Tanker Shipping Market Analysis and Forecast - Case Study Example

GRAIN TRADE MARKET FORECAST Figure Image showing loading grains at a port Source: (gCaptain Maritime & Offshore News, 2013) Contents Table of figures 3 List of tables 3 Supply analysis 13 Grain trade forecasting 17 Grain Shipments 22 Bibliography 24 Table of figures Figure 1-Image showing loading grains at a port 2 Figure 2 Baltic Dry Index, 1985-2013 6 Figure 3-Global markets for corn in 2013-2014 8 Figure 4-Dry maize market share Source: (Hgca.com, 2014) 9 Figure 5-Graph showing how the demand of dry grain is anticipated to rise in the month of April 2015 17 Figure 6-Figure of World Wheat Market 19 Figure 7-World Coarse grain market 20 Figure 8- The North Sea Route (Arctic-lio.com, 2015) 23 List of tables Table 1-Major grain importers 8 Table 2- Table showing the major grain exporters 13 Introduction Economists believe that although forecasting is an easier task, making it successful might be a bit difficult. Several forecasts do not always end up being right; with just a few being successful (Stopford, 1997, p.490). The importance of forecasting is that it aids businessmen in planning for the future. This paper is going to focus on dry bulk sector and in particular grain trade through analysis of different factors that affect grain market. The paper will concentrate on the coming months as present grain year finishes in the month of June, 2015. It’s hard to predict grain trade since the shipment of the tonnage hugely depends on the harvest size of the grains in their production areas and the amount that will be imported by other countries. The flexibility of sea transportation is also essential in grain trade. The demand and supply factors that affect the industry will be discussed while availing the preceding data. After that, an analysis and forecasting of the factor affecting demand and supply will be done. Background The grain trade history is as ancient as the start of civilization. The grain shipment all over the world existed in the ancient Roman and Greece empires. In the present world, the grain trade is very vital to the economy and it’s controlled by states. The grains have a political and economic importance as well as being imperative in the making of policies (Atkin, 1995, p.21). The meaning of grain is corn or wheat. The international grain code also categorizes soya a grain; soya will not be discussed in this essay. The grains are mainly moved in Panama and handy size ships. They are hardly shipped using capsize ship (Talley, 2012, p.90). There are five big groups that exist in this network for example Cargill, who add up to the whole of shipment globally (Economic Study, 1981). The exporting nations of grains are Argentina and America while Asian countries are the main importers. The routes of this trade have altered in the present time due to technological and industrial developments. The change is due to information availability from traders and lending firms that can forecast production of grain. Such indicators are inclusive of the dry index that provides a reflection of commodities’ freight rates (grain, coal, iron). Moreover, there is the IGC freight index (FAO, 2009) which is applied in the calculation of grain cargo. The information on grain trade is documented in the Grain council, USDA, UNCTAD and FAO websites. (Noble group, 2010). Forecasting and evaluation of dry grain During forecasting of the shipping market, the future of the whole market is taken into consideration. It mainly focuses on the outside environment that the shipping company operates. The purpose of this research is to study this market and forecast its operation for the subsequent months. The statistical analysis of factors affecting demand and supply and how they relate to the freight market will be explored. Before making the market analysis, it is vital to understand the shipping industry and its operations in business. Market analysis is the process in which the market relates demand and supply changes through familiarizing cycles of slumps and boom. As an analyst forecast in this market, he or she has to understand the cycle of business. Dry market shipment cycle The Baltic Dry Index, abbreviated as BDI, is an indicator for the trade and it is the economic pointer for the forthcoming trade. The cycles are evaluated by the use of BDI as it shows all dry bulk shipment and trade routes. Grain Freight Index (GFI) is also employed in working out the future trade and it only considers grain cargo. Figure 2 Baltic Dry Index, 1985-2013 Source: (Index, 2015) From the Baltic Dry Index graph, the general trend is that there was a low shipping supply due to low demands in the years 1985 – 2002 since the shipping supply affect the Baltic Dry Index. The shipping supply then increased and it was highest in the year 2008 as the demand was high and created inflationary pressures on the supply chain. The BDI then dropped sharply in the year 2009, as the demand for supplies was very low indicating a recession as the producers reduce their demand for ships leading to shippers reducing their freight rates on order to attract cargo. It is also clear that the BDI is constantly changing thus reflecting its price discovery mechanism. Demand and supply in shipping The shipping industry is a consequent of market demand. Demand in this case is volatile and changes quickly while supply is slow to change; thus, a balance is needed between the two (Stopford, 