Maritime logistics and the freight market stand as pivotal determinants in shaping prices for raw materials and agricultural products. Brokers' assessments reveal that in 2023, the freight component accounted for anywhere between 13% to over 25% of the grain price on a C&F basis, contingent upon factors such as volume, direction, port, and sea route. Recent geopolitical events, including the war in Ukraine since 2022, challenges at the Panama Canal, and the escalation of tensions in the Red Sea following Houthi rebel attacks on vessels, have profoundly reshaped the sea routes of numerous global shipping entities. These developments have reverberated across the insurance market, trade geography, and various other sectors. How a global operator in the dry cargo segment Handy, Supra and Panamax with an international sales structure and experienced staff sees the situation in the maritime logistics and freight market, in an interview with the director of BPG Shipping, Gennadiy Ivanov.
Gennadiy Ivanov: more than 25 years of experience in the field of maritime logistics
- Gennadiy, how do you assess the impact of the crisis in the Red Sea on maritime logistic?
- I think there is no need to repeat myself and emphasize the importance of the Suez Canal as a route between Asia and Europe, so let's get straight to the specifics. It seems to me that the war in Ukraine has significantly reduced the "sensitivity" of shipowners to military risks, because dry bulk ships continue to follow the Red Sea. Yes, some shipowners refused, some part, having a choice, prefers to avoid transit through the escalation zone. But unlike tankers, container carriers, and gas carriers, there is currently no chain reaction of shipowners in the dry bulk segment. This is also influenced by the ongoing implementation of previously concluded contracts, wherein shipowners retain the prerogative to decline entry into the Red Sea solely in the event of an official navigation ban, among other factors. However, despite the prevailing "positivity," lingering uncertainty regarding decisive de-escalation measures implies that, in the medium term, the traffic of dry bulk vessels may inevitably decline. Shipowners are likely to prioritize enhanced flexibility in their decision-making processes when negotiating new contracts, particularly concerning the selection of secure routes. Consequently, we anticipate a gradual uptick in freight rates if the market sustains its current cyclical equilibrium, or we may experience explosive growth, as in late November 2023, when factors such as China's declaration of support for the construction sector, diminished capacity at the Panama Canal, simultaneous congestions in the ports of Brazil, South Africa, and Indonesia, culminating in a pronounced supply-demand imbalance.
- What about Black Sea freight in the current situation?
- Primarily, it's essential to highlight that the downward pressure on freight rates from the Black Sea stemmed from a reduction in Ukrainian grain exports activity since the beginning of 2024, and the global situation of commodity markets plus the correction of the global freight market after the boom at the end of 2023. This especially affected the rates for batches of 25-30 thsd tonnes (handy-size vessels), where shipowners are forced to dump. It is interesting to trace the movement of freight rates for such benchmark batches (Handy-size/Meditaterian and Panamax/Far East) since the beginning of the "grain corridor" operation. It is worth noting that, unlike handy-size, rates for large batches (supramax, panamax) decreased much less "dynamically". Furthermore, it is noteworthy that presently, with the accumulation of successful experiences regarding ships passing through Ukrainian Black Sea ports, there remains a sufficient number of ship owners in the market who are ready to enter Ukraine. However, considering that the situation in the Red Sea will inevitably lead to a reduction in tonnage supply to the Mediterranean and Black Sea regions, it is foreseeable that any intensification of trade, including in countries like Romania, Bulgaria, and the Russian Federation, could result in a significant spike in rates. This surge would stem from a scarcity of tonnage in the region, both overall and specifically for Ukrainian exports.
