ANALYSIS: Ukraine's terminals compete as grain exports fall short

A significant drop in Ukraine’s grain production, coupled with the increase in port capacity in recent years, could drive higher competition between terminals and slash transhipment costs in the Black Sea country, which is one of the world’s biggest exporters of corn and feed wheat.

The move could redress some of the high prices that the country’s corn supplies currently command, and give a small edge in what could be another fierce export race. 

Ukraine’s crop production was cut by at least 16 million mt in the 2020/21 marketing year versus the 2019/20 season as hot, dry weather pared back yields and slashed production outlooks - particularly for corn. 

That loss of production means the country’s export surplus will be cut by around 14 million mt, at a time when heavy investment has significantly boosted terminal capacity across the country in recent years.

For now, Ukraine’s total grain handling annual capacity has increased to at least 78 million mt, while last year’s record production spawned a record grain export figure of 69.1 million mt.

But the situation for this year's harvest has been complicated in recent months on slow origination in the country, as reluctant-to-sell farmers held out for higher prices, forcing domestic CPT prices to parity with equivalent FOB prices.

That has made it hard for traders to lower their offers on the export market to attract more buyers.

However, companies that own terminals could cut their elevation costs in order to keep FOB offers attractive and compete with current CPT prices, and crucially keep the terminal working.

“If you have your own terminal, then from an economic point of view, you would rather sell elevation costs at $5-$7/mt than have it stand idle, as there are more terminals available while the crop has fallen,” one trader said.

Elevation costs reflect the price of building cargoes from the domestic corn market into export volumes for FOB ports and typically are around $10-11/mt.

“If necessary, yes, we can absorb a buck or so, if the FOB market is out of sync with the local market. But this is internal accounting and later, when the trading margin is up, we can add back to the transhipment account,” a second trader explained.

Most of the country’s biggest exporters have their own terminals, including Nibulon, Kernel, Glencore, Cargill, Louis Dreyfus, Cofco, but those traders will typically run their terminals at closer to full capacity.

As such, it’s the terminals that are not aligned to specific traders that face having to cut costs to try to attract more volumes and keep the terminal working.

“There potentially will be higher competition and dumping of costs in March, or maybe even in February…there is a lack of cargoes and more terminals and they are not equal,” Andrey Sokolov, the director of Ukrainian shipping magazine said.

“Those who have terminals will count the elevation costs into the trade margin to support trading, and as a result those who do not have terminals will be in a stressful position, or will go and ask terminals to make a discount as they cannot load and still be competitive without that,” Sokolov said.

Back in 2017/18, when Ukraine’s crop last suffered a heavy cut, terminals were forced to decrease costs from around $12/mt to around $7.50/mt for separate terminals, according to Sokolov.

However, over the last three years many new terminals have opened adding 13 million mt of capacity in that time frame.

That is without taking into account the renovation on old terminals to boost capacity.