1997, p.117). The shipping of grains is affected by various factors. The supply and demand model expands on the several factors that affect this industry. Given dry grain is a basic need, the shipping demand becomes inelastic for a short period. Although, in case the shipping price increases over an extended period, trade is forced to seek for other ways to compensate the inelasticity (Barro and Grilli, 1994, p.139). The supply mainly depends on the ship size and ships available for the transportation of cargo. Usually in trade, the supply curve moves from a minimum, and where the market is stable the curve rises though it stalls there for a short time. The evaluation of demand and supply factors plays a vital role in the understanding of this market and the preparation of a forecast. When demand increases due to any factor, there is a change in the freight charges as there is adequate tonnage. Increased demand will lead to a substantial rate increase. Demand analysis Source: (Titanoutletstore.com, 2015) Figure 3-Global markets for corn in 2013-2014 The table above illustrates that Japan are the leading importers of corn in the world according for over quarter of the total corn imports. Colombia and Malaysia are the least importers of corn in the world as per 2013-2014. Mexico and South Korea are also leading corn importers which is mainly used to feed livestock. The climatic changes in the Asian continent explains the reason why Japan and South Korea import more corn. Major Grain Importers Market Share in Percentages Asia 31 Latin America 22 Africa 22 Middle East 18 Europe 5 Table 1-Major grain importers In the table above, Asia has the highest demand for grains while Europe has the least demand. Thus, the Asian market affects the price of grains strongly and it also affects the shipping industry to a large extend as a drop in demand of grains in the Asia will cause a fall in the demand for ships and an increase will make the ship industry to boom. Latin America and Africa have the same demand of grains. Source: (Review of Maritime Transport, 2011) Figure 4-Dry maize market share Source: (Hgca.com, 2014) The graph above shows how countries export the dry maize compared to the U.S.A. Brazil is the main competitor to the use followed by Argentina. It is evident that South America and North America have a major influence in the maize market and can determine the world market prices by themselves. The economy of the world is important in influencing demand for ships. A relationship exists between states growing wealthier and demand for sea transportation of dry grain. Therefore, an individual has to study the economy well to know the grain market trends. The GDP of the world is increasing yearly and according to data in 2008 the GDP of the world increased by 3 percent and decreased by -0.8 percent in the succeeding year (Sabillon, 2005, p.54). In growing economies, 8% increase in GDP is huge and helps the states to develop at faster rates (IMF, 2012). As the country’s economy develops, the traded commodities via sea goes up. The trend is cyclic in that the sea trade leads to further growth of the country’s economy that later leads to global market growth. In addition, globalization has resulted in the growth of sea trade. The capacity of developing states particularly India and China which are highly populated, to take in basic food like bread has risen. This has directly influenced grain consumption in this countries, thus, an increase in trade. As states’ economies grow, their dietary patterns tend to change. The meat demand which has increased yearly, has indirectly led to the increase in the grain trade (USDA, 2008). Approximately 70 percent of the grain consumption forms animals’ feed. The trade of grain is pushed by consumption and production trends in various areas globally such as the crop yields, changing patterns in the consumption food, and weather conditions. Also, grain is used in bakery and in feeding animals for the production of meat (ICS, 2004). Globally, grain is widely grown. Most grains grown in Asia are for consumption and, therefore, do not influence the sea trade. In contrary, states like the United States produce grains with the main aim of exporting them. The trade of grain increases every year and in the year 2013/2014 it increased to 12 percent from 8 percent in 2012/2013(FAO, 2009). The seasonal variations that affect grain production, are climatic changes and differences in soil productivity. Grain trade in the sea is also influenced by natural calamities like floods and earthquakes. For example, calamities in countries such as China and Japan have forced them to import grains from U.S. for many years. The high yield seeds have been introduced due to the problems of crop disease and fertilizers are employed to increase productivity. The grain trade in the sea also depends on quality and type of grain that have been harvested in various parts of the world. A bigger portion of all production of grains is always used for consumption by households. Developed countries produce grains mainly with the aim of exporting. From the data by FAO (2009), only 0.14% of the total production of grains produced in China was exported. The grain statistics are always calculated every year starting from June. As the production of grain is dependent on many factors, it is difficult to forecast because of the present growing season in the hemispheres that influences grain forecasting. The average low