Despite the decline in grain export prices, business activity in the Azov region remains low. The current situation leads to the free tonnage overabundance in both spot and prompt. If last week Owners greatly drove up the rates for two weeks ahead, then this week the difference between spot and prompt rates has narrowed significantly.
Weather conditions began to have a major impact on the fleet disposition in the Azov region. In the first place, the weather worsened in the Kerch Strait, which slowed down the passage of vessels, as well as suspended transshipment on the Kavkaz roads. In the second place, the water level at Azov-Don Sea Canal outing may drop next week due to offshore winds, which will lead to delays and disturb the cargo export dynamics from Rostov, Azov and river ports. Experience has shown that such delays favorably affect the freight market growth, due to the fact that Charterers begin to pay excess for spot tonnage in a bid to arrange quicker shipment of the contracted cargo.
Given the low demand for tonnage in the Azov region, some Owners are forced to relocate their fleet. Sea vessels, which usually work from Temryuk in the height of the season, move to the Black Sea Ukrainian ports to take the cargo up to the full capacity. Old sea-river type vessels, which the major Charterers do not consider in connection with the insurance requirements, also shift to perform voyages ex Ukrainian ports. Under conditions of limited cargo offer on the market, non-standard parcels less than 3000 tons are not in favor, therefore Owners of vessels up to 3000 tons switch to work in the Mediterranean Sea. Such Owners’ strategy is not typical for September; usually this movement begins closer to winter.
Two weeks of stagnation on the grain market led to the fact that export prices for wheat strengthened the decline. For Owners, the overall picture has not changed. Importers are waiting for the results of the Turkish Grain Board tender; they hope that prices will fall even lower after the results announcement. According to the data from experts, the all-force activity will return to the market by the end of the 36th week. Even with such an optimistic forecast, the freight market will begin to grow only on the 37th week, when the entire spot tonnage will be fixed.
Another driver for the market mid-term reviviscence may be the Egyptian state-owned company GASC tender for the purchase of wheat, which has been conducted on August 27th. It was purchased 230,000 tons of Russian wheat and 60,000 tons of Ukrainian wheat with supplies for the period from 1st till 10th October. This means that shipments will begin nearer to the middle of September, and the 37th week will have a positive impact not only on the market of Kavkaz transshipment, but it also will push up the rates for direct voyages.
Amid sentiment about the likely forthcoming recovery of the market, Owners have changed tactics, and now they prefer to fix the tonnage on a short shoulder voyages, mainly to the Turkish Black Sea, instead of long-distance voyages. As a result, the rates on Azov, Yeisk and Rostov on this shoulder equalized. It’s been difficult to find a vessel for a long-distance voyage last week, and this led to a slight improvement of the rates for those directions. On the growing market, Owners are expected to align with the same strategy, and Charterers will have to overpay for long-distance voyages.
In the Caspian region, the market is broadening out: small exporting companies with no experience of trading with Iran enter the market. Often, they are persuaded to do so by permanent contractors, who thus try to work out a barter trading scheme. There are rumors that some major international Traders have already accumulated about 20,000 tons of unpaid goods at Iranian ports, which led to a pause also in big players’ shipments. At the same time, the threat of interruptions of grain supply to Iran is not yet expected, because Kazakh exporters are moving on to the shipments of new crop grain in the Caspian Sea in the near future.
The new nitrogen fertilizers plant in Turkmenistan is closing for the next prevention activity on September 3rd. For at least a month, the transit cargo offers from the Caspian Sea will be severely limited, and vessels open after the transportation of general cargo will be forced to go up to the river for grain loading towards the Black Sea. Increased tonnage supply in September may slow down the expected growth of rates for this direction.
Freight rates in the Azov region continue to reduce, but the pace of market decline has slowed. Unfortunately for Owners, this is more due to the approach of rates to the voyage self-costs, rather than serious changes in the state of grain market. According to the data from Traders, the price of domestic grain reduced slightly at the end of last week, but at the same time, the dollar went down too. These two factors compensated for each other, and the overall situation has not changed: there is still a lot of available (low-cost) spot tonnage.
