supply thus limiting imports is perhaps more pertinent this year. There are of course ongoing concerns about the overall health of the Chinese economy going forward which might serve as a drag on Chinese industrial production and ultimately demand for energy. On Tuesday, the IMF cut China’s GDP forecast for 2022 from 4.8% to 4.4%.

Ukraine’s Export Market
Under Threat?

Any illusions for a peaceful resolution in the current Russo- Ukrainian conflict evaporated on the 24th February, as Rus-sia’s invasion of its Eastern-European neighbour began in earnest. Whatever the outcome, shipping markets will be sig-nificantly impacted and in particular the threat to Dry Bulk from the dislocation of the important Ukrainian trade.

In the short term Ukrainian ports have all ceased all opera-tions, stranding a number of vessels in port whilst two dry bulk vessels an Ultramax and a Kamsarmax have been hit and damaged by missiles.

Chart 1. Ukrainian Primary Bulk Exports

Looking at the bigger picture, in 2021 Ukraine was responsi-ble for approximately 100mt of Dry Bulk export trade number-ing around 2,200 voyages principally in grains, steel, iron ore, and minor bulks such as aggregates, alumina, fertilizers and forest products (see Chart 1). Handysize tonnage accounts for about half of the vessels calling at Ukraine to carry its ex-ports but all the other sectors are impacted as for instance Capesize tonnage transports almost all the 20mt of iron ore shipped to China each year. But whereas Ukraine iron ore exports account for little more than 1% of world seaborne iron ore trade and this loss of cargo could probably be substituted by additional ore from Australia in Capesize or India in Supra-max, replacing Ukrainian grain will represent a much greater challenge.

Last year Ukraine exported nearly 24mt corn making it the worlds third largest exporter, as well as over 20mt of wheat and 5.5mt barley as the fourth biggest global shipper of both these grains. For corn and barley China is by some distance Ukraine’s biggest customer importing 8mt corn and nearly 3mt of barley in 2021 and the USA which already has limited existing additional supply, is the only realistic alternative giv-en that China does not buy from Brazil (due to its GM ele-ment) whilst It would have to substitute barley if available from either France or Australia. Other major importers of Ukrainian corn include Spain (2.5mt) Netherlands (2.2mt)

Egypt (2.2mt) Iran (1.6mt) and Turkey (1mt) which at 0.9mt is also the other main customer for Ukrainian barley. Replace-ment corn could perhaps be sourced from Brazil or USA add-ing additional tonne:mile demand but again concerns sur-round ever lower corn reserves. Should Ukrainian farmers be unable to plant corn (and barley) in March/April for this years harvest then global supplies could potentially become even more critical.

Ukrainian wheat is much more widely distributed, with Egypt and Indonesia at around 3mt each the largest markets with Turkey third at 1.5mt. However Ukraine is an important source for the demands of several African and Middle East countries with for example Yemen importing 0.75mt in 2021, three quarters of all its shipments, Saudi Arabia (0.7mt) and at 0.6mt half of Libya’s wheat whilst for Ethiopia also at 0.6mt and Kenya 0.35mt Ukraine is a vital supplier of wheat. But whereas Indonesia and Saudi Arabia could probably find ad-ditional supply from Australia which has had a bumper har-vest, other countries closer to Ukraine may struggle for alter-natives as doubts also surround the ongoing export capability of the worlds largest wheat exporter, Russia (25mt – 2021) .

With some evidence of concerns over future security of grain supply in particular, trading activity within the Black Sea has been intense so far this year, with a record 340 Dry Bulk ves-sels currently recorded in the area, over 100 more than this time last year (see Chart 2).

Chart 2. Dry Bulk Vessels Positioned in Black Sea Area

As Russia and Ukraine represent around 80 per cent of all Black Sea Dry Bulk trade, the numbers of vessels in the area are expected to shrink quite rapidly as tonnage, where possi-ble, seeks alternative employment outside of the current Black Sea conflict zone.

