The Black Sea's Bulk Boom

During recent years, Ukraine and Russia have significantly boosted grain and oilseeds production and exports to become some of the world’s most important exporters. This is largely down to the extensive development of seaport infrastructure in the Black Sea region, and the ongoing development of logistics systems, which has allowed Ukrainian and Russian ports to handle record volumes of grains.

During the Soviet era, cargo storage capacity at Ukraine’s seaports was estimated at roughly 6 million tpy. However, it was impossible to use these warehouses for exports after the collapse of the USSR, because the infrastructure was only designed to receive grain vessels, as the country imported cereals. One of the first commercial transhipment operations in Ukraine took place in the late 1990s in Illichivsk (now called Chernomorsk).

In 2002, Ukraine experienced a boom in the construction of grain export terminals and this trend has continued. In 2016, new terminal facilities with a combined capacity of 8.8 million tpy were put into operation at Ukraine’s ports of Mykolaiv, Chornomorsk and Yuzhny. They include a new terminal for COFCO Agri Group (belonging to China’s COFCO corporation) in the Mykolaiv seaport and the launch of a production and transhipping complex for Bunge-Ukraine Co. (part of the US corporation Bunge). The complex is comprised of an oil extraction plant, a vegoil handling terminal and a grain terminal.

In general, over the past 10 years, grain handling capacities in Ukraine and Russia increased from 25 million t to 90 million t. Despite the fact that Ukraine's port facilities are developing rapidly, the problem of underdeveloped access infrastructure persists. Projects for constructing and modernising access motor roads are carried out at the expense of port owners in cooperation with port and railway authorities. Modernisation also entails significant expenditure and often projects require a lengthy approvals process.

The start of grain shipping by river caused new loading schemes to appear, one of which is a scheme for transhipment on roads. Port terminals present numerous investment possibilities; grain production and export potential is projected to grow. Recently, there has been an uptake in foreign investment in the construction of grain handling terminals in Ukrainian ports. An analysis of the activities of foreign companies and representative offices of international grain trading companies in Ukraine showed that each new operator is interested in creating their own stable logistics chain, or ‘field-port’, which is a logistics chain from harvesting to shipping exports. This allows the companies to reduce transportation costs, diversify risks and improve grain business performance, by using the existing capacity more efficiently, providing storage, grain cleaning and conditioning services to third parties. Companies that invest in their own silos can reduce their dependence on market price volatility, which makes it possible to sell commodities under the most favourable terms.

Despite the current record-high production parameters, Ukrainian grain handling infrastructure remains an attractive investment. Ports are becoming increasingly attractive to investors due to the linearisation of control systems and a reduction in the amount of control procedures and documents.

At the same time, foreign investors face difficulties in Ukraine. The bureaucracy inherent in several of Ukraine’s largest trading companies can cause considerable delays to the construction of specialised grain terminals in Ukrainian seaports.

Export potential

In UkrAgroConsult's opinion, investment in domestic market infrastructure development could greatly enhance the country's grain export potential. The point is that Ukraine currently technically possess the largest grain handling capacities in the Black Sea region. The development of the internal logistics system and the construction of a stable delivery chain will help load existing facilities and increase Ukraine’s export potential.

More than 10 projects involving the upgrade and construction of new terminals are currently taking place. Taking into account the terminals under construction, Ukraine's grain handling capacity may increase by another 15 million t and reach 77 million t by 2020. In recent years, Russia has dramatically increased port grain handling capacities, particularly in Black Sea ports. Russia’s position in the global grain market remains strong. In 2016, Russia harvested an all-time high grain production of nearly 118 million t, which is 11% higher than in 2015. Wheat, corn, pulses and rice harvests in Russia will set new records in 2016/2017. In view of rising yields of cereals, including wheat, the total harvest of the country’s main grain crop has increased almost 77% since 2010 (to 73.3 million t in 2016). The key feature of Russia’s grain sector in the current period was an expansion of its corn planting capacity at the expense of some niche crops, such as rye, millet and oats. Ultimately, by 2016, corn in Russia had turned from a niche crop into one of the country’s main cereals. Russian producers have boosted corn production four and a half times since 2010 (to 13.83 million t in 2016 according to preliminary figures of the Russian Federal State Statistics Service). In addition, the commodity is actively supplied to the export market.

During the last three seasons grain exports from Russia exceeded 30 million t.

Russia’s exports were predicted to reach around 40 million t by the end of the 2016/2017 season, but this prediction is becoming increasingly doubtful. Russia exported 20.3 million t of grain in the first half of 2016/2017, up 1% compared to the same time a year ago (20.1 million t was exported in July to December 2015/2016). Thus, with the export potential forecast at 40 million t, Russia still has to ship abroad almost half the volume, whereas the latter half of the season traditionally accounts for just roughly 30 – 37% of total grain exports. Judging by export statistics, Russia’s handling facilities are capable of shipping between 4.5 – 5 million t of grain in a matter of months, except during the winter period.

Due to Russia’s expanding grain production and strengthening export potential, grain exports could be key to the country’s entry into the world market through grain shipments by sea via ports.

UkrAgroConsult has estimated that Russia’s overall capacity for grain handling in the Azov/Black Sea region (including the Rostov transport hub) is approximately 36.1 million t. However, in general, the ports of southern Russia cannot ensure it will be able to handle this increase in export traffic for a number of reasons:

• Weakness of the port ground infrastructure (low throughput of port railway stations, problems of railcar congestions on the access tracks and conventional inland railway restrictions). Remarkably, some ports and berths have no access railways at all.
• Overall underdevelopment of the port infrastructure (low speed of loading) and limited possibilities for any future expansion of the port area.
• Limitations on the size of vessels that can be received along with possible downtimes of vessels in autumn and winter for meteorological reasons result in higher freight rates when shipping grain from Azov ports.
• Acute shortage of rolling stock.

The overall grain handling capacity of Russia’s seaports is estimated at over 40 million t.

During this period of low commodity prices and traders’ willingness to reduce marketing costs forced Russian grain exporters to increase their usage of higher capacity bulk vessels. The prevailing share of small shallow ports in grain exports from Russia and strong demand for handling capacities in the Black Sea deepwater ports became the reasons to load grain for exports on the roads of Kavkas, Temyuk and Kerch ports.

Outlook

UkrAgroConsult believes that the grain handling capacity of Russian ports will be further increased mainly by modernising existing facilities in deepwater terminals of the Azov Black Sea basin. Especially, due to increased demand from exporters for grain export shipments by large-capacity fleet.

Besides, there is a need to increase storage capacity in large ports, which is most acutely observed during seasonal peaks of shipments (July – September).

If all the announced projects for construction and development of grain handling facilities in the Black Sea ports are implemented, there may be some surplus of handling capacity in Russia. Summarising all the projects aimed to develop grain handling capacities in the sea ports of Russia, by 2020 the capacities to handle grains could increase up to 60 million t.