On the 27th week, the Azov region’s commodity market became active, which tugged freight along. Mostly residues were sold, but the new crop of barley had already offered for shipment. Shipments were performed by coasters to long-haul destinations, or in large parcels via Kavkaz roads transshipment. The amount of available spot tonnage has been significantly reduced, and Charterers have begun to lose momentum. Market insiders started talking seriously about the situation turning to Owners’ advantage. By Friday, spot vessels were being fixed at USD 1-3 more than last week, and the difference with the prompt ones reached USD 5. However, the sharp spike in rates did not come as a great shock to Charterers, who have already considered such a scenario when concluding their pre-sale contracts.
Many Owners hope to see rates rise to the level of USD 20 per ton on the basis of the voyage from Yeisk to the Turkish Black Sea ports in the near future. However, at the moment, the market is rather not ready to meet these expectations. There is still uncertainty on the part of the regulatory authorities: the restrictions have expired, but, at the same time, “nobody gave permission”. For now, it is unclear, whether these are bureaucratic impediments or the ban is expected to be extended in order to protect the interests of monopolists. Therefore, rates on the basis of the voyage from Azov ports to the TBS will likely remain at a level above USD 15 in the near future, but the ceiling limit of USD 20 will not be reached.
In general, despite positive forecasts for the grain yields this year in the Russia, prices on the Azov region’s commodity market went up following the Chicago Stock Exchange. Arguments regarding “reduction of price under the pressure of a new crop” do not work during negotiations. If the price gap was about USD 5 at beginning of the reporting week, then towards the week’s end it increased, and the prices offered by most Turkish Buyers were not accepted. The latter went for price rising only when the grain was needed to resupply the stock of raw materials in order not to stop production.
Starting from July 6, the permissible vessels’ draft has been reduced at the lower reaches of the Don River; it will now be 3.1 meter. At the height of the grain season, this means an increase in the cost of river transportation. Many Traders are beginning to trend towards delivering cargo to seaports by land in order to avoid the risks of vessel’s short-loading or idleness. The greatest headache for Owners of the deep-sea fleet is caused by water level fluctuations: due to the draft restrictions, they have to significantly underload their vessels sailing from the Caspian Sea, or to include a ballast passage in the rate of the main cargo transportation towards the Caspian Sea.
In general, the Caspian region’s market reacted with relative calm, although the number of cargo offer even increased slightly. This is connected to the desire to sell the residues of grain stocks before the appearance of the new crop. During the week, rates have risen by an average of a US dollar. However, there is expected even more growth by the end of the month, so Owners are not ready to discuss consecutive voyages; they are fixing only spot positions.
On the 26th week, the Azov Sea market did not show significant changes. Freight rates increased by an average of USD 1, which more likely may be explained by pressure in waiting for the upcoming grain season. Many Charterers were trying to fix spot positions in the quickest possible time in order to protect themselves from the sharp spike in rates. Amid this, Owners have managed to balance the market, and in some cases, turned it to their advantage. At the same time, there are still few spot shipments, and the tonnage supply exceeds its demand; however, Owners are already flatly refusing to work at the minimum rates out of concern to miss the long-awaited market growth.
Traders think that activity will resume starting from the 27th week. According to market insiders, a new crop of barley should appear in the port by this time; there also should begin firm negotiations on wheat. At the same time, many of them agree that significant changes on the market are not expected until mid-July. However, Owners are trying to fix only spot positions, holding their prompt fleet in case of sharp jumps in freight.
At the beginning of the new season, grain is traded at a very large price range. Strong fluctuations of the latter are explained by news reports and forecasts of the upcoming harvest in the main grain-producing countries. Thus, in Europe, the yield forecast has been declining for several weeks in a row. In Russia, on the one side, the forecast for winter barley is lowered weekly due to the lack of precipitation; however, at the same time, the forecast for wheat and other later crops is raised. In the light of such uncertainty, there are signed very few long-term contracts, which generally hinders the growth of rates.
