Abundant domestic grain availability in China is set to have
negative effects on imports. Although the latest summer/autumn
Chinese harvest was no higher than the previous year’s output, it
was sufficient to keep the market well supplied. Coupled with
apparently adequate stocks, pressure from rising usage trends
has become less intense, implying an imports decrease, based on
IGC estimates, of 29% to under 14mt.
A differing evolution is unfolding in the soyabeans sub-sector.
After growing strongly by 15% in the 2013/14 marketing year
ending September, US Dept of Agriculture calculations point to
another increase, albeit much slower at 2%, to 113mt in 2014/15.
Continuing expansion of China’s import demand provides a
large part of the impetus for rising global soyabeans trade. After
increasing by 18% in 2013/14, Chinese purchases could rise by
5% within the current year, reaching 74mt. Expanding
consumption is the main explanation, both soyameal usage in
livestock feed and soyaoil usage in food manufacturing and home
cooking. Lower domestic soyabeans production is also a
The outlook for grain and soya trade later in 2015 is still
hazy. Domestic crops in northern hemisphere importing
countries’ mid-2015 grain harvests will be a large factor
determining foreign purchases. But these harvests are not yet
predictable, because weather conditions over the growing
season cannot be forecast accurately.
MINOR BULKS MISCELLANY
An extensive category, the minor bulks sector is comprised of
many commodity trades, some of which individually are large.
The diverse range comprises cargo movements related to
industrial and construction activity, while agricultural
commodities are also significant. Altogether this group provides
one-third of total seaborne dry bulk trade.
The most prominent elements within the ‘industrial’ sub-
group are steel products and forest products. Other large parts
are bauxite/alumina, iron and steel scrap, cement, salt, petcoke,
plus nickel and other ores. Among ‘agricultural’ minor
commodities are sugar, rice, oilseed meals, phosphate rock, other
fertilizer raw materials and semi-processed fertilizer products.
Last year, based on tentative calculations, growth in the entire
minor bulks group may have been minimal. This outcome
followed a robust performance in the preceding twelve months,
when total seaborne trade reached around 1,500mt, as shown in
table 2. In 2015, an upwards trend may resume.
Changes in individual commodity trades are often linked to
specific factors, but broader economic growth patterns are also
relevant. During 2014, import demand for industrial minor
commodities was limited, in a number of countries (in Europe,
for instance), by subdued economic progress with unfavourable
implications for manufacturing and construction activity.
In many minor bulk trades, global trends are closely related
to China’s import demand. Chinese buyers of bauxite/alumina
and nickel/other ores influence high proportions of world
movements. In 2014 Indonesia’s ban on unprocessed mineral
exports (extensively shipped to China) caused trade in some
minor bulks to diminish.
World seaborne bauxite/alumina movements apparently
declined sharply last year from around 140mt in the previous
twelve months. Reduced imports into China was the main
reason. This downturn resulted from buyers earlier anticipating
Indonesia’s export ban and consequently raising their stocks,
followed by the ban’s adverse effects when introduced at the
start of last year.
Brazil anticipates difficult year due to slowing Chinese economy
The slowing of the Chinese economy, together with falls in the price of many of the commodities which are crucial to Brazil, means prospects for 2015 are less good than for a decade, writes Patrick Knight.
Brazil has benefited enormously from the fast growth of the Chinese economy during the past ten years. Strong growth in demand for most of the commodities it exports, with iron ore and soya beans in the lead, but also including market pulp, timber, leather, alumina and cotton, and with maize an important newcomer in recent years, have meant Brazil has earned more from its exports than imports have cost.
The recent slow down in the Chinese economy, which has caused imports to fall sharply in the past few months, means exports to China will earn much less this year than they did in 2014. This will cut the profits of miners and farmers, which is likely to cause output and exports to fall in the next few months, possibly for years.
China has gradually moved up the list of the countries with which Brazil trades, overtaking giants such as the United States and neighbour Argentina in the
process. In the past couple of years, China has been Brazil’s leading market, as well as the main source of what it imports.
