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Grain finally leaving Ukrainian ports, but is it a temporary solution?
On July 22, the signing ceremony of the so-called "Grain Initiative" in Istanbul, Turkey, marked the first major deal between Russia and Ukraine since Russia invaded Ukraine on February 24. Yet, it was not a direct agreement between the two countries.
Ukraine signed an agreement with Turkey and the UN while Russia signed the same agreement with Turkey and the UN. The signed documents allow Ukraine to export grain from three key Ukrainian ports (also referred to as Big Odesa) in the Black Sea - Odesa, Chornomorsk, and Yuzhny. The "Grain Initiative" is valid for 120 days, or until the end of October.
The next day, Russia tried to disrupt this agreement by shelling the port of Odesa. However, the guarantors of the agreement – Turkey and the UN – forced Russia to adhere to the agreement. On August 1, the first ship with 26,000 tons of Ukrainian corn left the port of Odesa. It is the vessel RAZONI, which is under the flag of Sierra Leone headed to the port of Tripoli in Lebanon.
On August 5, three more ships – NAVI STAR, ROJEN and POLARNET – with 57,000 tons of Ukrainian corn left for Turkey, Great Britain, and Ireland.
On August 7, three ships from the port of Odesa and one ship from the port of Chornomorsk loaded with Ukrainian grain were headed to Italy, China, and Turkey. Four bulkers (MUSTAFA NECATI, STAR HELENA, GLORY, and RIVA WIND) have almost 170,000 tons of grain on board.
On August 8, the SACURA, which is transporting 11,000 tons of soybeans to Italy, left the port of Pivdenny. The ARIZONA, which is transporting 48,458 tons of corn to Iskenderun, Turkey, left the port of Chornomorsk.
On the morning of August 9, two more ships with agricultural products left the ports of Odesa: the Liberian-flagged ship OCEAN LION was carrying 64,720 tons of corn headed to South Korea. The Turkish-flagged ship RAHMI YAĞCI had 5,300 tons of sunflower meal in bulk that was being sent to Istanbul, Turkey.
The Ministry of Infrastructure of Ukraine announced that within two weeks, Ukraine plans to increase the volume of transshipment from three to five vessels per day.
Denying Shipments
On August 8, according to the information provided by the shipper of Ukrainian grain on board the ship RAZONI, the buyer in Lebanon refused to accept the cargo due to a delay in the delivery terms (more than five months). The shipper has already started looking for a new grain buyer in Lebanon as well as in other countries.
However, this is not a problem for Ukraine, since the vast majority of grain export contracts are concluded on FOB terms, that is, the deal is considered completed as soon as the grain is fully loaded onto the ship. After that, the risk is transferred to the buyer.
Taras Kachka, the Trade Representative of Ukraine, said that Ukraine expects to serve up to 80 ships per month through three Ukrainian ports, or about three per day (e.g., one from each of the three Big Odesa ports.). This will make it possible to export up to 3 to 3.5 million tons of products per month through these sea ports.
Unblocking the ports of Big Odesa is a significant relief for the Ukrainian economy, but this is not enough to export all the necessary stocks of grain. Taking into account the export by rail and road transport, Ukraine will be able to export at least 5 million tons of grain per month in order to export the stocks of last year's harvest.
River, Rail, and Road
We must also remember that there are three more types of export: river, rail and road.
At the mouth of the Danube River, there are four small ports: Kiliia, Ust-Danube, Reni and Izmail. However, these small ports can only provide 10% of all pre-war port transshipment. In the future, these terminals will be able to provide transshipment of up to 1 to 2 million tons of grain for grain producers. About 300,000 to 500,000 tons more can be exported by trucks every month, while the railway exports about 900,000 tons of grain per month.
In general, these three modes of transport can export 2.2 to 2.5 million tons of grain per month. If all three operate at full capacity, they will be able to export up to 2.5 to 3.5 million tons.
There are 13 railway border crossings on the western border, namely, four border crossings with Poland, three border crossings with Romania, two with Slovakia, two with Hungary and two with Moldova. In total, through all border crossings, it is possible to transfer about 220,000 tons of cargo, or 3,400 wagons, daily. In theory, it is possible to transfer up to 700 wagons with grain cargo every day (This is approximately 1.2 to 1.5 million tons per month.).
However, about 1,900 to 2,000 wagons, or 125,000 tons of cargo, are transferred to 13 border crossings daily, of which only 30,000 tons are grain. That is, the share of grain cargo in delivery at the border crossings is 14% to 15%.
There are two explanations for this. First, the railway systems of Ukraine and Europe are different. In Ukraine, the track gauge is 1,520 mm, and in the EU countries, they are 1,435 mm. Consequently, it is necessary either to reload the cargo from one wagon to another or to change the wheel sets on the wagons at the border. There are essentially two ways to cross the border. One can also try to do this using containers, but now everything is not so simple with them either.
Second, there are other cargoes to be transshipped (e.g. metals and ore), as well as empty fuel tanks and platforms used to deliver military cargo to Ukraine. And this is without mentioning the border crossing of the passenger trains.
However, even if the problems at the borders are solved, the limited transshipment capacities of neighboring European countries remains.
For example, last year Polish ports of Gdansk, Gdynia, Świnoujście, and Szczecin handled only 8.2 million tons of grain. The largest nearby port of Constanta, Romania, handled 25.2 million tons of grain. So, the ports of Poland and Romania can transship approximately 33 to 35 million tons of grain in total, which is half of Ukraine's needs). And this is without taking into account the fact that these capacities will also be involved in transshipment of European grain.
Considering more distant ports (e.g., the ports on the North and Mediterranean Seas), the cost of rail and road transport across Europe will “eat up” the entire profit of exporters.
In early July, delivery from the linear elevator in Ukraine to the Romanian port of Constanta already amounted to $150 to $190 USD/ton and continues to rise. At the same time, the cost of transporting cargo by the railway is $20 to $35 USD/ton. Everything else is the income of the owners of the wagons, as well as foreign carriers and transshipment terminals in Romania and Poland. Due to the rush demand, the cost of services of foreign operators has increased by three to seven times over four months. For example, if the cost of the services of the transshipment complex at the border was 5 to 6 EUR/ton, now it can reach up to 25 EUR/ton. With the active entry into the market of the Romanian and Polish grain for the 2022 harvest, the situation will worsen.
Mykola Solskyi, Minister of Agrarian Policy and Food of Ukraine, announced that the forecast for the 2022 harvest has been increased from 60 million tons to 65 to 67 million tons. About 50 million tons of this harvest should be exported.
Therefore, if there is no complete unblocking of Ukrainian ports as a result of Ukrainian military successes or the “Grain Initiative” is not continued, the question will arise again: how to export 50 million tons of grain. River, rail, and road transport will be able to ensure the export of only half of the grain intended for export.
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