During the reporting week, there have appeared spot offers from Charterers on the market, with the actual date of documents issuance on July 1. This allowed Shippers to exclude the loaded volume from the quota and, at the same time, to fix the vessel at a low rate. Such offers, even considering the risks of fleet idleness, were in demand from Owners’ side; this once again indicates the lack of cargo on the market.
The transit market has been under downward pressure in recent weeks. Compared to the beginning of navigation, the demand for the transit fleet fell, as the main part of urgent cargo was shipped, so Charterers began to take a more careful approach to the choice of vessels. This was the reason of rates declining, both towards the Caspian Sea and in the backhaul direction. An additional impact was the fact that the main part of transit cargo towards the Caspian Sea is intended to the Turkmenbashi port, which caused there congestion. Voyages in the backhaul direction often start from Bekdash, where there are also large queues due to the significant congestion of vessels. Charterers have almost no opportunity to work on the spot market to avoid heavy demurrages. Thus, by reducing freight rates, they try to reduce their losses.
On the 25th week, the situation on the coasters market in the Azov and Black seas region remained difficult. Market insiders expect that from July 1, restrictions on the export of main types of Russian grain crops will be lifted. Amid these expectations, a number of cargo offers for the first half of July appeared on the market. Traders are seeking options for shipping the first parcels of the new crop barley, which is being harvested in full swing in the Crimea, Krasnodar and Stavropol territories. Charterers with already signed contracts are trying to fix vessels as early as possible, taking advantage of the low market. Owners, in their turn, use the tactics of rates overshooting on July, trying to return the market to the level of voyages profitability in the quickest possible time. The balance has not yet been found, and so far, there are not many deals for July. For now, the market rather remains on the side of Charterers.
There is widely discussed the problem of issuing documents for a number of cereals that are nominally available for shipment since the beginning of July. Market insiders think that the Federal Service for Veterinary and Phytosanitary Surveillance officers have an unspoken order not to issue quarantine and, as a result, phytosanitary certificates before obtaining clarification from the Ministry of Agriculture. This may slow the rates growth in early July. Exporters who have faced a similar problem with the ban on sunflower exports in March will not enter into new contracts until the situation is clarified officially.
Market insiders also agree that the Ministry of Agriculture is likely to extend the ban on sunflower exports until the end of August to stimulate the domestic processing industry. Despite the negative reaction of the market to these intentions, prices for both sunflower oil and sunflower seeds have grown significantly. If the restrictions will be lifted, this crop may be in strong demand on foreign markets. For now, Owners may only hope for removing of the export quota for the main types of grain, such as barley and wheat.
The Caspian freight market is still in stagnation, meeting the same fate as the Azov Sea one. Everyone is waiting for the beginning of July, when the new crop of barley will appear on the market; it is already actively being traded. So far, the market insiders agree on the forecast that freight rates in the Caspian region will grow faster than the rates from Azov Sea ports, which is explained by the high demand for barley from Iran.
On the 24th week, the coasters freight market in the Azov region was characterized by a new trend, which may be cautiously called positive. According to information from traders, in the first days of July, there is expected increasing demand for the fleet to fulfill previously concluded contracts; work on them has stalled after the introduction of restrictions on wheat exports. With this in view, Owners tried to keep their vessels on a short leg (no further than Marmara). Most Owners will continue to use this reasonable, though forced, tactics in the absence of cargo. Taking advantage of low rates, some shippers are trying to fix vessels for several voyages or for time charter starting in July, but Owners do not rush to make deals in advance.