demand for shipment is directly proportional to the distance covered by the shipping vessel. The demand for sea transport is measured in ton mile. TM = the product of the cargo shipped tonnage and the distance of transport in miles (Fluglaerm.de, 2015). From the calculations, the grain train in TM has increased with time from 475 billion TM in the 1970 to 5, 067 billion ton-mile in 2014. The average ton for dry bulk has increased sharply with the time and has in turn affected ships demand. The soya beans and maize shipping took time in the earlier years due to outsourcing. Agricultural policies and political events indirectly influence the demand for grain transportation. The war impacts will influence the trade for a short period. A political embargo that was introduced by Americans on the USSR when they invaded Afghanistan reduced the Russian grain supply by approximately 6 m tons (Dronin and Bellinger, 2005, p.230). It brought alteration in the trade of grains as Russians had to import grains from states like Australia and Canada. The policies of agriculture also affect grain trade in the world market. The direct policy affects grain production and protects investors from world market conditions. In the past, India banned grain exports as it needed the grains in the local markets but the ban was lifted as the supply become more than the demand. It led to India becoming open to the world market. There are five main international companies that trade in grain. These companies are responsible for shipping three -quarter of grains in the world market. Hence, these players are responsible for moving the grains from the producers to the consumers. The risk involved in shipping grains is high. Grain is widely traded, and hence networking is required to operate internationally. The companies that deal in big grain have systems that give them all the needed information of any country. The agents of these countries are located in all important grain importing, exporting and producing nations, checking the weather, crop, conditions, political development, and economic trend. The economies of scale prevent other people from entering the market hence; the big firms can affect the market. Supply analysis Major Grain Exporters Country Market Share in percentages United States 33 The European Union 10 Canada 9 Argentina 8 Australia 8 Others 33 Table 2- Table showing the major grain exporters Source: (Review of Maritime Transport, 2011) The factors of supply comprise of the ships that are available for movement and the market. The major factors that influences the supply of ships are; production subsidies, shipyard costs and the shipbuilding capacity. The ship-owners determine the time that the new ships will be ordered and when the old ships will be scrapped. The charterers affect the supply of ships as they influence the ship-owners by asking for time to transport their cargoes. Bankers affect capital investment as they are lenders that finance the purchasing of ships. The authorities affect the supply of sea transport as they determine the fleet capacity by use of various legislations (Lun, Lai and Cheng, 2010, p.22). According to Stopford, 1997, (p.473), these factors can be grouped as production subsidies, shipyard costs and the shipbuilding capacity. The players above are the ones who decide on the capacity of ship supply. For further understanding, we shall discuss each of the four factors. Bulk carriers can be traced to 2000 years ago when the Rome imported over 30,000,000 bushels of grain from Africa (Stopford, 1997, p.292). Ships that had the capacity to carry grains were built. The construction was done in a way that they had holes that made them safer in carrying bulk grain. The employing of bulk carriers was important in the bulk trade growth. Panama ships and handy Max were used for the transportation of grains though occasionally capsize ships were used for bulk grains. There have been changes in the shipping industry such as new designs and technology like self-un-loaders. As a result of this changes, ship owners need to make complicated decisions while ordering new ships. The production of a fleet is calculated to know the conditions on the current market. The changes in the market conditions affect the operating performance of the ships. For instance, if the market is promising then the carrier ship after finishing its shipping its trip, it can load cargo on its way back. This has been the case in recent years as the market has been favorable. The new ships that are added influences demand and supply positively. The added ships cause satisfaction as demand is met but at the time there may be an oversupply. The new fleet always creates a long-term effect. For a ship to be delivered after being built it takes to up to four years. This forces the investors order for ships according to market forecasting. In 1980s, there was a boom in the building of bulk carriers due to dominance, and this led to the oversupply. The dry bulk market became comparatively stable in comparison to market of tankers. Over the years, the delivery of newly built ships has sharply increased and in 2009 it was at its peak. This behavior can make the ship owners and new investors alike to order new ships without proper study of the market and knowledge that ships take long to be delivered (Stopford, 2013, p.474). The size of fleet depends on loss and scrapping of ships. In the market, the fleet size can be balanced by scrapping. Other