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Giant supply tankers manoeuvre slower than agile demand yachts

10 January 202210 min reading

The current commodity rally has been made possible mainly by the powerful infusion of cheap money into markets by central banks and governments of the world's leading economies in an attempt to reduce the negative effects of the pandemic. Price increases are not caused by structural changes in leading economies, changes in technology or geopolitical processes. Everything is bad: the last time it was in 1929. 

Elena Faige Neroba
Business Development Manager
Maxigrain

There is no definition of what is supercycle but usually, it’s a long period during which prices for most commodities move mainly in one direction - first growth and then decline. In other words, supercycle is a time when the profitability of the commodity sectors is significantly higher than in previous years: Heavy industry is growing, basic sectors of the economy are thriving. So, the price-risen period could be recognized as a supercycle if it is:

• long duration - 20-70 years.

• the main factor in the supercycle is usually demand, which is growing due to major structural changes in the world's largest economies (the oil crisis of 1960-1990 - an exception).

• prices for all key raw materials have a general long-term upward or downward trend.

From what we definitely know in the past we faced 4 supercycles: 

• Industrialization of the United States in 1890-1930.

• Global pre-war militarization and post-war economic recovery

• Global oil shortages as a result of the OPEC embargo and the Iranian revolution

• China's economic recovery and industrialization

So the key question is if the last one ended or not.

China is one of the most influential economies in the world. After the trade war with the United States, AFS outbreak and its consequences, systemic internal economy problems in advance of the new 5-year-circle in COVID pandemic days it’s like the Anka bird – not the Humaia.

The current commodity rally has been made possible mainly by the powerful infusion of cheap money into markets by central banks and governments of the world's leading economies in an attempt to reduce the negative effects of the pandemic. Price increases are not caused by structural changes in leading economies, changes in technology or geopolitical processes. Everything is bad: the last time it was in 1929. 

The development of environmentally friendly industries and green energy could be the sign of a new circle. The supercycle of industrial metals will still have to go through a phase of post-pandemic decline in public financial support for China and other major global players.

The market of the ferrous metals group, which includes steel and iron ore and is many times larger in terms of money than the market of non-ferrous metals, will not receive such support. Are traditional hydrocarbon energy sources, such as oil and coal, becoming cheaper?

Meanwhile, we faced the domino effect, and after the grain, not without a political context, fertilizers entered the race. Farmers around the world say their costs are rising. But they are silent about the fact that they have not seen such prices, if not for a long time. It is worth paying attention to the ratio of the cost of a ton of wheat and ammonium nitrate (now - the peak in the last 5 years) and corn to NPK (peak was in 2018/19). How many tons of products need to be sold to buy fertilizers is, in fact, higher than the average for the last two seasons, but this ratio cannot be called explosive. Rather, the question may not be in cost, but in availability.

ANOTHER INTRIGUE OF THE SEASON WILL BE NEW DESTINATION REACHING 

Swiss-based Solaris, which has deep connections with RF, is confident China will become a big buyer of Russian wheat, following breakthroughs in the Algerian market, says Reuters. Solaris won a large part of the Algerian state wheat tender in November and the supply is due in December after years of lobbying for access to the market traditionally dominated by France. Why knows – maybe with a help of sacred wild boar. 

For Russian wheat exporters, Egypt is a strategic export destination, and it is clear that companies are looking for ways to strengthen and expand their presence in this market. In the first half of the season, Egypt clearly lagged behind in terms of purchases, and the share of Russian grain in tenders decreased. Not surprisingly, after the success of negotiations with Algeria, a delegation of Russian officials went to Cairo. And these negotiations were successful. A Russian-Egyptian joint venture is being set up to supply Russian grain to the Egyptian market. Mr. Eduard Zernin head of the Russian Grain Union says, that potential investment projects were also discussed during the Russian agribusiness business mission to Egypt earlier in December, including the long-discussed issue of building a grain hub for Russian grain in the MENA region. At the same time, the wheat harvest in Russia is much lower than expected by the Ministry of Agriculture. That is, on the one hand, officials seek to create maximum barriers to the exit of grain from Russia, and on the other - provide it with new markets.