However, freight rates from the Azov Sea ports at the end of June – beginning of July have not yet been formed. Most part of the fleet at the Black and Azov seas is still open in spot. Only niche goods, which do not fall within the quota, appear on the market. Not all Owners are ready to fix on the last days of June, and those who agree give quite different rates. Thus, the rate on the basis of the voyage from Yeisk to Samsun is ranging from USD 11 to USD 18, against the current market’ rate of USD 9-10. With all this taken into account, it could be argued that the common grain program from the Azov ports has not yet been formed, excepting large Charterers. The latter, amid the market volatility, will try to work primarily their own vessels, fixing spot/prompt positions from the market only to avoid losses. It will be possible to determine a more precise market configuration closer to the July dates.
Judging by the indicators on the commodity market, sales of new crop grain at the stock exchange have been suspended; in the time following, in July and August it will be traded in spot/prompt.
The freight market in the Caspian region remains at the same level for the second week in a row. According to Exporters, purchasing prices for grain are very high, and no one wants to work at a loss. The key factor affecting purchasing prices is the US dollar exchange rate, which shows sharp fluctuations. This also has a negative impact on the freight market.
On the 23rd week, freight rates in the Azov region fell to a minimum; they are on the verge of economic reasonableness of voyage performing. On the basis of voyages from Azov ports to the Turkish Black Sea coast, a ton of cargo could be shipped for USD 10, in some cases even for USD 8. For some Owners, with figures like that, the economics does not always break even, considering the cost of the voyage. But even at such low rates, it is not possible to fix due to the fact that a significant number of tonnage is open in spot. The situation will not change within the foreseeable future: the old crop residues volume is extremely low; amid the sufficiently strengthened ruble, poor business activity of domestic sellers is quite understandable.
However, market insiders are actively discussing new crop grain prices, which have been steadily rising since the beginning of June. At the end of the reporting week, prices for the new crop wheat with a protein content of 12.5% and delivery to Novorossiysk on FOB basis in July fluctuated at the level of USD 198-202 per ton. In the middle of the week, Ukrainian wheat has being traded at USD 202 per ton, and Russian one at USD 204 per ton; by the end of the week, prices rose by another USD 2.
At the very beginning of June, the results of the GASC tender were announced: Egypt purchased 120 thousand tons of common Ukrainian wheat at the price of USD 210 per ton with delivery10-25 July from the ports of Nikolaev and Odessa on FOB basis. Amid positive forecasts about the harvest volume in Ukraine, grain from this country turned out to be the most competitive in comparison with offers from France and Russia. Despite the fact that a preference was expressed for bids no higher than USD 210, French grain continued to grow in price, which pulled the market up in other supplying countries as well.
The ongoing stability of the Caspian market looks almost positive as compared with neighboring regions. During the reporting week, freight rate on the basis of the voyage from Astrakhan to Iran was at the level of USD 20 per ton, which is twice as much as the rate for a comparable voyage from Rostov to Marmara. The only noticeable source of demand for tonnage remains the cargo traffic of Turkmen fertilizers, which is currently the main opportunity to make a profitable voyage for Russian-flagged vessels.
On the 22nd week, the coasters markets in the Azov and Caspian regions kept the trend towards stagnation. Apparently Owners will continue facing hard times during the month of June. Most of the tonnage is still open in spot, and there is a lack of cargo offer.
News on the fact the demand for tonnage may grow only by the end of July-early August due to the precipitation deficit in the southern regions, also does not add any optimism. In confirmation of that, futures for July contracts exceed August contracts, in average, by USD 5 at the moment. However, it is too early to assume that the entire coasters fleet came to a standstill. Shipments are being made, but there are very few of them. The rate on the basis of the voyage from Rostov to the Turkish Black Sea coast still fluctuates around USD 10 per ton of grain.
Charterers of non-grain cargo are taking advantage of the moment and trying to conclude profitable contracts for the next six months. Their activity provoked on the market a surge in demand for time charter for the next six or seven months. Commonly, during the high season (from July to December), the rate of time charter for a Russian-flagged river-sea type vessel of 3000 tons fluctuates from USD 3600 to USD 4200 per day. This year, when transferring vessels for time charter in May-early June (during the low season), there has been a marked tendency to reduce the rate to USD 3000-3200 per day, depending on the vessel’s characteristics.
