URSABLOG: Grains Of Truth

If ever there was evidence needed that shipping – i.e. transporting stuff by ships – was more efficient and caused less friction in the world than other methods of transportation, then the recent problems faced by the EU commission over overland grain exports from Ukraine have proved a case in point.


The invasion of Ukraine blocked the export of seaborne grain from Ukrainian ports until the UN Black Sea Grain initiative, brokered by Turkey, allowed for the export from three ports in Ukraine: Odesa, Chornomorsk, and Yuzhny. This allowed the grain to be exported far and wide, and also free up valuable storage facilities so that last summer’s harvest could be gathered in. This has been extended, despite threats and further tweaks to the deal, and is still working.


Meanwhile on land the countries closest geographically to Ukraine, some of them the most supportive politically, are protesting because agricultural products are being exported by land and then being dumped in their markets. Poland, Hungary, Romania, Slovakia and Bulgaria have all started to take unilateral actions that ban food products from Ukraine. This has now led to the European Commission to announce ‘preventative measures’ so that these individual actions by member states do not affect the workings of the single market and split the otherwise solid support for Ukraine.


The EU had dropped tariffs and quotas on foodstuffs from Ukraine after the invasion, partly in support of Ukraine and also fearful that the world would go hungry due to a shortage of foodstuffs from such a major exporter. However a bumper harvest from EU producers last year has eased supply concerns, and combined with the Black Sea Grain Initiative there is not the hunger panic that existed previously. In fact the opposite.


Much of the grain entering the EU goes in trucks, trains and barges and is restricted by the amount of such transportation equipment available. This is also – per tonne – very expensive. Even if the intention was to transport Ukrainian produce to other ports – either in the Black or Baltic Seas – the combination of restricted transport and the high cost of it has meant that grain and other foodstuffs have remained nearby to Ukraine, reducing the price of locally produced agricultural products and leading to the protests that resulted in the import bans.


This is another effect of the Russian invasion of Ukraine which has resulted in a wholesale disruption of trading patterns, some benign for shipowners, some not so benign. Our own analysis of tonne miles for dry bulk carriers in the handy-kamsarmax range has shown that at the start of the conflict, in March last year, tonne miles carried was down 8.5% year on year, but has since shown an increase every quarter.


It is worth remembering that it is volumes over distance that drives the shipping markets and affects supply. If the amount moved is disrupted and has to be stretched over greater distance then the supply of available tonnage is less, which theoretically at least, means that freight rates should increase. However this is assuming that demand for cargo at least remains constant, and as we know – having experienced a slump in freight rates in the latter stages of 2022 and into the first months of 2022 – this was not the case. There was a lot of other stuff going on at the same time, not the least the effects of higher inflation and the consequent increases in interest rates. China, and their COVID lockdowns played their part too.


It is also worth remembering that it was not only grain that was in short supply: energy too was severely affected. LNG had a perfect storm, and the tanker market has reaped a similar whirlwind, but coal – once seen as a dying trade – has increased in importance.


Coal was the primary tonne mile demand for panamaxes/kamsarmaxes (30%) for the year from March 2022 to March 2023, but grain played a significant part too: grains (excluding soybeans) were responsible for 25% and soybean cargoes at 22%. Over the same period coal carried by Ultramaxes was 18% of total tonne miles while grain cargoes (excluding soybeans) were responsible for 20%, with soybean cargoes at 9%. Supramaxes by contrast were important for coal – 21% of tonne miles – whilst grains (excluding soybeans) and steels accounted for 14% each. The primary demand for handysizes was grain (excluding soybeans) at 23% and fertilizers at 18%.


We are looking into how these figures have evolved over the last year and see any likely trends and patterns that are emerging, and what cargoes (and ship sizes) will benefit the most from this disruption. But overall the prognosis is good: despite the performance of the freight market over the last six months, March 2023 tonne miles were up a sizeable 19.20% from March 2022. Of course, past performance is no guide to future performance and who knows what is in the pipeline in the months to come? But consistent increases in tonne miles in every quarter since the war started is a sign of both a disruption to trade routes and continuing demand for cargoes carried by the bulk carrier fleet. An increase in global economic growth and a further improvement in the Chinese economy should lead to some optimism for dry bulk carrier ship owners.


But as my colleague in our research department rather sanguinely puts it:


Tonne mile demand figures are one way to tell [the effects of the war and subsequent sanctions], but they somewhat fail the accuracy test as they capture stronger or weaker seasonal patterns and are affected by, for example, new demand sources coming online and/or old ones lessening in significance.


And it’s not just sanctions that affect the market. In the face of fractious member states, the EU has stepped in to keep the internal market functioning: they are proposing to bar imports of agricultural products to Poland, Hungary, Romania, Slovakia and Bulgaria until June except for re-export to other EU member states or parts of the world. Furthermore, Brussels will organise convoys of trucks, trains and barges to transport the grain to other ports – good luck with that! – for re-export. It will also increase the capacity of the river Danube (although there are also environmental constraints on that too. A good time to be a truck or barge owner.


The simple fact remains however that transport of bulk commodities by sea is cheaper, more efficient and environmentally friendlier than any other method of transport. Commercial traders will not pay extra just to move the stuff over land because it is politically expedient to do so. An un-named senior EU official admitted that it remained unclear how moving all this grain overland would be funded and organised. Apparently surprised, the official went on to explain that even though Spain had tried to subsidise a train to transport grain across the continent recently, it was much cheaper to directly import it from Latin America.


Norbert Lins, chair of the European parliament’s agriculture committee, went further and said that Brussels should buy the grain itself and ship it to third countries. “The commission has the tools and should use them,” he said. What he means I suppose is that the EU should buy the surplus grain to get rid of it elsewhere and keep the domestic prices higher in the EU. What he doesn’t say is who are the eventual buyers for these cargoes, and also who will arrange (and pay for) for overland transportation when it is the very lack and cost of overland transportation that is the cause of the problem.


This means that the discussions surrounding the further extension of the Black Sea Grain Initiative carry much more importance than usual. It is not just the continuing export of grain from three ports to hungry countries around the world that is the issue, it is what happens to the grain if it is not exported, and the effect it has on the unity of the EU in turn. I am sure that Russia has noticed this, and will be using it to gain any further leverage that it can squeeze out of the deal.


But the fact that it is only three ports in Ukraine can export grain at present should also be a reminder of how restrictions to the freedom of navigation leads to disruption and dispute on land as well as at sea. As the world continues to fragment it is worth remembering that shipping keeps the world’s goods moving – please remember COVID – in an efficient and environmentally friendly way. Disruption at sea multiplies disruption and conflict on land, as we continue to learn in many unexpected and unpleasant ways. There is more than a grain of truth in the saying that the sea connects us all.


Best regards,

Simon Ward