Keeping up the momentum
Grain loadings in South America are finally ramping up, bolstering Panamax freight as the US’ presence starts to wane. This should help to sustain demand through Q2, but some risks remain for the second half of 2021.
Seasonal boost in ECSA
After a slow start to the year, the pace of grain shipments from East Coast South America (ECSA) has finally picked up. As the soybean export season commences, Brazilian agribulk exports on bulkers totaled almost 18.5 MMT in March, up by 10% YoY, although weak activity in the months prior mean that shipments over Q1 are only 2% higher YoY. Argentinian grain liftings also strengthened in March, jumping by 23% YoY to 7.7 MMT, but total volumes over Q1 still fell by 2% YoY.
Exports from these two countries brought total ECSA shipments in March just shy of May 2020’s record of 26.2 MMT. Based on shipments so far this month however, April shipments are on track to hit an all-time high of 27.8 MMT, marking a 14% increase YoY.
This has naturally benefitted the Panamaxes, which haul the majority of the grains from this region, but the smaller ships have not missed out. Supramax cargoes in April are on track to surpass 5.5 MMT, up by 31% YoY and the highest since mid-2019.
US still in the market
We have almost become used to these impressive growth figures from South American grain shippers, but in contrast to the last couple of years, they are currently competing with elevated volumes from the USA, who are still enjoying the tailwinds of a bumper export season. A surge in Chinese demand over the last six months helped to push US grain exports up by 69% YoY, buoying rates on both the country’s Pacific and Atlantic coastlines. This includes record purchases of corn to restock depleted supplies.
Although we’re coming to the tail-end of the US’ exporting season, the pace of shipments remains high relative to last year. April volumes are on track to surpass 11.1 MMT, up by 17% YoY, but exports from the Pacific Northwest region, where cargoes are predominantly Panamax stems, are trending 23% higher YoY. This, along with a recent boost in Pacific coal activity, is helping to keep Panamax tonnage in that basin, and freight rates high. And, as we wrote a few weeks ago, this effect is also seeing ships having to ballast further on average to reach cargoes in the Atlantic, tightening the market to a greater degree.
Part of the reason why ECSA grain shipments climbed so rapidly last month is because of delays in the harvesting of this season’s soy crop earlier in the year, which saw shipments over January-February slow by around 10% YoY. Because of these delays, the usual build-up of tonnage in the region for the time of year has taken longer to clear, tightening supply elsewhere. Queues of empty Panamaxes in Brazil, for example, hit an all-time high of 4.4 MDWT at the start of this month 66% higher than average for this point in the season.
Panamaxes loading grains in ECSA in March waited on average 17.5 days to load, six days more than average for this month over the past four years and the longest average waiting time since 2016. Supramaxes also waited around six days longer than average in March, though average durations were still shorter than June 2020’s peak.
These inefficiencies and strong cargo volumes in both basins have helped to propel the sub-Cape markets to their highest levels in a decade, and we expect the South American grain crop to keep the momentum going through Q2. However, as we move into the second half of the year, there are some factors to watch that may be signaling a cooling in the market.
The first and most significant of these is Chinese demand, which accounted for a third of bulker employment in the grain market last year. As its pig herd recovered from Swine Flu and domestic grain supplies were hit by bad weather last year, China hoovered up record quantities of soybeans and corn from the US and, more recently, Brazil. By the start of this year, China’s appetite for soybeans had sent prices to their highest levels since 2014, and pushed crush margins to all-time highs. In the past few weeks however, demand seems to have waivered.
Prices have continued to rise, but crush margins have collapsed, briefly turning negative in March for the first time since 2019 as soybean meal in China moves into oversupplied territory. Following the binge on American agricultural products, 38m tonnes of grain arrived in Chinese ports over Q1 this year, 59% higher versus imports over the same period in 2020, and this is beginning to weigh on the animal feed markets. At the same time, we have passed the peak season for pork consumption in China, so demand will likely remain subdued until herds are rebuilt. With the majority of South America’s crop also heading to China crush margins could be weighed down further.
Recently, China has also hinted at measures to reduce the share of imported soybeans and corn in its animal feed mix, prompted by the soaring cost of relying on seaborne supplies. These suggestions have not been implemented yet, but could pose a further threat to imports later in the year, especially for corn, which the country only began buying in significant quantities last year. Further, the hefty purchases from the US may not be sustained over the 2021-22 marketing year if Chinese stocks are sufficiently rebuilt in the coming months.
Meanwhile as the queues in Brazil unwind, we also expect to see less support to the market from this inefficiency. Congestion has already fallen by more than 1 MDWT from its peak at the start of the month, and if it continues to slide in the usual seasonal pattern, it will have halved by July. As this happens, and as more vessels open up in the Far East after discharging, we could see some heat taken out of the market.