The purpose of the current article is to analyze the dynamics of trade development with the MENA region for two recent seasons, as well as estimate the features of communication between the whole range of regional sellers and buyers, and highlight what changed for the reporting period, and what are the current expectations and main issues that concern both Black Sea suppliers and their African and Arab buyers.
Let's start from the very beginning. To date, it is perfectly clear to everyone that Black Sea grains, especially wheat, already occupied the confident position on the MENA markets, and became the absolute leader of the buying race. The whole range of factors became the predecessors of such situation, but at the reporting stage it can be said with confidence that the share of Black Sea grains significantly increased even in the classical regions of North Africa, which always focused on working with French grains (with the exception of Algeria, but most likely it is for a short time only).
Therefore, the story, which started with the banal dumping attempts of Black Sea traders to sell the same or no worse quality wheat at the prices below the French or continental European grain, along with the readiness to supply significant volumes of grains on the regular basis, and more scrupulously monitor the qualitative features, especially in the tender deliveries, already became the sustainable practical realization of the good old Olympics motto "Faster, higher, stronger". And even the fact that to date French wheat is cheaper than, for example, the same Russian one, can no longer affect the change of the status quo. Moreover, it seems that the Europe is no longer ready to fight for the MENA markets, as the aggressively disposed trading community of the Black Sea region does. For example, at the end of April 2019 during the last tender in Morocco there were no applications for European wheat at all. As it is said, Black Sea is here to stay, whether you like it or not.
Of course, it does not mean that trading has become less risky, smoother or less dependent on the factors we already mentioned before. Moreover, according to the GAFTA statistics for several recent years, and especially for the last season, the leading positions of Black Sea grains in the region are directly proportional to the number of disputes related to it. So, among the TOP-3 contracts, which were disputed and arbitrated by the GAFTA courts of the primary jurisdiction, the leading place is occupied by the GAFTA contracts 49 and 48, namely — deliveries from Central and Eastern Europe on FOB and CIF terms. Of course, not all these disputes are directly related to the Black Sea supplies to the MENA countries, but the statistics are statistics.
We tried to understand what is the major concern for Black Sea sellers and their regional buyers.
The quality is the past, present, and the eternal future issue that will never lose its relevance. During the last grain congress in Cairo (Middle East Grains & Oils Congress) in March 2019, one of the main questions asked by representatives of Egyptian buyers to Black Sea sellers was the quality issue, namely, why the qualitative features of the goods arrived to the destination country, almost always significantly differs from the quality standards specified in the shipping documents, which payment should be made.
Of course, the issue is very controversial, and it is always possible to find traces of speculation from both parties: both from the part of the buyer, who does not want to overpay for the goods on the falling market, and from the part of the seller, who by fair means or foul tries to get and provide the perfect set of contract documents. As a result, such cases can only cause the less and least trust level between specific counterparties, as well as at the more global level between regional sellers and buyers, and the reasons for such accusations can naturally also be both objective and subjective. But if sometimes the issue can be solved with few losses by attracting additional surveyors or more close monitoring of compliance with all rules and regulations of the GAFTA in terms of sampling and analyzing procedures, it is not infrequent that the same server, standing both on loading and unloading works can show radically different results.
Naturally, if the supplier is sure in the quality of the cargoes, he should not have much difficulty to prove it to the buyer, stressing the incorrectness of his conclusions. If the buyer turns out to be right or his fears are not so ill-founded, then the attempts to tell that the seller sold the goods on the basis of the finality of the quality certificate on loading, can only serve to add fuel to the controversy, and the seller risks much more than just to damage relations with the specific buyer in this certain transaction.
Geopolitics and market volatility
Despite the fact that the two factors are quite heterogeneous, their impact on what is happening in the region is interconnected. At the present stage, it is possible to clearly see how the certain political decisions collapse or accelerate the market, which, in turn, lead to the inability or unwillingness of the certain contractors to fulfill their contractual obligations. In addition, the general instability in the region adds almost permanent risk factor. Despite the fact that the supplies of significant volumes of Black Sea grains to unstable Libya or warring Syria still take place, the transactions still remain quite risky, and they are not always standard.
As for Iran, then on the one hand, we have the increased interest and desire to work with the country (for example, the February trilateral memorandum of cooperation signed between Iran, Russia and Kazakhstan), and on the other hand — Donald Trump, who promised a new round of sanctions against the country in the nearest future. How the state policy and the declared support of inter-state trade will be able to help private traders, who face with their specific issues and problems, or simplify their life in the process of delivery and receipt of payments from Iranian counterparties, only time will tell, because to date the number of problematic challenges exceed the number of safely issues. And although the obvious surface solutions may, for example, include the refusal from payments in US dollars and making payments in any other currency, it is the uncertainty about the political and economic situation in the country that makes it increasingly unclear in the business plans of those traders who plan to work with Iran, and understand its potential.
In fact, the problem is also perennial, as the problem of quality. So, it is not necessary to expect that payments from the region will be made with the accuracy of Swiss watches, because of some factors mentioned above, and because of a number of reasons of absolutely subjective nature. It covers the deficit of free resources, and expensive credit currency, and the reluctance or unwillingness of buyers to pay for the letter of credit option (tenders naturally are not the included), and the constant increase in regulatory inspections by all possible banks in the payment chain, etc. As for aggravating factors such as market fluctuations or banal reluctance to pay, we already mentioned above: it is the local mentality, and unfortunately, there is nothing for it.
At the same time, the additional constraining factor to work with the same public buyers, which are often more desirable partner compared with the private sector, is the constant requirements for issuance of the bank guarantee for rather significant sums, which only large-scale market players can manage, or the fact of 180-day deferment of payment under the letter of credit, which can also be quite painful for the medium trader with the limited operating cash flow.
I should stress two points. First, Black Sea grains in its classical appreciation (Ukraine, Russia and Kazakhstan) already have the strong European Black Sea competitors acting by Romania, Bulgaria and, partially, the Baltic States. And if the relative share of Romanian grains is not yet so large, we should remember that multinational companies dominate on the Romanian market, with the strong external capital and the desire to capture and hold its market share, so the classical TOP-3 of Black Sea countries and especially Russian wheat should look at the growing competitor, and think how to keep the earned leadership positions.
Secondly, taking into account the ever-increasing volumes of Black Sea grains going to the region, the number of local buyers who would like to participate in the trade operations, is also increasing. On the one hand, there are former consumers of French wheat, who have their own conservative expectations about the quality of the goods, and the execution of transactions. On the other hand, there are quite inexperienced in international trade buyers who have its resources, but don`t have understanding of how it works (the same Iran). One has to spend more time with such contractors, explain and even train them, before forming them as the full-fledged partners, and not wait for them to understand everything, and start playing fair and square. And, of course, on the third hand — there are always many persons, for example, in Egypt, who are trying to speculate and make a bundle. In the days of high volatility, even proven contractors can make unexpectedly unpleasant movements, and create additional problems, which often bring the situation to default.
In lieu of a postscript. As for the dynamics of two recent seasons, the MENA region is undoubtedly prospective, and Black Sea grains will most likely keep stable on the market. Nevertheless, there are many specific details in trade with the region, which number will only continue increasing. Therefore, I wish you successful trading and attention to details!
Ivanna Dorichenko, Managing Director of Tradaide, London, International arbitrator of GAFTA/FOSFA