Expectations that freight rates will grow rapidly after the Turkish holidays have not been met. The market continues to fall both in the Azov region and in the Black Sea. Rates from Rostov to Marmara with wheat are on average USD 17 per ton. As a comparison, rates fluctuated at USD 28 for the same voyages in 2018.
To maintaining of prices on the domestic market, the Turkish Grain Board announced a new tender for the purchase of 250,000 tons of soft milling wheat for delivery in mid-September. Most likely, market insiders will wait for the results of this tender to determine trends in the movement of grain prices. The tender outcome should be known on September the 3rd, and this may become a pivot point for increased activity in the region.
The freight market in the Caspian Sea supported the overall southern trend of decline. In addition to the traditional regional difficulties caused by sanctions, the volume of cargo offers from the Caspian Sea ports (Makhachkala and Aktau) decreased sharply during the reporting week. Producers in the Northern Volga region have not yet completed harvesting, which does not add positive to the market. Open spot tonnage already begins to accumulate at Astrakhan.
As expected, freight rates in the Azov region dropped seriously on the 33rd week and despite the height of the grain season, reduced to May’s level. Owners feel certain that the market will come to life at the beginning of the new week, and that they will have the opportunity to raise rates, but experts who keep a close watch on market conditions are not sure of that: still buyers offer too low prices, and exporters continue to hold on to the goods. At this stage, many consider cheapen ruble as the primary driver of new deals conclusion. Over the past week, the US dollar appreciated by almost 1 ruble, which led to a surge in activity closer to the weekend, but a large number of spot tonnage does not allow yet rates to grow.
The Black Sea grain market is also depressed, freight rates from the Ukrainian Black Sea ports and Novorossiysk are reducing in in direct ratio to the Azov ones.
The freight market from the Volga and Don is also in a state of stagnation. The reason for this is very low scores of new harvest in the Volga regions, so Owners are more interested in transit cargo from the Black Sea to the Caspian Sea and return. Competition and high margins on this market allow Owners to feel confident in the trade issues, despite the lowering rates from the river.
The Caspian region also showed a negative trend amid a backdrop of Muslim holidays. Charterers of fertilizers from Turkmenistan took advantage of the situation for some measure, intercepting part of the tonnage for transit shipments. There is still an imbalance on the market, and a large number of spot vessels will open at Astrakhan on the 34th week, which will continue to pull the market down. The short-term prospects largely depend on how quickly Iranian importers will return to activity, as there are no problems with the availability of cargo in the Astrakhan region, and the cargo offer clearly exceeds the demand. Market insiders believe that the market should stabilize in early September.
According to data from shippers, the price of grain on the domestic market continues to grow, which has a negative impact on exports. In the meantime, the volume of harvested grain exceeds last year, as estimated at the beginning of August. According to expert opinion, another reason for that is the improving infrastructure for grain storage in the regions. Producers are trying to hold on to the new crop wheat and thus create a roaring demand on foreign markets.
Continued rainfall in the Central Federal District kept high domestic grain prices and influenced the further fall of freight rates in Azov to the level of USD 19-20 per ton of wheat on the basis of the voyage from Rostov to Samsun. At the current state of the market, the minimum difference between selling and buying prices is about USD 3 per ton, while both sides believe that the market will move in their favor in the future.
The holiday of Kurban Bayram led to the termination of purchases from the middle of the week by Islamic countries, which actually went on a long weekend. The number of new deals concluded tends to zero, and Traders tried to cross over to the European direction.
Many Owners preferred to postpone the conclusion of contracts for the after-holiday period, counting on the subsequent growth of the market. Besides, a large part of the fleet is delayed in queues at the ports of discharge, becoming unavailable for new voyages temporarily.
In spite of early summer’s rumors about the plans of the port of Rostov to move away from handling of general cargo and focus on bulk cargo, in mid-August transshipment of equipment is still performed. Tariffs for transshipment on the direct option remained at the same level, but the use of berths has become much more expensive. At the same time, direct transshipment requires coordination of the side by side approach of the river-sea vessel and the river vessel, which may lead to idleness of both vessels under adverse conditions. By such manners, it is possible to predict the growth of demand for direct shipments of Russian-flagged vessels due to the rise in prices of ‘vessel-berth-vessel’ transshipment.