As indicated by statistics, grain exports to the EEU countries, especially to the Republic of Belarus, have grown significantly on paper over the past few months. Market experts attribute this to manipulation of documents and increase in exports of products bypassing the quota under the guise of fictitious deliveries to the EEU countries. It should be noted that many Exporters use such schemes not in the result of good living, they only try to fulfill previously signed export contracts in order to avoid penalties for non-performance.
Market insiders think that the Caspian region may face a deeper crisis at the beginning of the new grain season than the Azov one. In the Iranian direction, the main commodity nomenclature, as before, will be corn and barley. According to official statistics, currently there are large carry-over stocks of these crops. This will not allow producers to get affordable price from Buyers at the beginning of the season, and many of them will hold their products. This likely may significantly slow down the dynamics of the market recovery in the region.
The coasters market spent the 21st week in relative silence. Freight rates fell by another USD 1, and a ton of bran could be shipped for USD 10 on the basis of the voyage from Yeisk to the Black Sea. There are no positive changes, there is observed the lack of cargo; the fleet is working on the verge of profitability, many vessels are open in spot, and there is a tendency to further increase the spot tonnage.
Due to the holidays in Muslim countries, especially in Turkey, there is a noticeable decline in business activity; long queues of vessels waiting for loading and discharging formed at Turkish ports. Many companies that still have possibility to export, i.e. whose products aren’t subject to restrictions, have to wait until the middle of next week when holidays will end, as far as buyers have taken a break and do not confirm any transactions: all Turkish banks are closed, and it is difficult to pay for the goods on time and get permission for discharging.
Experts note a decrease in the volumes of shipments from Exporters of non-grain cargo. Due to the economic downfall and the subsequent drop in demand for finished products, manufacturing companies significantly reduced the volume of purchases of raw materials and energy supplies. Most Traders think that the transportation of coal and metal continues at the level necessary only to keep production in working order. The situation is not expected to change until mid-summer, assuming that the quarantine restrictions will be lifted or at least eased, and stability and predictability will be restored in the banking sector. The latter is necessary for increase the volume of working capital of market participants.
Many Traders and Owners are waiting for the new grain season; they reckon to resume their activities with the new crop appearance on the grain market. This should favor the growth of the freight market. This growth, as well as the number of shipments from the Azov ports, will directly depend on how much Russian grain will be in demand from major market players working from deep sea ports. Russia and Ukraine are expected to be the main grain exporters in the Black Sea region in the new season. In Romania, a poor yield is predicted due to the drought.
At the moment, the Volga region’s flour mills are experiencing a shortage of raw material supplies due to the fact that the purchase price for wheat is too high. It is expected that producers will not rush to dump the new crop, and exporting companies’ buyers will have to face fierce bidding. In case if Russian grain wins any foreign tender with shipments from Taman or Novorossiysk, there may be expected new restrictive or regulatory measures on grain exports. For Exporters working from the Azov ports, these concerns complicate the planning their own export program.
In the Caspian region, the number of requests for inland transportation have rose; this may be explained by an increase in domestic purchasing prices for grain. Farmers clean their warehouses of the old crop and prepare elevators for the new crop grain.
Part of the coastal fleet will be laid-up for a couple of months due to the very low freight market. Owners think that “it is easier to stand idle or to go for unscheduled repairs than to work at a loss”.
The coaster market still was down in the dumps and has not experienced any significant changes on the 20th week. Demand for vessels remained extremely weak; at the same time, a large amount of spot tonnage has congested in the Azov Sea, which pulled rates down in neighboring regions as well. Observations suggest that part of the fleet is switching to the Continent due to current situation, which is also bearing additional pressure upon the market.
According to experts, business activity will continue to decline over the next two weeks, as far as Turkey, which is one of the main grain importers, goes for long holidays. On May 19, the country celebrates Ataturk Day, and on May 23, the end of Ramadan. Turkish companies will work only three days on the 21st week due to holidays; they will almost completely miss the 22nd week.
