Ince Tokyo loaded 50,000t of wheat in December to kick off GrainCorp’s 2020-21 export program in Port Kembla. Photo: NSW Ports

A SIGNIFICANT spike in ocean freight rates, driven by strong demand for grain and coal vessels, is creating some turmoil in the dry bulk commodity market at the moment as consumers and the trade scramble to cover forward business.

The leading sea-freight index on London’s Baltic Exchange closed higher for the third straight week last Friday, with charter rates for the larger capesize and panamax vessel segments rising for five consecutive sessions to close at 2281, its highest level since September 2019.  Reports of a frenzy to secure panamax size, and smaller vessels, for the shipment of coal and grain in coming months pushed the main index 16 per cent higher across the week to cap the biggest five-day gain in four weeks.

The Baltic Dry Index (BDI) tracks freight rates for capesize, panamax and supermax vessels ferrying dry-bulk goods across the world’s oceans. It is not only a reflection of the cost of shipping raw materials from supplier to consumer but also a real-time proxy of global demand for key commodities such as grain, coal and iron ore. It is considered one of the most important global economic indicators as it predicts future economic activity.

The panamax index, which accounts for 30pc of the BDI, is the best indicator of the cost of shipping grain. It advanced 153 points, or 5.4pc, on Friday to close at 2975, its highest since September 2010. That followed surges of 211 points, or 8.9pc on Wednesday and 239 points, or 9.3pc on Thursday. It was up almost 33pc for the week, the largest weekly gain since the week ending 19 June 2020.

The average daily earnings for panamax vessels closed last week at an average of US$26,773, a rise of $6595 over the previous Friday’s close. That equates to an increase of more than $0.13 per tonne per day on a 50,000t cargo. And the increase would be more significant on the high-demand routes such as into China. Incidentally, this is more than two-and-a-half times breakeven income of around US$10,200 per day.

Ag drives increase

Agricultural exports have been the biggest boost to the panamax and supramax segments in recent months.  Soybean exports out of the US had a solid start to their season, with shipments in the first four months – September to December – hitting a record high of 39.6 million tonnes (Mt), with China the primary destination.  Dry-bulk shipments accounted for 93.7pc of this total, with the balance of 6.3pc shipped in containers. This came on the back of extremely robust Brazilian soybean exports in 2020, up 12pc, or 83Mt compared to 2019. And the rain-interrupted start to Brazil’s 2020 soybean harvest has delayed exports, with the huge vessel line-up reducing the availability of panamax vessels in the spot market.

Total Chinese soybean imports from Brazil and the US in 2020 hit a record high of 95.3Mt. This is the equivalent of 1906 panamax cargoes of 50,000t, an increase of 296 consignments from 2019.
Most of the pressure on the global dry-bulk shipping system emanates from China, with its enormous and growing passion for imported commodities such as soybeans, corn, wheat, coal and iron ore. Ironically, dozens of vessels laden with Australian coal lay idle off the Chinese coast awaiting discharge due to the ongoing trade dispute between Beijing and Canberra.

While the iron ore trade between the two nations remains unchallenged at this stage on the back of increasing demand from China’s steel industry, the coal trade has been severely disrupted. Total Australian coal exports fell by 94Mt, or 6.1pc, in 2020 compared to the previous year. This was primarily due to changes in China’s import policy, and to a lesser degree, lowered global demand due to the coronavirus pandemic.

Eyes on Chinese demand

The demand picture in the panamax segment of the market for the balance of 2021 hinges firmly on China’s appetite in the second, third and fourth quarters of the year. If Chinese consumers continue to buy agricultural commodities at record pace from South and North America, Europe, and to a lesser degree Australia, the availability of panamax vessels will stay tight for the balance of the year, and freight rates will likely remain high accordingly.

While seaborne trade in the Pacific basin only accounts for 22pc of grain exports, 58pc of global grain imports are in the Pacific, with South-East and North Asia the largest demand centres. Since the major grain export regions, such as Brazil, Argentina and the US Gulf, are in the Atlantic basin, the average distance the majority of grain vessels must travel is much longer than those out of Australian ports to the same destination.

Bulk gets box business

The sizzling container market has also created some positives for dry-bulk shipping globally. Some commodities often transported in containers are temporarily being transported as bulk cargoes, as boxes are becoming hard to secure and expensive. Some consumers who traditionally buy in containers are looking at bulk options due to extended container-shipping delays, and the potential for substantial savings in their raw-material costs.

This is great news for Australian grain exporters, especially when we have a sizeable exportable surplus to clear.  Being an island nation nestled in the south-west corner of the Pacific Ocean does have its advantages. The shorter distance to our key customers in Asia, relative to major competing origins, becomes our friend. Our global export reach is also extended in a rising freight market.

The pace of Australian exports has been solid over the past three months. However, it is behind where we need to be to clear all but stocks required to meet traditional inelastic demand in the second half of the year.  Australia’s competitiveness has improved dramatically because of the rise in sea-freight rates, which will be a critical competitive advantage as we go head-to-head with new crop northern hemisphere exporters from July onwards.