The export of commodities, both hard and soft, have been responsible for more than half of all Brazil’s export total earnings in recent years, and have guaranteed a surplus in visible trade for several years.
For more than a decade, the Chinese economy grew by more than 10% a year. Growth was spurred by massive spending on infrastructure works, as well as construction of all kinds, which resulted in the country becoming the world’s leading manufacturer of steel.
The migration of tens of millions of people from the countryside to cities each year, led to a surge in demand for a many foodstuffs, notably grains, oilseeds, meats and dairy produce. Much of the extra feed and food came from Brazil.
China has had to abandon its long term policy of being entirely self sufficient in food. With limited supplies of land and water available, there is no going back on this.
With growth in China now in single figures, and the news that rather than growing, as they have done for many years, imports fell in 2014, the price of most commodities, which fell in 2014, can be expected to tumble further this year.
The price of iron ore, which had neared $100 per tonne in several years, averaged only just over $80 per tonne in 2014. Many expect the ore price to fall to little more than $50 per tonne later this year and to remain there for several years. While demand for ore is falling, supply continues to increase. This is because most of the world’s largest mining companies all embarked on massive expansion projects aimed at increasing supply by up to 50%. Despite the risk of oversupply, the mining companies felt that if the price of ore fell by enough, many mines in China, where production cost are well above average, would be forced to close down. This would allow the price of ore from Brazil and Australia, which is better quality than what exists in China, to recover.
But the expected mine closures in China have not occurred and although some mines there may eventually be shut down, a reduction in the supply of Chinese ore may not come soon enough to prevent the profits of miners such asVale,Anglo American, Billiton and Rio Tinto, from falling sharply.
Another worry for the miners, is that the supply of scrap steel in China, which has been negligible until now, is beginning to increase, as many more cars and consumer durables reach the end of their useful life. This will allow much more scrap to be used to make steel, resulting in demand for iron ore to slow. This has already happened in the United States, Japan and many European countries, which all import far less iron ore than in the past.
Vale has already announced that it will slash spending both at its Carajas complex, where output was due to almost double to 200mt (million tonnes) by about 2018, as well as in the higher cost mines in Minas Gerais state, whose ore is shipped from terminals such as Tubarao in Espirito Santo state.
The Anglo American company, which made its first experimental shipments of ore from its newly opened mine in Minas Gerais state in October, the ore taken in slurry form along a 500km pipeline, is unlikely to ship the 12mt or so promised for this year, as demand slows and competition increases.
Several of Brazil’s steel companies, hit by low prices of steel and weaker than anticipated demand on the domestic market, had switched from buying most of their ore from Vale, to using ore from their own reserves in the past few years.
Some of them, notably the National Steel Company, the CSN, often earned more from the export of their ore, than from the sale of steel. With the price of ore down sharply, Vale will give more emphasis to the domestic market, virtually abandoned in the past few years of soaring world ore prices. This may prove a major challenge to the steel companies, whose mines are mostly higher cost than those of Vale.
The impact of the slowdown in China, coupled with the continued stagnation of most countries in Europe, has affected the iron ore market faster and more dramatically than that of most soft commodities. Work on building new railways, roads and apartment blocs can easily be brought to a halt or slowed. But people continue to need to eat, while the populations of numerous large countries notably in Asia continues to grow, while more continue to move to cities, where they eat better than in the countryside.
The price of several soft commodities, notably soya and maize, as well as sugar and wheat, have fallen steadily in the past few months, which has benefited consumers. The lower price of grains is mainly because farmers in many countries around the world responded to several years of high prices and increased plantings. Many also improved plantation care, notably by using more fertilizer and farm chemicals. This all adds to cost, but allows yields to rise. If farmers margins continue to be squeezed, however, this process may be reversed, although it will take some time to come about.
Several years of high profits allowed the tens of thousands of farmers who grow soya in Brazil, to pay off debts accumulated when they bought more land, which resulted in the planted area increasing by up to 4% each year for many years.
