Analysis: China, Egypt import tussle could reignite wheat market

China and Egypt look set to duke it out for top spot on the world wheat import rankings in 2013.

Frost and heavy rains shaved millions of tonnes off the Chinese wheat crop this year and traditional number one importer Egypt finally regained access to sufficient financial resources to resume wheat imports following two years of only limited trading activity amid the ‘Arab Spring.’

This potential flare up in aggressive import activity may disrupt trade flows to other large scale importers, due to a drawdown in exporter reserves. In doing so, it could spark a complete change in tone in the wheat market at large which until recently had languished in the shadows of other crops such as corn and soybeans.

BACK IN THE GAME

China looks set to bring in close to 9 million tonnes of wheat this year after frost during pollination and heavy rains during harvest cut the amount of wheat suitable for human consumption by around 15-20 million tonnes.

This marks an aggressive step up in wheat import activity from recent years. Between 2005 and 2010 the country brought in less than 2 million tonnes per year and was well outside the top five ranking of wheat importer countries.

Though China is likely to rival Egypt as the World’s top importer for the 2013/14 marketing year, it is not the first time it has played a dominant role in wheat trade. During the first half of the 1990’s China was routinely the top importer of wheat, often bringing in nearly twice the amount sent to Egypt and other top locations.

Though China’s emergence as a top wheat buyer may have the appearance of a new phenomenon, it is not unprecedented and not anything Chinese traders are unfamiliar with.

What is new is China’s aggressive play for wheat is occurring just as Egypt looks set to return to the wheat import game. Egypt underwent a protracted absence due to trade disruptions during social and economic upheaval in the wake of its 2011 ‘popular uprising.’

Egypt’s economy was devastated by the aggressive change in leadership seen in 2011, which disrupted credit markets and drove several established trade partners away as the new regime took over the running of the country. Many grains analysts are hoping the change in leadership last month will bring about a speedier resumption of commodity flows to the country.

Some promising developments have already taken place in recent weeks. Egyptian authorities secured multi-billion dollar loans from the United Arab Emirates and used that windfall to start financing talks with major wheat suppliers such as Russia.

With loan agreements and wheat supplier contracts in place, wheat market traders expect Egypt to embark on a purchasing drive that will cater to near-term consumption requirements and start to replenish domestic reserves driven to their lowest levels in close to a decade.

This clash of a rejuvenated Egypt with an aggressive China on the world import stage stands to be one of the most potentially disruptive demand-side developments in the wheat market in years. It could well set the tone for a period of better-supported and more volatile world prices in the months ahead.

STOCKS RECALIBRATION

This impending swell in import interest will sharpen market focus on the degree of any fresh purchase agreements conducted by Egypt, China and other top importers over the coming months. It will also draw greater scrutiny to the amount of wheat inventories available for consumption.

At face value, world wheat inventories of more than 172 million tonnes appear to be relatively abundant. The world stocks-to-use ratio (a measure of relative supply tightness) of more than 24.5 percent is above last year’s reading and sharply higher than the 21-22 percent levels that prevailed during the 2007-2008 wheat market rally.

However, when you subtract those inventories that are locked away in Chinese silos and are thus highly unlikely to become available to any other consumer nation, the stocks picture is dramatically tighter at just over 115 million tonnes. It highlights the degree to which China’s substantial crop holdings can often paint a misleading picture of global crop availability, as such reserves are effectively off limits to any other import countries.

A fairer measure of supply availability is to track the inventories located within the top exporting countries — Australia, Canada, The European Union, The Former Soviet Union, and the United States. Combined, these countries are estimated to hold roughly 51 million tonnes of wheat, or roughly 29 percent of total inventories.

Following the recent and projected Chinese and Egyptian import deals with Australia, Russia and elsewhere, those inventories can be expected to decline notably, which should exacerbate any sense of emerging tightness in this market

On the one hand, such a drawdown in available stocks bodes well for other exporters such as the U.S. and Canada, which due to proximity reasons often lose out to Black Sea and European suppliers on Middle Eastern and Asian trade deals.

For other large importer nations, the impending reduction in available stocks due to higher import demand from China and Egypt will be cause for concern. It could potentially trigger a wave of more competitive import bidding among those other countries as they try to avoid being outmaneuvered by their larger-scale peers.

Gavin Maguire is a Reuters market analyst. The views expressed are his own.

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