Lower ocean freight costs support grain exports

Soft ocean freight rates, which hit 25-year lows in early February, are helping cut into Canada’s grain freight disadvantage with some of its competitors, according to industry participants.

The Baltic Dry Index, which is used as a guide for global shipping rates, is sitting at 715 points, up from a 25-year low of 647 points on Feb. 3. However, that’s still well below the 2011 high of 2,173 points in mid-October and the 2008 peak of 11,793 points.

David Przednowek, manager of marine logistics with the Canadian Wheat Board, said the softening of ocean freight rates has been beneficial for Canadian grain shippers.

Transporting grain from Canada to many global areas, including Asia, takes more time, in comparison to moving it from Australia. However, softer shipping rates have narrowed the freight disadvantage, making it more competitive for Canadian grain distributors, he said.

Trevor Lavender, president of the Summit Maritime Corp. in Montreal, said much of the dramatic downward trend seen in ocean freight values is due to the large supply of ships. A lack of seasonal demand, due to the Chinese new year holiday, has also weighed on freight rates recently.

The short-term trend for freight markets will continue to see shipping supply far outstretch demand, Przednowek said. Dry bulk exports will increase three to five per cent this year, reflecting strong demand for commodities by emerging markets, he said.

However, despite increased exports to emerging markets, dry bulk demand will not be able to keep up with the 10-15 per cent increase of ships being introduced into the market, he said.

Przednowek projects the influx of new ships will continue for the rest of this year into the first half of 2013, which will keep ocean freight costs low.

However, Przednowek cautioned that there could be an uptrend in rates if China’s demand for ore and coal picks up. Increases in crude oil, which impact bunker fuel costs, also may impact freight rate values, he said.

Rotterdam bunker prices have increased from around US$650 to US$700 a ton since Christmas, Przednowek said.
Lavender speculated ocean freight rates will start to head back to normal levels by 2014 as the oversupply of ships and demand begins to sort itself out.

Przednowek also felt dry bulk container owners may face additional challenges which could further raise freight rates down the road.

Euro-zone credit problems may cause European banks to reduce the amount of credit made available to shipping owners, he said. The banks that have been lending to shipping businesses have already been tightening credit lines, forcing some shipping outlets to close up shop.

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