A similar situation has developed in the Caspian region: business activity has decreased to a minimum due to holidays (Kurban Bayram) and long weekends. This may lead to a large congestion of vessels at Astrakhan and on the roads of Iranian ports, which will cause a decrease in freight rates. According to Traders, the difficulties in settlements with Iran have resulted in the fact that most local importers are trying to switch to cash payments. In the region, complex schemes of money transfer through Turkish and Dubai companies have become a common practice, which dramatically prolongs the transfer time periods and often leads to idleness of vessels in wait for receiving of freight payment.
Freight rates in the Azov region remain roughly the same as on the 30th week, and now there appears a trend for a further decline on the market. The most likely obstacle to the dealmaking was the high selling price of Russian grain and the lack of significant improvements in the Turkish economy. Many Turkish Traders report that they have not yet signed a single contract for the purchase of new crop grain from the Azov region. Under such conditions, Ukrainian grain is regard as a great competitor to Russian grain: it is cheaper, although it loses in quality; besides, the freight rates from the Ukrainian ports of the Black Sea are much lower than the Azov ones.
August will be difficult for Owners on the Azov market. One of the key reasons for that is Kurban Bayram in Turkey, which is the main receiver of grain from Azov. In addition to the business activity decay, there is a risk that vessels will not be discharged during this period. As a result, a significant amount of tonnage will open almost at the same time. It is fair to assume that the rates will fall even lower, and the level of freight rate for voyage from Yeisk to Samsun will be less than USD 20. Growth of rates should be expected in the second half of the 34th week and on the 35th week. In such circumstances, there appears a great demand for long-distance voyages from Owners’ side. Firstly, these voyages will help to wait through the instability on the market, and secondly, they would avoid idleness at Turkish ports during Kurban Bayram.
Judging by the number of requests, after a calm period in the Caspian region, a sharp increase in demand for tonnage is expected in the second half of August. The reason for this is the stabilization of weather conditions and the growing activity of Iranian Importers. Based on these expectations, freight rates in the region for prompt dates have already begun to increase. Incoming requests for voyages with the new crop grain from the Middle Volga region are also mostly intended for the Caspian market.
Freight rates for transportation of general cargo in transit and to the Volga region continue to grow. Despite the situation with grain and the appearance on the market of a major number of Russian-flagged vessels that were previously employed on transshipment, the growth trend in this segment has not changed. Moreover, the rates for direct voyages to the Volga and the Caspian regions are so high that it is often more profitable for Charterers to consign general cargo with transshipment to river vessels at Rostov.
Against the background of improving grain quality and price increase, producers have chosen the tactics of waiting. Therefore they are in no hurry to sell new volumes of goods. As a result, during the reporting week freight rates bounced off the maximum, despite the height of the grain season. A good many of the fleet are in the spot, including vessels which were previously employed on transshipment on Kavkaz roads, where feed grain is shipped mainly.
General forecasts for the Russian grain harvest were revised downwards again: from 121.9 million tons to 117.2 million tons. As of the 30th week of 2019, the crop yield is 36.2 cwt of grain per hectare. In 2018 an average of 36.9 cwt from one hectare was collected for the same period. Along with a decrease in the total harvest, forecasts for the grain supply for export are also reducing: from 52.5 million to 41.9 million tons. Such dark prospects, together with a relatively low dollar (which continues a slow decline), support grain sales prices at a fairly high level, which clearly does not help the conclusion of new deals.
On the back of this news, freight rates in the Azov slightly decreased instead of growing. This is very unusual for the market in late July, when the grain season is usually in full swing. On the 30th week rates for the voyage from Azov to Marmara are at the level of USD 26 per ton of wheat. Last year, on the 30th week, average rates for the same voyage were USD 28 per ton. Despite the fact that the difference is only +/- USD 2, it is unusual market move, as the last few years in a row rates never fell in mid-July, but only grew until the winter. There is still no roaring demand for vessels, there is a lot of spot tonnage. Despite the current market conditions, Owners expect a significant revival in August, when the main export volumes will be ready for shipment at ports.
