Bloomberg News

Russia Expands Ports to Regain Wheat Advantage: Freight

September 28, 2011

(Updates wheat prices in 12th paragraph.)

Sept. 28 (Bloomberg) -- Russia is poised to again become the world’s second-biggest wheat exporter as the nation’s biggest grain-port overhaul raises shipping capacity by as much as 67 percent in four years.

Government and private operators are spending $574 million to develop and add terminals on the Baltic, Azov and Black Seas and the nation’s rivers to end bottlenecks that keep trains waiting for weeks to unload. Supply is surging following an almost yearlong ban imposed by Prime Minister Vladimir Putin to conserve grain after the worst drought in half a century.

Russia’s emergence as a leading supplier may reduce global grain prices, said Peter Biermann, a trader at Aston FFI in Lausanne, Switzerland. “Russia could easily become the No. 1 exporter of wheat in the world” on the expansion plans, Biermann said. Aston is a trading unit of Russian grain and oilseed producer OAO Aston.

Russia is seeking to again become a leading wheat supplier about three decades after the cost of imports helped push the Soviet Union to the brink of bankruptcy in the 1980s. Exports began climbing in 2001, and in 2002 Russia was among the top three wheat-exporting countries, according to U.S. Department of Agriculture data.

It may export more than 12 percent of global wheat this season, the International Grains Council says, making it the world’s fourth-biggest supplier. The ban was lifted on July 1.

Hidden Costs

The new investment may increase grain loading capacity to almost 42 million metric tons in 2014 from 25 million tons this year, according to Bloomberg calculations based on investors’ plans.

More terminals will reduce the hidden costs of grain shipments by at least $15 a ton because exporters won’t have to pay for the idle hours that rail cars and ships spend in bottlenecks or for fines for delayed cargoes, said Igor Pavensky, head of Rusagrotrans’s market analysis department. Rusagrotrans is the country’s bigger carrier of grain by rail.

Russia may be able to widen the discount at which it sells grain in international tenders by $7 to $8 a ton by 2015, Pavensky said. Russian wheat now sells at a discount of about $10 a ton compared with French milling wheat from Rouen, he said.

Government and private operators plan to invest at least 18.2 billion rubles ($574 million) to add 18.9 million metric tons of capacity at grain terminals in the five years through 2014, according to Bloomberg calculations based on company plans. That includes additions last year during the export ban.

Asia, Cuba

Lower logistics fees will allow traders to open up new markets, Rusagrotrans’s Pavensky said. Russia may supply up to 4 million tons of grain to the Asia-Pacific region and up to 2 million tons to South America and Cuba by 2020, he said.

Dry weather is hurting crops from the U.S. to Ukraine. Mexico’s Grupo Bimbo SAB, the world’s largest bread maker, and CSM NV of the Netherlands, the biggest manufacturer of bakery ingredients, are among companies that have increased prices to pass on higher costs.

The Russian ban sent wheat futures to a 29-month high on Feb. 14, with prices jumping as much as 91 percent from the end of June 2010 to that peak. Since then, prospects for rising global output in countries including Russia, and the slowing economy, have cooled the increase. Prices, at $6.58 a bushel today on the Chicago Board of Trade, are down 28 percent from their high.

Weather and Politics

“Cheaper input costs will allow Russia to export at more competitive prices to the Mediterranean and beyond,” said Swithun Still, a trader at Switzerland’s Alegrow SA. “However, as last year showed, we are at the mercy of the weather and politics, two things we cannot predict very well or control.”

Putin imposed the grain export ban to shore up domestic supply after the drought caused Russia’s grain crop to plummet 37 percent to 60.9 million tons last year, from 97 million tons a year earlier.

Handling prices have been rising because of capacity limitations, spurring state and private investors to build terminals, Alexander Korbut, vice president of Russia’s Grain Union, said by phone on Sept. 22. At one terminal in the port city of Novorossiysk on the Black Sea, fees jumped about 40 percent to $28 a ton from a year ago and at another by about 35 percent to $23, he said.

Grain handling is “extremely profitable in Russia,” Korbut said. “When small ports appeared on the Azov Sea in 2006 to 2008, investors made a return in just one season.”

Rail Cars

Plans to boost exports may stumble on a lack of railway infrastructure and rail cars; rising transportation costs; and market demand, according to the Institute for Agricultural Market Studies, known as Ikar.

About half of the projects are located in the city of Novorossiysk, where OAO Russian Railway banned rail shipments on Aug. 27 because of congestion. The restriction to one terminal was lifted after 10 days and to the other after almost three weeks.

Most of the new projected capacity, or about 13 million tons, may be devoted to wheat exports, according to Ikar. This amounts to 10 percent of the world’s wheat imports, a quantity Russia will find hard to grab from existing suppliers, Ikar director Dmitry Rylko said by phone on Sept. 26.

Ukraine, Russia’s neighbor and the world’s third-biggest barley exporter last season, may compete with Russian projects as it has about 6 million tons of surplus export capacity already, according to Rylko.

Ukraine, Kazakhstan

While Ukraine increases capacity, now at about 30 million tons, Kazakhstan also has ambitious plans to expand its wheat- export potential and the U.S. may also increase grain shipments in five years, he said.

“Still, we need the terminals,” Rylko said. “They’re being built with room to grow and so we can at least maintain exports.”

Private building efforts are already underway. Delo Group, beneficially owned by Sergei Shishkarev, head of the transport committee in Russia’s lower house of parliament, opened a terminal in Novorossiysk this year, according to the group’s press service. Vladimir Lisin, the billionaire owner of OAO Novolipetsk Steel, built a terminal in Tuapse last year, according to his UCL Holding company.

In addition to Novorossiysk and Tuapse, investment is also flowing into construction of terminals and expansion of existing capacity in Kaliningrad on the Baltic Sea, in Taman on the Black Sea, on Azov Sea ports and on the Volga and Don rivers.

A government plan to construct another deep-water grain terminal at the port of Taman, on a peninsula between the Black and Azov Seas, may further expand capacity at least 6 million tons by 2017, state-controlled United Grain Co. said last week. The terminal may cost 10 billion rubles, according to a company presentation last year.

“A fight for clients who supply grain will emerge,” Korbut said. “This will increase the profitability of growing grain.”

--With assistance from Lyubov Pronina in Moscow, Maria Kolesnikova in London and Rudy Ruitenberg in Paris. Editors: Torrey Clark, Alan Crosby, Anne Swardson

To contact the reporters on this story: Marina Sysoyeva in Moscow msysoyeva@bloomberg.net Ilya Khrennikov in Moscow at ikhrennikov@bloomberg.net;

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net


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