Lower ocean freight rates allow CWB to compete

(Resource News International) — Cheaper ocean freight rates over the past year have made it easier for the Canadian Wheat Board to ship grain to destinations where Canada is at a freight disadvantage, according to a CWB official who expects rates to remain under pressure for the foreseeable future.

The Baltic Dry Index, a weighted average of a number of segments in the dry bulk freight market, had climbed to record highs above 11,700 points around this time a year ago before crashing with the global economy to a low under 800 points in November 2008. The index has since shown some recovery and is now at approximately 3,000 points.

The Baltic Dry Index “is nowhere near where it had been, but is now at a level where ship owners should be making some money,” said David Przednowek, senior manager of ocean freight and terminal logistics with the CWB, on May 25.

While Chinese demand for iron ore has been increasing recently, the global iron ore demand is still down, Przednowek said, accounting for the current state of the freight markets. In addition, less coal is moving globally, both for running steel blast furnaces and for electrical power plants, further opening up the capacity in the shipping sector, he said.

Lower freight rates make it easier for Canada to ship grain farther away, said Przednowek. “We trade into a number of freight-disadvantaged markets,” he said, adding that when freight rates are lower, that disadvantage is reduced.

Przednowek noted that Australia is physically nearer to Southeast Asia then Canada is. “So with all other things being equal, when freight rates are higher, we’re at a greater disadvantage when it comes to marketing,” he said.

Przednowek said it was a similar situation for Canada trading durum into the Mediterranean region in competition with European sources.

When freight rates are lower “the playing field becomes more even,” said Przednowek. “The same advantages and disadvantages are still there, but they’re not nearly as pronounced as when the market was very strong,” he added.

Looking forward, Przednowek said the direction the freight market takes will be dependent on the global economy and how fast it recovers. “Right now, I’d say the jury is out there.”

However, Przednowek didn’t expect rates would return to the highs of 2008 anytime soon. He pointed out that “there is a massive order book of boats built,” which will lead to a sizeable increase in available tonnage.

With the demand for freight still down overall, and the expectations for increased capacity, he thought rates would remain under pressure for the foreseeable future.

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