What's new in the grain industry?
The Panamax and Supramax average earning have been supported by a strong US grain and Indonesian coal shipments in recent weeks following China’s unofficial ban on Australian coal and the news about Brazil’s slow soybean planting, which raised concerns for potential delay and crop conditions. The Panamax average earning (P5TC) rebounded strongly to USD12,863/day on 28 November, up almost 23% from USD10,488/day about two weeks ago. Also, Supramax earning (S10TC) increased to USD11,198/day from USD9,707/day over the same period, according to the Baltic Exchange.
For the grain trade, China continues to buy US soybean in large scale, and most importantly, early 2021 demand have switched to the US to avoid the risk of delay in Brazil’s grain export season owing to the La Niña impact.
Cumulative soybean inspections reached a record 24.4 million tons, which was up from 10 million tons as of 19 November 2020. China continued to be the dominant destination at a record 17.6 million tonnes, representing 72% of total inspections. Although we have seen slower pace of shipments in early November, especially from US Gulf area, a slowdown in US export sales after November is normal as buyers start to look at South America to book forward supplies. However, since early November, much of the market attention was focused on weather and planting delays in Brazil.
Although planting progress in Brazil have caught up quickly with the return of rain, we believe that the market still needs to adjust delays-related trade flows in Brazilian shipments in the beginning of 2021. Brazil’s depleted old-crop stocks and strong need for early-harvested soybeans for the local crush industry, together with the harvesting delays, will result in much lower export volumes for January and February 2021. The S&P Global Agribusiness intelligence team expects the Brazil’s soybean shipments in January and February 2021 will decline to just 2.6 million tons from 6.2 million tons the year before. On the other hand, Chinese demand for soybean remains strong with the recovery in pig herd and pork consumption from African swine fever outbreaks, and therefore China still need coverage for the first quarter of 2021. We expect most of alternative soybean volume will originate from the US to avoid delay risks in Brazil. Moreover, as of 30th November 2020, S&P Global expects 2020/21 China corn imports to reach about 24 million tonnes from 7.7 million tonnes in 2019/20 season. Also given the fact that (1) China’s domestic prices have made new all-time record high again in November and (2) China has committed to purchasing agricultural products from the US at almost 50% above the 2017 baseline as a part of the US-China phase one trade agreement, there still are upside risks to our China corn import forecast and we believe US corn will meet most of the growing corn import demand in China. Thus, we lower exports forecast from Ukraine and Brazil.
For coal trade, we have seen strong Indonesian coal shipments to China following China’s unofficial ban on Australian coal imports. As we have explained previous article (Who will replace Australian coal), China tried to replace Australian metallurgical coal with Mongolian volume and thermal coal with Indonesian coal. However, as the risk of second wave of COVID-19, Chinese checkpoint at the border imposed stricter COVID-19 checks on Mongolian truck drivers, causing significant logistic issues and reduced inland coal supply. Also, tight supply from domestic mines with higher heating demand resulted in soaring domestic prices. This forced Chinese authorities to award coastal power plants with additional quota for December, which resulted in the surge in coal shipments from short-distance suppliers, mainly Indonesia.
Interestingly, total Australian coal shipments also recovered as Australia offered its coal to Japan and India with much cheaper prices in order to offset reduced demand from China. This also helped Pacific earning of Panamax to stay firm since mid-November. However, we still remain cautious for the early months of 2021.
First, since US grain exports will peak in the fourth quarter of 2021, US export volumes cannot offset the loss of ECSA and Black Sea export volumes in 2021 and current strength of US grain shipments will eventually decrease ECSA and Black Sea corn and soybean shipments. Also, recent rally in international soybean prices would limit additional demand backed by robust crush margin and may force some buyers to wait for the Brazilian crop in the second quarter of 2021. Second, once Chinese domestic production recovers slightly and domestic prices stabilise, China’s import restriction will remain a prominent feature in 2021. Therefore, high demurrage would still be major issue with vessel queues still at record highs. Also, if winter restocking activities from major power plants in Asia is completed, available tonnage will increase again. Large number of newbuilding deliveries are still expected in Asian shipyards as well. Furthermore, recent announcement of winter regulation from South Korea to close 9–16 coal-fired plants through winter will put more pressure on the winter coal import demand.
In conclusion, the sub-Panamax freight market still has upside potential in the short term with strong Chinese demand in coal and grain. However, once the surge in restocking activities complete, demand growth may fade with worsening COVID-19 situation, exposing freight rates to struggle with oversupply in early 2020 before vaccine-driven demand growth picks up in second-half 2021.
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