than market conditions being the major factor, scrapping of ships also depend on factors like prices of the scarp, variation in regulations (Stopford, 1997, p.467). age and the present incomes of ships. Decisions such as scrapping of ships are typically made for the betterment of the business. The decision-making process must incorporate future market as one of its consideration. The percentage of ship scrapping was less in the period of booming. The market conditions are what decide ship scrapping. Sea transport influences Freight rates. The shipping business depends mainly on freight rates as one of the major market regulators. In grain business, freight rate is the primary factor in grain’s market marketing chain (Stopford, 2013, p. 139). Expenses incurred in the transportation of grain account for a significant portion of the grain price since grain is a commodity of low value and yet very bulky. Volatile and variable best describes grains’ ocean rates. The ocean shipping rates are not linked to the price of grain as the cycles of grain price depends mainly on weather conditions, wide-ranging economic development, and agricultural policy. Demand and supply factors and market conditions drive the freight rates (Stopford, 1997, p. 139-141). Imports of grain are done by a variety of countries whose capacity varies, and this is a major aspect of grain business, unlike other goods where geographical areas are defined. Henceforth grain markets are majorly spot charter fair, in which the rates are fixed on the spot. The balance in demand and supply of cargo and vessels determine freight rates. Usually, in trading grain steamers are lent on a charter basis. The rates of freights are worked out by the balance of cargo and vessels demand. Therefore, the supply depends on the demand for shipping of dry grain which also depends on the season. Grain trade forecasting Figure 5-Graph showing how the demand of dry grain is anticipated to rise in the month of April 2015 The graph above shows how the demand of dry grain is anticipated to rise in the month of April 2015. The GDP of the world from statistics of IMF shows that there was 4 percent increase in 2013 (Coyle, 2014). The rate is more as a result of emerging economies growth that is anticipated to rise by 8 percent (ERUSSDA, 2008). Progressive economies are anticipated to increase by 11% in 2015. As a result of demand forces from new economies, prices of commodities are anticipated to increase. The population of the world will increase at an average rate of 2 percent each year. The population in the developing states will grow more than that of developed states. With quick urbanization and industrialization of developing states and population increase of the young in developing states, the demand for dry grain will increase sharply (ERUSSDA, 2008). Grain trade in the sea will mainly be conquered by America with Argentina closely following then Australia and Canada. The world major grain importers and exporters will be from the Pacific region, Middle East, and Latin America. According to the grain Council for crops, in the year 2014/2015 coarse grain and wheat trade may decrease by 8 percent. Maize and wheat are the main grains that are traded in the world market, and they add up to 89 percent of the global grain train. Coarse and wheat grain The production of the wheat crop affected high record in Russia, Australia, and Algeria. It has also been forecasted to be high in 3 years. According to the estimates, imports of wheat will go down because of a good harvest in importing states like North Africa and Middle East. The harvest of corn globally has remained the same since 2009/2010. The forecasted corn trade in the USA for 2015/2016 is 13.8 billion bushels, which is an increment by 1% from previous years (WADE 2015, pg 2). China and Vietnam imports have increased though its effect will be minimal. The trade of corn will increase as more shipment to Syria, Brazil and Canada will increase as a result of poor harvest. The move will be of effect on the exports of America as it will be increased. Moreover, America uses corn as a raw material in the manufacture of ethanol, and this might as well reduce its exports (Braun, 2009). From the table of World Wheat Market below as produced by FAO, the global wheat production, and supply is forecast to reduce. This reduction is attributed to low ending stocks in Kazakhstan and Ukraine (The Pig Site, 2015). The stocks of coarse grains are estimated to drop due to falling maize supply condition in the United States, where the stock-to-use ratio is heading towards a decline from 15% in 2011/2012 to 13.3% in 2012/2013 (The Pig Site, 2015). Figure 6-Figure of World Wheat Market Figure 7-World Coarse grain market The import of grains into Asia is also forecast to reduce in 204/2015 by 1% (The Review of Maritime Transport 2007, p.18). The imports of Pakistan may reduce by approximately 80% as a result of good harvest. EU imports will reduce by 21 percent as a result of the availability of crops. The imports of Middle East will also go down by around 20%. The imports of Japan for a period have shown a decreasing trend that will continue in that manner. Coarse and wheat grain import to South Korea will reduce. The reduction of imports is brought about by low demand for wheat in this country. The sea trade of grains will rise in the mid-2015 onwards. In the Northern hemisphere, domestic crops are key factors that affect trade