From the August 11th till 15th, Turkey will celebrate Kurban Bayram. Usually, neither the Importers, nor the ports work during this period. Therefore, many Owners are trying to organize their work in such a way as to avoid a week of idlesse on discharging. Voyages to European destinations are in great demand.
In the Caspian region, rates remain at the level of the previous week. The balance on the market was achieved mainly due to the weather factor. The demand for the fleet remains stable, but due to heavy rains in the Stavropol region, part of the Charterers suspended their schedule performance, and the demand for tonnage aligned with the supply partially. Also in the region there is a problem with the extremely low nature of the new crop barley. In fact, the cargo is more cubic than usual, and the vessel falls short of about 200-250 tons, so the dead freight on conversion to ton reaches USD 4-5.
According to the data from market insiders, the renovation of the Garabogaz Fertilizer Plant was finally completed. The production startup is expected in the 31st week, which may enhance competition on the market of transit cargo from the Caspian Sea and river ports.
The situation in the Azov-Black Sea region has stabilized by and large, freight rates stopped at level of USD 27 on the basis of the voyage from Rostov to Marmara, avoiding sharp spikes, as it was on the previous weeks. The key reason for the decaying of rates was the growth of grain prices on global markets, especially against the background of negative forecasts of grain harvest published by the United States Department of Agriculture. Russian producers preferred to hold on to the goods at the prospect of better export prices.
Price increase trends are confirmed by the results of the fifth Egyptian tender, in which the price increased by USD 1-2 as compared with the previous tender and reached the level of USD 215.59 including freight. This tender also marked the return of Russian Traders to the Egyptian market (the previous two tenders were lost to Romanian and Ukrainian suppliers).
Cause for some optimism is the information of Turkish sources about the decline in forecasts of their own wheat harvest. Expecting a hefty increase of imports, some grain Traders have already started long-term contracts negotiations with Owners for shipments to Turkey.
Favorable weather conditions in May and June allowed farm units of the Southern and North Kavkaz Federal districts to secure a record quality harvest with an average protein grade of 18% (against 14-15% in previous years). This circumstance increases the competitive ability of domestic grain and may open new markets in theoretical terms. The extension of the zero export rate for wheat till July the 1st, 2021 was also an advantage factor. With great probability, all of these things make it possible to predict the growth of shipments from deep-water Black Sea ports and the increase in the demand for long-distance voyages (Italy, France, and Spain) from the ports of the Azov Basin.
The situation with the partial “freezing” of grain exports was used by coal Traders. Activated on the freight market, they kept rates at current level, which is USD 25 on the basis of Rostov/Azov – Marmara.
Freight rates show restrained growth dynamics in the Caspian region, in the span of one week they reached the level of USD 32 on the basis of the voyage from Astrakhan to Northern Iran. The key reason for the rise in the cost of freight was the high demand for tonnage caused by the occurring of the new crop barley. At the river elevators, there is an accumulation of grain parcels, so the demand for freight is comparably low in the Volga Basin. The main activity is concentrated in the Volgograd region: freight rates from the river ports of the lower Volga is growing in the wake of Astrakhan.
There has been some reinvigoration on the transit cargo market. The point is that a lot of cargo arrives to the ports of the Mediterranean and Black Seas in August, which are intended for transit to the Caspian Sea. Charterers schedule their shipment plans so as to have time to cover with the delivery of goods before the end of navigation. Experts anticipate an increase in demand for transit vessels in August and September and a corresponding growth of rates.
During the reporting week the number of cargo offers from suppliers of the new crop grain increased significantly. This led to the export prices lowering (on basis of FOB Rostov reduced by an average of USD 5) and to an increase in Charterers’ demand for tonnage. Rates grew, adding another USD 3-4 and reaching a level of USD 27 on the basis of the voyage from Rostov to Marmara, and Owners preferred short voyages. This circumstance can provoke the abundance of tonnage in the Turkish Black Sea ports on the 29th week. For example, there were about 20 vessels waiting for discharge on the roads of the port of Samsun at the end of 26th week, and July the 15th is the National Holiday in Turkey, therefore cargo operations were not being performed.
The demand for grain transshipment at the roads of port of Kavkaz increased markedly, which is explained by more favorable grain prices on basis of FOB Kavkaz. The sticking point for the further growth of shipments is the lack of the Russian-flagged tonnage supply. The average rate on basis of Rostov-Kavkaz at the end of the week was about USD 14 per ton.
