Coronavirus May Pressure Dry Bulk Freight Rates and Benefit Grains & Oilseeds
Grain & oilseed (G&O) dry bulk freight rates have so far remained higher YOY in Q1 2020, due to a combination of higher YOY daily time charter rates for Panamax and Supramax and the implementation of International Maritime Organization (IMO) 2020 regulation. While uncertainties remain on how long the coronavirus outbreak will last, the combination of expectations of an oversupply in dry bulk shipping capacity and a relatively low crude oil price environment is likely to limit the upside for G&O dry bulk freight rates in 2020, benefiting prices of G&O in importing countries.
Currently, not all countries require vessels to be quarantined after berthing in countries affected by the coronavirus outbreak. However, the requirement for medical/temperature screening of ships’ crews in most countries could still cause delays.
What’s the impact of continued relatively low freight rates in 2020?
1. G&O exporters located further away from their destination will become increasingly competitive.
2. G&O processors in importing countries could preserve and/or improve their processing margins, due to cheaper landed costs of imported raw materials.
3. Containerized G&O exporters/importers need to develop a contingency plan to move their cargoes, as a shortage of containers may last through 1H 2020.
Asian G&O Import Demand Remains Healthy in Q1 2020
A combination of seasonal dry bulk demand weakness during Q1 2020 and the coronavirus outbreak in China – which imports the majority of globally shipped dry bulk cargo volumes, including ~70% of iron ore, ~20% of coal, and ~20% of major G&O, making it the largest importer in the world – caused the Baltic Dry Index (BDI) to drop to the low of 411 in early February 2020 (see Figure 1). The coronavirus outbreak has disrupted industrial activities in China, which resulted in reduced demand for dry bulk vessels, particularly demand for Capesize vessels that carry industrial raw materials to China. China’s soybean industry also faced issues in Q1 2020, but Rabobank forecasts a quick recovery of China’s soy oil and soymeal demand leading to a forecast increase of China’s soybean imports to 86m to 87m metric tons in 2019/20, up about 4m metric tons YOY (see our report, Coronavirus Hits Chinese Soy Supply Chain).
BDI has since recovered to 627, as of early March 2020, due to increasing demand for Panamax and Supramax vessels, which the global G&O industry mainly uses for shipping. Availability of G&O cargoes contributed to this increasing demand, as Asian G&O import demand remains healthy so far in Q1 2020, supporting the recovery in BDI-Panamax. China continues their soybean purchases in Q1 2020, despite the coronavirus outbreak. On top of this, buyers from other Asian countries, such as South Korea, Thailand, and the Philippines, took the opportunity to procure wheat and corn in February and March 2020 on the back of a drop in G&O prices.
Figure 1: BDI decreased by 42% from early January 2020 to early March 2020
Source: Baltic Dry Index, Bloomberg, Rabobank 2020
Limited Upside for G&O Dry Bulk Freight Rates in 2020
Even though Q1 2020 G&O freight rates are higher YOY (see Figure 2), the impact of IMO 2020 regulation on the increase in G&O freight rates has been less than what we initially expected (listen to our podcast, The Impact of the IMO 2020 Regulation on the Grains & Oilseeds Industry). This is because prices of marine gas oil (MGO) and very low sulphur fuel oil (VLSFO) have decreased by more than 35% (or more than USD 250/metric ton) from January 2020 to early March 2020, which was largely caused by an even stronger decline in crude oil prices during this period. In addition, the impact of the coronavirus outbreak, which has reduced shipping demand for industrial raw materials, containerized cargoes, and liquid cargoes, has reduced global demand for MGO and VLSFO. Dry bulk vessels that are not fitted with scrubbers need to burn MGO and/or VLSFO to comply with IMO 2020 regulation.
Figure 2: G&O freight rates from major origins to China, Jan 2019-Mar 2020*
Source: Bloomberg, Rabobank 2020
*Freight rates = vessel costs, fuel costs, and other costs
In its February 2020 report, BIMCO expected dry bulk fleet to grow 3.1% YOY in 2020, down just slightly from the 3.9% growth registered in 2019. BIMCO also estimated that demand for dry bulk shipping would only grow between 1.5% and 2.5% in 2020 due to the coronavirus outbreak, thereby adding to the dry bulk shipping overcapacity situation. We expect the combination of dry bulk shipping overcapacity and relatively low crude oil prices to limit the upside potential of G&O freight rates in 2020.
Although we expect the consumption of G&O and meat in the foodservice industry (FSI) in Asia to be negatively affected by the coronavirus outbreak, G&O demand from home consumption in Asia is still expected to remain resilient, thus offsetting most of the G&O consumption reduction in FSI.
Relatively low freight rates are beneficial for G&O processors in Asia, as they could preserve and/or improve their processing margins due to cheaper landed costs of imported raw materials. This is also useful for G&O importers for purposes of raw materials diversification, as they could procure G&O from new origins in small volumes for initial quality testing.
Global Lack of Container Availability
Even though the majority of G&O exports are shipped as dry bulk, containers are also partly used to ship G&O to destinations with port limitations as well as to ship specialty G&O. For example, in 2018, containers were used to transport 8% of total US G&O shipments. Approximately 94% of US containerized grain exports were destined for Asia. The coronavirus outbreak in China has resulted in a global reduction of available containers, due to congestion in Chinese container terminals and reductions of Chinese exports in containers. While industrial activities in China are slowly reverting back to normal, the availability of containers for G&O exports might only improve in 2H 2020.