Disregarding the fact that prices have now started to slip, and trusting that as happened so often in the past, prices will recovered later in the year, farmers who plant soya and maize in leading producing state Mato Grosso, 2,000km from the nearest port, are expected to produce up to 4mt more soya this year than in 2014.
The 2014/15 soya crop could total more than 95mt, which will help push up world stocks to record levels, inevitably causing prices to fall further.
While on the one hand prices continue to fall, while on the other, costs, notably of transport, continue to rise, so many farmers may come to regret the decision to plant much more 2014/15. Many farmers are already complaining that they will make losses this year and it remains to be seen how long their financial reserves will last, before farmers are forced to cut plantings, as well as reduce plantation care. This will mean less fertilizer will be both used and imported.
Approximately 50mt of soya beans will be exported from Brazil this year, 4mt more than in 2014. The price of beans is expected to average about $370 per tonne, compared with the $510 per tonne for the beans exported last year. As a result of the lower prices, the soya beans, meal and oil to be exported this year is on course to earn between $23–24 billion, almost 25% less than the $30 billion the export of soya products earnedin2014. Thedifferencewillbesorelymissedbyboth farmers and traders, although to a lesser degree by the shipping companies, who will carry more.
The lower earnings from soya and maize exports will make a big dent in Brazil’s export earnings this year. The trade account will almost certainly slip into the red as a result, as soya is Brazil’s leading export earner, followed by iron ore, which will contribute less.
On the positive side, 3mt of soya products, the majority beans, were shipped from ports in the north and north east of the country last year. More than a million tonnes were taken to ports close to the mouth of the Amazon along the river Tapajos from close to where it was grown in Mato Grosso state for the first time. But almost 3mt will use two new terminals started up by Bunge in 2014.
Getting beans from farms to ports in the north using a combination of road and water, costs about $100 per tonne. This compares with the $150 it costs to take a tonne of beans by truck to Santos or Paranagua along precarious and congested roads. The ports in the north and north east of Brazil are also three to four fewer days sailing time to leading destination China, than from ports such as Santos and Paranagua, so further savings are being achieved because of this.
What happens to the Brazilian currency, the Real, helps determine both demand and prices. A weak currency has worked in favour of farmers and miners in the past few months, when the Real fell by up to 25% against the $US dollar.
Brazilian farmers and miners were fortunate that the price of most of the commodities it exports were above average during the period when the Real was relatively strong, relative to the $US dollar. This meant their earnings were protected.
Although the prices of most commodity have fallen, the weaker Real means farmers are getting as much in the local currency in which most of their costs are incurred, than they did when commodity prices were higher. On the other hand, inputs
such as fertilizer, of which almost 30mt is used, 70% of it imported, will cost more from now on. This means farmers can be expected to use less fertilizer from now on, which will be reflected in lower yields in the years to come.
For the time being at least, demand for the bauxite and alumina of which Brazil is one of the world’s leading producers and exporters, have not slowed significantly as a result of the slow down in China.
But the situation is much less positive for the companies which use alumina to make primary aluminium in Brazil. No new aluminium smelter has been built in Brazil for 25 years, while the amount of aluminium consumed there has been growing steadily, with more having to be imported each year. The main reason the for smelters reluctance to invest, has been the relatively high price of electricity in Brazil, far higher that in almost all the other aluminium producing countries. The exceptionally dry weather which damaged both the sugar and the grains crop in many parts of Brazil last year, resulted in water levels at most of the lakes which power hydro-electric power stations falling so low as to oblige the authorities to start up the much higher cost gas and coal fired plants during all last year, instead of just at times of peak demand. The high cost of running these "thermal" plants non stop, means that the cost of electricity will rise by at least 25% this year, and could rise further next. Lakes are still dangerously low, so will take several years to recover. Brazil looks certain to have to import increasing amounts of aluminium this year, even though with the economy unlikely to grow for the second year running and key industries, notably the motor industry, is set to produce fewer units.