(Howe Robinson Research)

USA Coal Exports – Changing Trading Pattern

Last year USA lost 21mt seaborne coal trade with thermal down 12.5mt(-35 per cent yoy) at 24mt and met down 9.5mt(-21 per cent yoy) at 35mt. To date demand for its coal is at best flat though as a greater proportion of current sales are heading to Asia and the sub-Continent, changes in coal  trading patterns are impacting the wider dry bulk market. Central to these changes has been China’s decision not to buy any coal from Australia for the past nine months. Due to this high level decision China has been forced to source metcoal in particular from other countries, of which USA has one beneficiary. So in 2020 US exported 1.6mt metcoal to China most in the second half of the year; whereas In Q1 2021 alone USA exported 2.1mt metcoal to China as well as 0.4mt thermal (from virtually zero in 2020).

But though China has now become USA’s number one export market for metcoal, overall USA metcoal exports has fallen yoy in Q1 by 1.3mt to 9.1mt as other Asian countries have taken advantage of more readily available Australian product; thus USA exports to India and Japan are both down 0.4mt at 0.7mt whilst shipments to South Korea have fallen by a massive 0.8mt(-80 per cent yoy) at a mere 0.2mt. Other sharp falls in Q1 metcoal shipments include Brazil (down 0.4mt at 1.4mt), Ukraine (down 0.4mt to 0.6mt) and Turkey where exports have almost halved at 0.2mt though in this instance Turkey increasingly sources metcoal from the nearby new Russian installation at Taman in the Black Sea.
The picture is somewhat different with USA thermal coal shipments where exports are up 0.7mt yoy at 9.1mt with high quality anthracite from east coast ports proving especially popular. In contrast to met, thermal coal shipments to India are up 0.6mt at 3.8mt and up 0.3mt at 0.7mt to Japan. Only South Korea down 0.5mt at 1.1mt has imported significantly less thermal coal in Q1. There has also been a partial recovery in some trans-Atlantic trades with The Netherlands doubling imports in Q1 to 0.8mt whilst comparatively big rises to Egypt (up 0.3mt to 0.45mt) and Morocco ahead by 0.13mt at 0.3mt have also been evident.

Clearly changing demand for USA coal is impacting dry bulk markets as shipments to India and the Far East at 10mt in Q1 (up 8 per cent yoy) now surpass traditional Atlantic trades (now down to 8.3mt in Q1 having been as high as 14.1mt as recently as Q1 2019).Not only has this development provided greater tonne:mile demand but with more longer haul shipments, a greater proportion of cargo is now being carried by the larger vessel sectors. Thus in Q1 coal shipments in Capesize are ahead by 1.1mt (+36 per cent yoy) at 4.2mt and Post Panamax up 0.6mt at 2.7mt(+ 30 per cent yoy) whilst shipments in Supramax(down 0.6mt at 4.8mt) and Panamax (minus 0.8mt at 6.5mt) have decreased around 11 per cent yoy.

China Corn Imports

With record quarterly corn imports in Q3 and around another 1mt reportedly on the water, China looks set to breach the annual foreign import quota (this year set at 7.2mt). To date China has imported 6.9mt (up 3mt yoy) on the back of increased consumption and concerns that this year’s domestic harvest might have been negatively affected by an earlier drought, localised typhoon’s prior to harvest and increased pest damage.

Chinese corn production is usually around 250mt but demand has increased over the last two years due to increased poultry numbers and the government decision to ban the feeding of swill to the nation’s pig herd. So, despite pig numbers being decimated by African Swine Flu over the past three years, corn stocks appear to have been significantly drawn down and a possible shortage of supply evidenced by domestic corn prices have accelerated to a record high 2,608 RMB per ton on the Dalian Commodity Exchange last week.

In recent years Ukraine has provided the vast majority of China’s corn imports though last year’s record shipments 4.1mt have already been eclipsed with 4.9mt landed in China by the end of Q3. However this year’s major development is the return of consistent shipments from USA since June with Chinese imports rising to 1.5mt by the end of Q3, already five times greater than the sum of last year’s last year’s total figure.

However, much more cargo may still be on the water as an analysis of USDA data reveals a half the 1.2mt shipped in September sourced from US Gulf unlikely to have reached discharge as yet whilst another 0.7mt corn has been reportedly been shipped during October from US Gulf loading ports. As most corn shipments to China are carried by Panamax-Kamsarmax tonnage these incremental volumes and longer employment days would be a major boost for the sector going forward. Looking back in history, the boost from the additional 5mt corn shipped from USA to China in 1995 was sufficient to push Panamax annual rates up to decade high levels  of nearly $15,000/day, up from $10,500 in 1994 before falling back to just under $10,000 in 1996 when China no longer required additional imported corn.

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