Freight rates soften

by World Grain Staff
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Dry bulk freight rates have headed determinedly downward since May after a buoyant start to the year. One broker contacted by World Grain had an easy answer to the decline. "The World Cup," he joked. "No one’s fixing cargoes, the sun is shining, and we’re all watching the soccer."

The slowdown of the bulk markets did uncannily coincide with the build-up to the month-long sporting extravaganza in South Africa. But structural and seasonal causality are easier to pin down than sporting distraction.

For vessel operators, the numbers have certainly been rather severe since May. After enjoying substantial gains earlier in the year, the Baltic Dry Index (see chart on page 50) fell from a yearly high of 4,209 points on May 26 to just 2,280 in early July. The Baltic Panamax Index was below 2,500 in early July after looking certain to break 5,000 in May, a collapse mirrored in the supramax and handysize markets. The bearish nature of the shipping markets was reflected in the IGC Grain Freight Index, which, despite a series of bumps and slumps, had maintained a defiant upwards trajectory for the best part of a year until late May. As the northern hemisphere’s summer progressed, gains in the earlier part of the year were wiped out, as reflected in U.S.-dollar-per-tonne rates on key U.S.-Gulf-E.U., U.S. Gulf-Japan and Brazil-E.U. routes.

Peter Norfolk, research director of Freight Investor Services (FIS), said the decline in iron ore demand, particularly from China, had been a key factor in the collapse of capesize freight rates, helping to drag down rates for the smaller sizes used in the grain trade from May onward after record imports earlier in the year.

He suggested that a new quarterly benchmarking system for seaborne iron ore shipments had skewed the market. The system, to simplify a complex process that most analysts agree currently lacks transparency, uses the previous quarter to set the next quarter’s contract prices. Therefore, the high price of iron ore in the earlier part of the year was still being reflected in contract prices as summer commenced, despite spot prices tanking as demand contracted with sliding steel prices. "The steel market is fairly weak because of oversupply, so iron ore demand has softened," said Norfolk. "The discrepancy between spot and contract prices has also seen some steelmakers in China turn to domestic supply or carry out maintenance works. The result has been that the cape market has plummeted."

Where the cape market goes, the other vessel categories almost always follow.

According to one panamax broker who asked not to be named, another factor in the decline of the panamax market had been the unexpected strength in demand for South America grains earlier in the year.

"There was a wide spread between the Atlantic and the Pacific markets," he said. "As the spread widened, ships from the Pacific headed to the East Coast of South America to load grain for Asia. This took up a lot of tonne-miles for the panamax market from Chinese New Year in February through to May."

Figures from Informa Economics back up the analysis. During 2009-10, soybean exports out of South America dropped 17% to 33.9 million tonnes, a three-year low. For 2010-11, South American soybean exports will rebound 54% to 52 million tonnes, a record year.

The panamax market was also buoyed earlier in the year by heavy demand for Indian iron ore into China and for coal from Indonesia into both China and India.

However, the end of the South American grain season and the onset of the monsoon season in India released large numbers of panamax and smaller vessels back into the market, just as capesize demand dried up. "Demand for coal from Indonesia into China is very strong, but the tonne-miles involved don’t compare to ECSA-Asia," said the panamax broker.

Another factor has been vessel supply. Capesize newbuilding deliveries totaled 111 in 2009; by early July this year they had already reached 106, according to figures from FIS. Panamax new deliveries after just over six months of 2010 totaled 83, compared to 84 in the whole of 2009. Delivery rates for smaller vessels have also been aggressive, adding significant capacity to the global bulk carrier fleet.

While newbuilding deliveries are expected to anchor rates for the rest of the year, the demand picture remains relatively healthy for the dry bulk carrier fleet.

Drewry predicted earlier this year that total seaborne trade would grow by 6.8% to 3.185 billion tonnes this year after declining by 1.8% in 2009. Grain shipments would increase to 243.3 million tonnes, up 16.1% year-on-year, the biggest percentage gain of any of the bulk trades.

Rahul Sharan, a dry bulk analyst on Drewry's India desk, believes the market will remain bearish in the coming months before picking up as the year progresses. He told World Grain the slowdown in the Chinese housing sector and iron ore price negotiations were key factors in the recent freight rate slump. "This will continue for the next few months, but it is not expected to continue until the year-end," he added. "Deliveries are playing a role, but it is mainly this short-term pricing and the Chinese factor."

As the year progresses, U.S. grain exports — forecast by Drewry to rise from 73.7 million tonnes in 2009 to 88.8 million tonnes this year — would become more of a factor for smaller vessels and "may impact even the panamax rates later in the year," said Sharan, with buyers in North Africa, the Middle East and Asia more aggressive this year than last.

The U.S. would also step into the breach left by lower anticipated Canadian exports, with exports from the U.S. Gulf driving up tonne-miles.

Grain and soybean exports out of the U.S. dropped 16% to 113.7 million tonnes during 2008-09, from the previous year’s record, according to figures from Informa Economics. Exports during 2009-10 are forecast to rebound 5% to nearly 120 million tonnes, with soybean exports out of the U.S. forecast to set a new record in 2009-10, totaling 40.3 million tonnes, and corn (maize) exports forecast to be 3.6 million tonnes greater in 2009-10 at 50 million tonnes.

"Some enthusiasm has emerged now that China has purchased more than one million tonnes of corn from the U.S. for 2009-10," said Ken Eriksen, senior vice-president for Transportation Services at Informa Economics. "Despite this buying spree from China – they last purchased significant quantities more than a decade ago – this buying is based on economic opportunities that recently emerged. Certainly the falling ocean freight rates have been important, offsetting corn costs that turned higher in July in the U.S."

Eriksen predicted that falling ocean freight rates would see exports to Asia again start to favor U.S. Gulf elevators over Pacific North West (PCW) options. "With ocean freight rates falling considerably, the U.S. Center Gulf has an advantage over the PNW elevators landing grain and soybeans into Asia," he said. "This advantage for the Center Gulf will lead to higher tonne miles since most of the grain and soybeans that would shift from the PNW are for destinations in Asia.

Speaking in mid-July, Eriksen explained that in the previous four weeks the Gulf-minus-PNW ocean freight rate spread had narrowed more than $13 per tonne to about $24 per tonne. "Meanwhile," he added, "the export value of corn between the two port ranges narrowed nearly $4 per tonne.

"The freight rate has given the Gulf a considerable advantage. One month ago it cost $9 more to land corn in China that originated out of the Gulf whereas in the second week of July the Gulf had nearly a $10 advantage to land corn in China."

For panamax and smaller vessels, Norfolk predicted a quiet summer. "There could be a boost later in the year from grain and coal," he said. "But in the next couple of months, the market looks like it will be subdued."

Michael King, a freelance journalist and editor, has been writing about shipping, transport and commodities for more than a decade. Currently based in Indonesia, he can be reached at: