Soft ocean freight rates benefit grain exports

Ocean freight rates have come up off their two-year lows over the past month but are still relatively soft, which is beneficial for Canadian grain exports as the country is traditionally at a freight disadvantage to some of its competitors.

The Baltic Dry Index, which tracks global shipping rates, is currently sitting at around US$1,500 which compares with the low hit in mid-February of just over US$1,000, but is still less than half the level seen at the same point a year ago and well below the highs set in 2008 above US$10,000.

David Przednowek, manager of marine logistics with the Canadian Wheat Board, said the relatively soft freight rates were generally favourable for Canadian grain shippers.

Moving grain from Canada to many destinations, particularly Asia, takes longer compared to moving from Australia. As a result, when freight rates are lower, Canada’s shipping disadvantage becomes less pronounced.

Przednowek said ocean freight rates were expected to “chop around in a holding pattern” over the next while, with the longer-term outlook pointing to lower freight costs overall.

In the near-term, freight markets are dealing with both the disaster in Japan and unrest in the Middle East and North Africa.

While a number of ports in northern Japan will likely remain closed for an indefinite period, Przednowek noted that southern ports are still operating normally with no serious disruptions to grain movement.

The big impact from the Japanese disaster on the dry bulk freight market will be on iron ore and coal movement, he said, as steel production in the country will be curtailed in the short to medium term and supply chains will see disruptions.

However, as Japan rebuilds itself in the longer-term, Przednowek expected to see increased demand for the large capesize and panamax vessels.

The price of oil is another nearby factor. Przednowek noted that with the rising price of oil, bunker fuel prices have risen by over US$100 per ton over the past month. A standard panamax burns 32 tons of fuel per day, which works out to an additional US$3,200 per day in operating expenses.

Looking farther ahead, Przednowek said “a couple hundred million deadweight of additional capacity” is set to be added to the dry bulk market over the next couple of years, as ships that were ordered at the height of the market in 2008 are finished being built.

Demand won’t be able to keep up with that extra capacity, he said, keeping costs softer overall.

Speaking at the annual GrainWorld conference in Winnipeg at the end of February, Trevor Lavender, president of the Summit Maritime Corp., said the ocean freight market could be expected to remain choppy until 2012-13.

The market, he said, was in a cyclical downturn overall, but a number of issues, including the global economic situation and weather concerns in a number of areas, could lead to some instability.

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