“New” grain corridor: freight dynamics
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Period
Freight (USD/pmt)
30.000 mt / 10% Wheat
Ukraine (Black Sea) – Spain/Egypt Med
Freight (USD/pmt)
65.000 mt / 10% Wheat
Ukraine (Black Sea) – Far East
Sep’23
75-70
80-90
Oct’23
70-59
80-75
Nov’23
59-43
75-70
Dec’23
43-37
70-65
Jan’24
37-32
68-62
- Another question regarding insurance premiums in terms of military risks when entering Ukraine and the Red Sea
- At the moment we can see that insurance premiums increase during the Red Sea/GOA passage.
|
|
Before escalation |
Currently |
|
GOA transit costs |
||
|
Insurance
|
USD 5-10.000
|
Indian Ocean / Gulf of Aden / Red Sea HRA: 0.30% for 7 days and subject to 50% NCB (no claim bonus) (for example for H&M 15 mil the insurance costs will be USD 45.000 with potential further 50% discount) |
|
Security Guards
|
USD 5-10.000
|
USD 5-10.000
|
|
EWRI to call Yemen ports |
||
|
Aden / Mukalla (Yemen) |
0.25% for 25 days and subject to 50% NCB |
0.40% for 25 days and subject to 50% NCB |
|
Saleef / Hodeida (Yemen) |
0.5% for 25 days and subject to 50% NCB |
0.7% for 25 days and subject to 50% NCB
|
Concerning the present status of Extra War Risk Insurance (EWRI) requirements for vessels entering Ukraine, traders can generally estimate the current cost of extra war risk insurance at a freight rate of about 5-10 USD/t for 7 days. If a vessel surpasses the initial 7-day period, which becomes more probable during winter, each additional day is estimated to incur a cost of around 0.6-1 USD/t.
In the case of the "closure" of the Suez Canal for Ukrainian grain exports to the east, the difference in the voyage from the Black Sea to North China, bypassing Africa, is about 20 days. Considering today's expenses for renting a ship and fuel for a shipment of 65 thousand tons of grain, this extended route would lead to a freight increase of around 20 USD per ton.
- What, in general, are your forecasts for the trends of the freight market in 2024? What can Ukrainian traders expect?
- Regarding the forecast of the freight market for 2024, in my opinion, the main trends should be highlighted:
• CHINA/INDIA
Potential stimulation of China's economy. India's economy is clearly growing.
Similar to the aftermath of the 2009 crisis, when substantial subsidies injected into the Chinese economy caused a sharp increase in freight. This week, China has officially disclosed a substantial package of support for the local stock market.
• WORLD ECONOMY - SUPPLY/DEMAND
In 2023, maritime trade increased by 3.2%. Under the same forecast for 2024, the projected increase in tonnage is approximately 2.4%. If the same dynamics are maintained in 2024, there are no grounds for a critical imbalance between tonnage supply and cargo demand. It is worth noting that amidst the global trend towards the decarbonization of shipping, shipowners are increasingly operating within the parameters of relevant International Maritime Organization (IMO) regulations, which in the long run may reduce the demand for newbuildings.
• CONGESTIONS (TON-MILES)
In 2023, the ships changed their route to bypass the Panama Canal. In 2024, bypassing the Suez Canal will potentially be added to this. Given the escalating influence of climatic factors, which amplify economic pressures and contribute to congestion issues, it's plausible to anticipate a notable uptick in ton-miles and consequently, freight demand.
• GEO-POLITICAL
No comments here - everything is clear. It is important to add that geopolitical problems also have potential changes/reorientations of traditional trade routes with hard-to-reach predictability of consequences, primarily the volatility factor. At the moment, the escalation in the Red Sea has primarily affected crude oil and container cargoes, laying the foundation for inflation.
• CO 2 - 𝙘𝙡𝙞𝙢𝙖𝙩𝙚 𝙜𝙤𝙖𝙡𝙨
From January 1, 2024, the cost of EU carbon emission allowances will be included in the Capesize freight estimate, namely for the route from Brazil to Rotterdam (C2) and from Colombia to Rotterdam (C7). Henceforth, shipping companies will be compelled to acquire EU carbon permits (the core of the "idea" is that emissions trading will force shipping companies to invest in green technologies). Consequently, an anticipated redistribution of tonnage between regions is on the horizon, when more efficient (environmental) tonnage will be better for trade in Europe.
In general, 2024 is poised to witness repeated periods of sharp growth in volatility, and therefore making it crucial for Ukrainian grain traders to be careful in matters of freight valuation and coverage.
Interviewed by Olena Cherednichenko