The activity of shipments from the Volga River Basin remains weak. The accumulation of grain parcels at the river elevators has actually just begun, so Charterers are still busy with preliminary calculation of the transportations cost. The major freight market from river ports will be formed at the end of July. The main factor of influence on the market will be the heat and drought, which have settled in over the South of Russia in the second half of June and influenced the decline in the forecast of current year’s harvest in the Volga region.
Generally speaking, market sentiment is determined by the dynamics of the harvesting campaign, which has begun earlier than usual. 29.3 million tons of grain was harvested on the 28th week (5.2 million tons more compared to a year earlier). And while the harvesting rate still exceeds the level of 2018, the total crop yield is reducing and has already equaled last year’s figures: 37.8 cwt of grain per hectare. Reasoning from this fact, inference should be drawn that the 2019 harvest will not break the records of 2017.
When if the quality of grain and yield in Russia was affected by heat and drought, in Ukraine the harvest is threatened by heavy rains and high humidity. Such weather conditions are especially unfavorable for barley, making it difficult to harvest. As the result, there is a similar situation: the harvesting rate is growing, and the total grain yield is reduced. It is expected that freight rates from the Ukrainian ports of the Black Sea will grow the quickest at the end of July, and the increase will gradually slow down in the future.
The Caspian region shows an improvement in demand for the fleet from Astrakhan and Volgograd. Rates are growing, and another factor influencing this was the sharp reduction in the available Iranian-flagged fleet, most of which switched to contract work.
When if the freight rate on basis of Astrakhan-Northern Iran was USD 26-27 per ton of barley at the beginning of the week, it reached USD 29-30 at the end of the reporting week. Also, the comparably low density of the new crop barley (stowage factor) makes its contribution, so that vessels can intake it substantially less. Owners compensate this shortage by means of dead freight, which is included in the rate.
Freight rates moved into an active phase of growth on the Azov market. The demand for tonnage clearly exceeds the number of available fleet, and that fact is forcing Charterers to improve their offers in order to avoid breakdown of executed contracts. Key differences of the 27th week from the previous ones were an almost full absence of the spot fleet in the region, as well as the tendency to shortening of sea-legs distance from Owners’ side. For the sake of profitable freight Charterers have to remove all options further than Marmara, considering that Owners prefer to make short voyages on the growing market.
Georgian importers express concern about the current geopolitical environment. It is whispered on the market about a possible imposition of embargo by Russia on the supply of wheat in Georgia, which historically was very dependent on supplies of Russian provisions, including grain. At the same time Exporters believe that if any restrictions will be imposed, the process of issuing phytosanitary and quarantine documents will likely become more complicated, which will increase the transit time and freight rate.
At the moment, the grain of the new crop is supplied to sea ports primarily, and the demand for tonnage from the river is low. This is most pronounced in relation to shipments to Turkey, where are not many real deals, apart from the pre-contracted volume. Amid a backdrop of the decrease in the activity of fertilizer flow from the Caspian Sea (due to difficulties at the Garabogaz Fertilizer Plant), vessels working in transit faced the problem of lack of firm cargo offers from the mid-Volga. Basically, on the market there are offers from the Rostov region: Rostov, Starocherkassk, Volgodonsk.
The Caspian market has come alive again for the first time in weeks owing to the appearance of new crop barley in Astrakhan. In the meantime, the Russian-flagged vessels are in short supply. Charterers are ready to overpay an average of USD 2-3 for them as compared to the fleet with foreign flags. Sanctions against Iran continue to have a profound effect on Caspian trade. Market insiders expect that the Azov market may be flooded with additional volume of grain intended for Iranian supplies, which will affect significantly the power landscape in the region. In this case, the price of grain will reduce seriously, and the activity of importers will grow, which can lead to a record demand for tonnage.
Some farming units in the Saratov and Samara regions have already started harvesting, and most producers are going to start harvesting next week. For today, there are no clear forecasts for the quality of grain from this region. Upon preliminary information, the grain-unit may be low due to lack of rain, but many shippers still hope solid performance.