Argentina burst into the market suddenly with a rush. Although a small, compared to Russia, but record cop, which is estimated at 21.5-22.5MMT, in addition to neighboring countries, is actively sold to Indonesia, Nigeria, Kenya and MENA countries - at least 2 vessels are shipped to Turkey, at least 3 vessels to Morocco, as well as several cargoes to Algeria and Egypt in December-January. What the market has been waiting for since the beginning of last season - harvest pressure - has happened. Despite the lack of quality grain at the start of the season, the Southern Hemisphere is able to form the satisfied quality batches at a competitive price due to quantity. Australia has already predicted 37-39MMT by locals, although there were preconditions that the rains implement a scenario similar to the European and Ukrainian, depriving the Australian grain of a number of quality indicators.

Do all of these have any matter on Turkish pricing? For sure: commodities trading stands on supply and demand. Countries are like connecting vessels. Turkey has a unique geographical location. It seems to connect Europe, Asia and Africa. Therefore, it is difficult to determine which market is more important but competition for grains between Africa and Asia is a part of Turkish daily reality. Asia spans from the shores of the Mediterranean to the Pacific, where the majority of the world's population lives - 4.5 billion people with different traditions, history and culture. The region consumes more than 410MMT of wheat per year and is in short supply, although historically wheat originated and spread around the world from here, from Mesopotamia.

Afghanistan is a major consumer of flour, mostly imported. Production - at the level of 4-4,5MMT, consumption - at the level of 8MMT. The country's flour mills are obsolete. Whether Afghanistan will cope with the need to import 3.5MMT in the absence of storage capacity and in the light of new realities is a question. Imports of flour, in particular from Uzbekistan, may increase, Mr. Alexander Gavrilov, head of Asian Sales division in Sodruzhestvo told at Treng and Hedge Club.


Uzbekistan, Tajikistan and Kyrgyzstan are countries with high dependence on imports and consumption of bread per capita. In addition, there is no other feed grain than wheat. Countries depend on imports of Kazakh wheat, in particular for processing and re-export from Uzbekistan.

Iran is one of the riskiest and premium markets, grain imports are regulated by the state. Ukrainian wheat was not allowed on the Iranian market. But at the same time, Iran is not very demanding on quality. Germany was one of the countries that advocated cooperation with Iran and will also supply there.

Pakistan - recently appeared on the map as a bright importer. Wheat, as in other Muslim countries, is the basis of the diet, increasing population and poultry production. Russian and Ukrainian wheat is imported duty free.

China is a policy and a state regulation. The issue is huge stocks and at the same time ongoing imports of wheat. As long as corn was expensive, it made sense for fodder purposes, but as it gets cheaper, the question arises again. Obtaining permits for low-margin crops is not interesting. Mr. Gavrilov's opinion is shared by Maxim Minenko, head of the procurement department of the Chinese company Juisan Food. On the other hand, the question of demand remains open. China intends to sell 0.5 MMT of wheat from the state reserve in the coming days. The flour-milling industry is represented by artisanal small mills, but their share is gradually declining. As in pig farming, large players who are more manageable are entering the market. 

According to the Union of Grain Processors of Kazakhstan, about 150 operating enterprises producing about 3.3 million tons of flour in recent years. Flour mills consume about 1/3 of the country's wheat. Due to rising production costs, Kazakhstan may face unclaimed grain. Diversification of production since 2009 - reduction of planting areas for wheat and reduction of incentives for its production. Russian grain is in high demand in the Kazakhstan market due to low production costs and an illegal component in the form of tax evasion.

Kazakhstan is the main supplier of wheat to Central Asia, and applies a barrier railway tariff for the transit of Russian grain. Both of them are very dependent on the demand and influence of Iran. Kazakhstan is selling its grain this season, and buying Russian grain duty-free. Undeclared exports of wheat from Russia are estimated from 500k to 1 million tons, according to Yevgeny Gan, head of the Union of Grain Processors of Kazakhstan.

Central Asian countries, importers of flour, are trying to limit imports of finished products, preferring to develop their own processing industry.

The main consumers of flour in Central and Central Asia are poor countries, with up to 80% of the population eating bread. At the same time, high population growth rates remain. At the same time, consumption preferences are not expected to change, even with increasing incomes. Balances of wheat production in Central Asia are difficult due to the non-transparency of exports and imports.

One of the reasons for Pakistan's high wheat imports is considered to be purchases in favour of Afghanistan to support the country's authorities. Afghanistan needs up to 3 million tons of grain a year. The balance will remain strained due to population growth in these countries. 

Turkey faces a difficult task: to keep the markets afloat amid inflation. Because we already see that they can be taken off by competitors we didn't even know about. There are no more Hadjivat and Karagez between us. They are somewhere on the supply tankers or demand yachts. 


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