Some Owners preferred to leave their fleet at berths and not fix it in the face of the negative voyage economics. Other Owners try to reduce losses by agreeing to any rates, which leads to chaos on the Black and Mediterranean seas markets. Even large grain Exporters who have their own fleet are now looking for cargo on the market, as far as their vessels were left without work after fulfillment of the quota. The current situation will continue at least until the appearance of the new grain crop in July.
Market analysts provide a mixed assessment of the results of introduced quota. According to some of them, the main beneficiary of this situation was VTB group and its grain holding. By introducing this quota, the state supported “its” trader, since the real efficiency indicators of the new holding were far from the planned ones. In a point of fact, after the quota introduction, domestic wheat prices increased dramatically, and the number of possible exporters decreased just as sharply; this created favorable conditions for large traders to dictate their terms. During the reporting week, there were widespread rumors among market insiders that the quota could be extended until the end of the summer; this again will play into the hands of major players.
While the most part of the fleet in the Azov region continues to stay idle without work, the Russian-flagged vessels are actively involved in transit voyages from the Black Sea to the Caspian Sea and in the backhaul direction. In total, rates for such voyages have decreased slightly since navigation start, but still remain at a level that allows Owners to keep profitability of their business.
The main reason for this situation is considered to be high competition for vessels among Charterers due to difficulties in crossing land borders, which is reinforced by high demand for Turkmen fertilizers on foreign markets. According to key market players, even if the freight levels for transit voyages are further reduced, they can still remain profitable for Owners for a rather long time due to the fact that there is no ballast passage, as well as no dividing of voyages into “main” and “backhaul”.
The freight market in the Azov region still was “knocked out” on the 19th week. Since the volume of the export quota was fulfilled, no new contracts could be concluded. Almost all attempts to find alternative solutions and get permission to export were unsuccessful, and the week passed in the doldrums. The situation was slightly brightened up for Owners by the news that some Exporters refused part of the declared volume, and about 80,000 tons of cargo allowed for export has appeared on the market. This volume has been completely fixed almost immediately. According to market insiders, it was done by some major player. Many Owners are sure that such situations with the rejection of previously declared volume will occur more often near the end of June, so the market may still be in demand for tonnage in the current grain season. Meanwhile, rates from the Azov Sea ports have fallen to the lowest annual values.
In addition to the fulfilled quota, the market is also negatively affected by the seasonal factor. The low activity in the first half of May is always associated with holidays in Russia; and in the second half of May, Islamic holidays begin. Since the tonnage supply on the market seriously exceeds the demand for it so far, the situation with the holidays did not significantly affect the freight rates and the fleet positioning. Owners are more concerned with the issues of instantaneous loading of their vessels and do not make strategic plans for several weeks ahead.
Non-grain and niche cargoes remained workable on the market. Increased activity, for example, is shown by shippers of sawn wood. However, despite the low freight rates and flexibility of Owners, it is not always possible for the parties to confirm the deal. Due to the unstable situation in the recipient countries and difficulties with financing and obtaining of loans, market participants who do not have their own working assets cannot find financing to enter into new contracts with producers.
Experts of the grain market note that spring frosts and insufficient amount of precipitations in the southern regions of Russia may seriously affect the yield of winter crops. The forecast for the new crop has already been lowered by analysts by 5 million tons, to 123 million. According to producers, there is not enough moisture at the local level, and the summer is expected to be hot, which also does not add any optimism in regards to the yield of the upcoming season. However, there are no problems with precipitations in the Central and Northern regions of Russia, so there may be expected an increase in grain supplies from these regions; this may support freight from the river and the Azov ports. Nevertheless, experts are betting that the freight market will be very slow to recover from the current crisis so far, and rates will reach profitability only by the end of the summer.
