(Resource News International) — High ocean freight rates are limiting Canada’s grain and oilseed export program and those rates aren’t expected to decline significantly anytime soon.
“In the last few weeks you’ve seen rates increase by 15 to 25 per cent depending on the destination. When you combine that increase in freight rates with the higher Canadian dollar, it’s really making our products less competitive heading into a number of markets, for all commodities really,” said an industry source who did not wish to be named.
The increase in rates is partly due to climbing crude oil values, which recently reached new intra-day highs above US$138 per barrel. That being the case, prices are likely to stay firm as long as global energy markets remain strong.
“I think right now you can expect ocean freight rates to stay in step with crude oil. I think a lot of ship owners that forward booked will be taking hits to their profits. I’m sure that on all of the business that they don’t have fixed they’re going to want to get a premium for their vessels to help average out their costs,” the source said.
“It’s going to be hard for Canada (for canola). Something has to give and it’s probably going to be the futures that have to come down or basis levels will have to widen out if we’re going to do a bunch of (canola) selling here,” he continued.
Not especially hurt
However, David Przednowek, senior manager of ocean freight at the Canadian Wheat Board, does not necessarily feel Canada’s grain and oilseed export program has been hurt more than those of other countries.
“Freight becoming more expensive from point A to point B is not a good thing for anyone generally but having said that I would not say that it has specifically adversely impacted our business.”
Przednowek conceded, however, that doing business with a geographically distant country can become more difficult as transportation costs rise.
“A good example would be feed barley exports into Saudi Arabia,” he said. “You have Black Sea feed barley from the Ukraine, which is very close geographically to Saudi Arabia whereas if you’re trading barley off the West Coast, there is a great distance relative to your competition. So, as freight rates increase you become at a greater freight disadvantage. You have to take a look at what prices are, landed Saudi Arabia. The buyer is willing to pay X amount, landed Saudi Arabia, and your freight equals Y and your competitor’s freight equals Z. That consideration affects what your FOB price ends up being if that is the market price.”
Przednowek said a number of factors are contributing to the increase in ocean freight rates, including high crude oil prices, the steady pace of Chinese commodity imports, strong demand, and port congestion. Prices may ease off however, as new vessels being built come on line in 2009, 2010 and 2011, he said.
“I think the expectation is that overall the market will remain strong but volatile in the next six months. It might back off of these really strong levels but in the overall historical context the market will remain strong. Then, once you get into 2009, 2010, 2011, the market is anticipating a huge roll-out of new vessels,” he said.
Based on the forward freight assessment of the Baltic Exchange, a strong downward trend is predicted in the market as more vessels become available, Przednowek said.
“Compared to the current spot prices, you see a big drop-off,” he said.
That being said, new financing problems tied to the global credit crunch and soaring prices for required building materials mean some vessel orders are likely to be cancelled.
Even then, though, the greater supply will pressure the market lower, he said.