like in the present growing season it is hard to forecast the trade of grain after June. As there have been increasing food prices in the recent years, a few countries have protected their consumers and producers by implementing policies. Many countries have imposed heavy taxes on exports to guard their produce and make it for local trade. Kazakhstan, Russia, and Argentina have imposed grain tax particularly on corn and wheat exports. China as a country decided to impose a tax on the export of grains and scrapped off subsidy that was placed on the export of grains. Ukraine and Argentina have placed wheat export restriction. When the exporting countries decided to lower the prices of grains, the countries that import also decided to reduce their prices. Countries like Serbia and Indonesia, wheat imports tariffs. The decrease in the quantity of export and imports by States subsidies on imports will lead to a surge in grain demand market. The raise in the fuel costs for transporting grain will lead to an increase in the price of grain. The world fleet of the ship will rise in 2015 as compared to the previous year. The market of handy max will also increase and the market for Panama will likewise increase. It will create a surplus in supply in the global market. Due to the oversupply the forecasting of future demand will be difficult due to dropping freight charges. The congestion of ports is not likely to be of any effect on the trade of grain. Due to the surplus of the ship, the demand drops and this in turn affects bulk carrier’s rate. As a majority of trading of grain is carried out in the spot market, the surplus of ships will affect the rates of freight (FAO, 2009). The market of handy size won’t be affected as handy size growth is limited. The handy size number built in 2015 will be higher though that is likely to be done away with by ships scrapping (Braun, 2009). Owners of the ship are converting tankers to carriers as there is a change in tankers market regulation. The effect will also lead to an increase of ships in the market. As the new ship join the fleet, the ships will increase immensely. The increase is substantial in dead weight to a fleet of the world. The ships that had delays in their delivery will also hit the shores, and the result may be an increase in tonnage. As estimated the ships that were to be bought should now be cut by a bigger percentage. An approximation of 14 million tons of fleet was to be scrapped in the previous year. But this move is majorly a way of earning and hence it depends on mostly what has been earned from the ships. In the handy size market, a huge tonnage of ships was scrapped, and the trend is forecasted to be the same in 2015. Grain Shipments Grains are shipped from the United States to Japan, the grains mainly being wheat and corn. The route used by vessels is the North Sea Route; which connects the Pacific and Atlantic Ocean. The picture below shows the North Sea Route (Arctic-lio.com, 2015). The shipment along the line has, however, been on the decline in the past years. According to Buixadé Farré et al., (2014), the number of shipment dropped from 1,355,897 tons in 2013 to 274,000 in 2014. Although this does not directly relate to number of grains, there is a significant relationship with the number of grains shipped and which can be interpreted as a drop in grain trade; just as the forecast above. Figure 8- The North Sea Route (Arctic-lio.com, 2015) Conclusion The trade in grain will experience a decrease in the year 2014/2015. The decrease is majorly due to good harvesting of wheat in many parts of the world. The grain will also move towards the same trend as wheat. Apart from good harvest, ship surplus in the market will lead to lowering of freight prices in the spot markets. Increasing fuel prices have effects on the rate of freights that may offset cheaper freights offered by the fleet. In the coming future trade in grain, routes won’t stay the same. Ethanol production is going to affect the export of grains in America though good harvest in Brazil and Argentina will cross the effect. The wheat production has a present surplus in the market that will lower wheat price. When forecasting the shipping market, the future of the whole market is taken into consideration. It mainly focuses on the outside environment that the shipping company operates. The target of this paper was to study this market and forecast its operation for the subsequent three months. The statistical analysis of factors affecting demand and supply and their relation to the freight market was evaluated. The companies that deal in big grain have systems that give them all the needed information of any country. The agents of these countries are located in all important grain importing, exporting and producing nations, checking the weather, crop, conditions, political development and economic trend. Sea transport influences Freight rates. In grain business, freight rate makes a major factor in grain’s market marketing chain. Expenses incurred in the transportation of grain account for a significant portion of the grain price since grain is a commodity of low value and yet very bulky. Volatile and variable best describes grains ‘ocean rates. The ocean shipping rates are not linked to the price of grain Bibliography Arctic-lio.com, (2015). [online] Available at: http://arctic-lio.com/images/nsr/nsr_1020x631.jpg [Accessed 19 May 2015]. 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