No End in Sight for Shipping Volatility

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After the COVID years, normal was supposed to be back on the agenda. Instead, geopolitical strife and heightened weather risks are stalking the oceans, creating snarl-ups, market imbalances, and routing problems for anyone in the business of grain shipping, reports World Grain.

The cost of divergence

The partial closures of the Red Sea and Suez Canal due to attacks by Houthi militants have been game-changers for shipping this year. Bulk shipping has been less impacted than the container sector quite simply because more bulker owners are willing to risk rocket attacks to avoid diverting around southern Africa. Even so, the disruption has had a significant impact on operations and the cost of shipping commodities in 2024.

The other key artery for shipping, the Panama Canal, also has been a bottleneck for shipping this year with capacity restricted due to drought, constraining access for bulk carriers.

This had a particularly detrimental impact on US grain exports to Asia via the Mississippi River system and the US Gulf, said Ken Eriksen, managing member of Polaris Analytics and Consulting.

The increased sailing distances resulting from diversions to avoid the world’s two famed Canals have combined with rising demand to put strong upward pressure on freight rates across the dry bulk sector.

Never-ending bottlenecks

Aside from two of the world’s leading arteries suffering from limited effective capacity, Alexander Karavaytsev, senior economist at the International Grains Council (IGC), said grains and oilseeds shipments also have been hampered by difficult conditions — either too low or too high water levels — on key waterways across the US Midwest, which led to barge freight restrictions and added to logistical costs for US exporters.

Issues with low water in Europe flipped in June when high water levels forced closures of sections of both the Rhine and Danube to freight because vessels could not pass under bridges safely.

Grain plays its role

Grain shipments also have helped tighten the bulk carrier market in 2024. Filipe Gouveia, shipping analyst at BIMCO, told World Grain that between January and April 2024, ships in the supramax and handysize segments had benefited from 2% year-on-year stronger cargo demand and longer average sailing distances.

For grain shippers, all of this has resulted in a highly volatile market. In the first week of June 2023, the IGC Grains and Oilseeds Freight Index was at 125. It then hit a 12-month low in July before rising to a 12-month peak of 191 in December. As of June 4, the Index had subsided to 148.

Good news for shipping

With negatives easy to find, there is some good news for those reliant on trading internationally. Shipping in general has found ways of coping with the extra distances of sailing via the Cape of Good Hope.

Perhaps more significantly for global grain availability, Ukrainian exporters have been able to resume business via Black Sea and Danube ports as the Russian navy has been forced to withdraw and Russian missile and drone attacks have become less effective.

In addition, after Russia withdrew from the Black Sea Grain Initiative (BSGI) last July, Ukraine established the Ukrainian corridor, a route passing through the territorial waters of the North Atlantic Treaty Organization’s member states of Romania, Bulgaria, and Turkey. This has enabled Ukraine to resume high-volume shipments of agricultural products since October 2023.

The US Department of Agriculture (USDA) raised estimates of Ukraine’s overall marketing year 2023-24 grain and oilseed product exports, including wheat, coarse grains, oilseeds, vegetable oils, and protein meals, by 7.3 million tonnes from January to April of this year.

Rising waters in Central America

At the start of June, the Panama Canal Authority announced it was increasing the draft of vessels allowed to use the system to 45 feet two weeks earlier than planned due to the expected onset of the rainy season in the region.

This increase in capacity will offer a welcome respite for grain shippers. The Panama Canal is a major chokepoint for a significant volume of grain trades, averaging around 30 million to 34 million tonnes per year, with grains the second largest commodity flowing through the Panama Canal after only oil and oil products, said Natzkoff. He said most of the grain routes that go through the Panama Canal are moving on East Coast South America-Asia or US-Asia routings with the main commodities being corn, soybeans/meal, and wheat.

The increase in capacity will enable grain flows to resume more efficient, less expensive, routes between the Pacific and Atlantic oceans.

Weather threat

However, the challenging weather that has restricted Panama Canal capacity also could play a different disruptive role in bulk shipping this summer, especially in the US Gulf. According to the National Oceanic and Atmospheric Administration, the 2024 Atlantic hurricane season is expected to be more active than normal with the most disruptive storms usually occurring in late summer.

Large-scale port closures on a localized basis are an almost annual event. In recent years, Hurricane Irma in 2017, Hurricanes Florence and Willa in 2018, Hurricane Dorian in 2019, Hurricane Laura in 2020, Hurricane Ida in 2021, and Hurricane Ian in 2022 all have proved significant shipping events, noted S&P. Last year brought Hurricane Idalia on the East Coast and Hurricane Hilary on the West Coast.

Ports typically only remain closed for a few days, but recovery can take a couple of weeks to achieve, while the most extreme events can cause weeks of disruptions, as shown by Hurricane Sandy in 2012.

Supply picture

Any shipping disruption effectively reduces the effective capacity of the global fleet of bulkers. This has been particularly relevant in 2024 because the order book has been relatively static, certainly compared to container shipping, which has seen record deliveries this year.

Uncertainty concerning cargo demand usually explains owners’ eagerness to order new ships.

He said the combined Supramax and Handysize fleet had grown by 3% year-on-year so far in 2024, although effective supply was expected to grow slightly slower than the fleet because sailing speeds have slowed.

He added that a combination of uncertainty regarding alternative fuels, long delivery times and high prices for newbuilds had further limited newbuild contracting.

However, for owners looking at the supply-demand balance in the short and medium term, Red Sea vessel diversions loom large. Put simply, the reopening of the Suez Canal could reverse the current market very quickly, causing freight rates to tumble as quickly as they have risen, perhaps by as much as the 40% to 50% they have gained this year, according to MSI.

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Source: World Grain