The introduction of restrictions on grain exports from Russia has had a negative impact on the European wheat market. Shipments from Ukraine, Romania and Bulgaria have come to a standstill, as far as no agreement has yet been reached on the price. The domestic market in Romania offers producers a price significantly higher than the export price. Amid the drought and forecasts of a low harvest, low volumes of grain exports are expected from this country. In Ukraine, also due to the large price difference between exports and the domestic market in favor of the latter, goods such as bran and meal are mainly shipped, and wheat shipments are discussed mainly for July dates.
The Russian grain quota has hit hard not only the country’s coaster market, but also the Black and Mediterranean seas freight. A large number of open river-sea type vessels are trying to find work in an unusual for them region betting on dumping, and thereby reduce the market. The beneficiaries of this situation are Charterers of transit cargo. Transshipment on the Kavkaz roads almost completely stopped upon fulfillment of the quota. There were a lot of Russian-flagged vessels on the market, and competition for transit cargo increased sharply. Rates began to decline both for general cargo towards the Caspian Sea and for fertilizers and sulfur in the backhaul direction. At the same time, there is still a large deficit of the cargo offer from the river, which negatively affects the market. Some Owners are so desperate that they are ready to go in ballast from the Azov and Black seas to the Mediterranean Sea for the purpose of taking general cargo in transit to the Caspian Sea.
In the Caspian region itself, the freight market continues to fall due to the lack of grain cargo owning to fulfillment of quota. Caspian Owners are ready to take any backhaul cargo from Iranian ports to Makhachkala, Astrakhan and even to river ports to reduce their losses.
On the 18th week, the freight market in the Azov region has collapsed completely. For most of the grain market players, the 2019-2020 season ended ahead of schedule on April 26, when it became known that introduced from April 1 to June 30 quota for grain exports of 7 million tons was fulfilled. After the entire declared volume was formally exported, the Federal Customs Service suspended issuance of new export declarations. As a result, a large number of the fleet ended up in spot positions without cargo, and freight rates have dropped to a minimum. At the same time, the actual shipments from April 1 to April 26 amounted to 3.2-3.3 million tons, and the remaining volume has only been declared and is planned for shipment in May-June.
According to some experts, despite the fact that the quota was fulfilled, it is unlikely that Exporters will be able to export the entire declared volume in the current grain season, i.e. until the end of June. It is believed that major players declared large shipments to their trading companies in a bid to be on the safe side. There is a chance that closer to June, they will appear on the market at a knock-down price in anticipation of the new crop. Most market insiders are hoping for an increase in the quota by the Ministry of Agriculture; according to rumors, about a million more tons may be allowed for export. The Agmin itself, however, claims that its plans don’t involve this.
Some Charterers who have fixed the fleet but did not have time to make shipments, have got into a tough situation. It got to a point that on Friday, April 24, people received permission to transport grain to the export terminal and executed a railway subsidy, and on Sunday, April 26, it turned out that the subsidy was no longer needed, because the quota was fulfilled. According to rumors, the Ministry of Agriculture can make an exception for such cases and introduce targeted quotas for particular shipments upon presenting of bills of lading.
Traders are trying to draw up new supply chains in circumvention of imposed restrictions. Basically, all of them are revolve around the formal conclusion of contracts for the grain export to the EEU countries with further re-export to third companies. Thus, there occurred offers on the market for shipments to Armenia “in transit through Georgia”; in the Caspian direction, grain exports to Kazakhstan are increasing, with further reissuance of documents to Iran. The latter scheme looks quite difficult, as the authorities of the neighboring Republic also imposed restrictions on grain exports.
A reduction in the offer of wheat on global markets led to a rapid spike in its price it at the end of the current season. One of the main beneficiaries in the current situation may be “VTB Group”, whose affiliated companies are rumored to have declared the main part of the limited by quota wheat. If the current market situation persists, they will have great opportunities to sell large parcels at overestimated prices.