The Freight Market: Up And Down Like An Up And Down Thing

The cost of shipping commodities such as iron and wheat around the world is almost certain to increase due to demand from China, India and emerging economies and thanks to port congestion in major exporting countries.

Analysts say buoyant consumer demand in Asia is helping outweigh the impact of a slowing U.S. economy, record oil prices and falling stock markets and will force freight rates higher.The Baltic Exchange's chief sea freight index, which gauges the strength of major trade routes for coal, iron ore, cement and commodities such as grains and sugar, plunged at the start of the year fuelling fears of a U.S.-led global slowdown.

The index has had a roller-coaster ride over the last six months, hitting an all-time high of more than 11,000 points in November but then collapsing to under 6,000 in January.But the index has bounced back since then thanks to soaring demand from the Asia, especially China.

From a low of 5,615 points at the end of January, the index has jumped to more than 7,000 points.

"At the time we thought the sharp fall in the Baltic (indices) was nothing to do with underlying demand at all," said Helen Henton, head of commodity research at Standard Chartered Bank."A lot of it was driven by iron ore price negotiations between Brazil and China and cancellation of 30 large cargoes that knocked the market in a very short-term way," she said.

Henton said that now negotiations had concluded, the expectation was for freight prices to push higher again on pent-up demand."A lot of demand is still coming out of the Far East, from China and India, and other emerging economies ... there's also growing congestion at ports which is tying up the world fleet," said one dry trade analyst at Clarkson ship consultancy who declined to be identified.

He said iron ore and coal demand were the principal drivers of the recovery. Echoing Henton's view, he said the conclusion of some annual iron ore price negotiations between Brazilian miners and steel mills in South Korea and Japan had also spurred fresh buying.

According to the International Iron and Steel Institute world crude steel output reached 1.34 billion tonnes in 2007 -- the highest in history. It was the fifth consecutive year that output grew by more than 7 percent.

China's coal export ban announced in late January will add further support to prices, experts say, as major importers Japan, South Korea and Taiwan switch to suppliers further afield, increasing tonne-mile demand.

Some analysts say the ban could lift freight markets significantly as the three import 40 percent of global seaborne steam coal.

Port congestion, a major driver of sea freight prices, has also risen, principally in major mineral exporting countries like Brazil, Australia and South Africa, analysts say.

Brokers at J.E.Hyde consultancy have pinned some of the rebound on fresh purchases from China as traders returned from New Year celebrations.


Dry trade experts at Simpson, Spence & Young said strong soybean demand from China through 2008 was likely to stoke freight costs further. July soy futures prices on the Chicago Board of Trade have struck a record on anticipated Chinese demand after severe weather destroyed 40 percent of China's rapeseed crop.

Recent government figures showed that China imported 3.44 million tonnes of soy in January, the highest since June 2006.But despite robust demand, nagging concerns over the U.S. economy and even slower global growth persist.

A Reuters poll of top economists on Tuesday predicted major world economies are set to slow another notch from the slower pace predicted in January, with the likelihood of a U.S. recession now even higher. OECD chief Angel Gurria on Wednesday predicted that global economic growth was going to be lower than cited just a few months ago.That could spell trouble for future raw materials trade, knocking sea freight prices lower again.

In perhaps an ominous sign, and despite the recovery from last month's low, the Baltic's chief index shrank 238 points on Wednesday to 7,081.The Baltic's Capesize index, for classes of ship typically hauling more than 150,000 tonnes of mostly minerals, slid 6 percent, 596 points, to 9,279. The Baltic's Panamax index, gauging grain trade on 80,000-tonne ships, sank 4.4 percent, 340 points to 7,313.

But analysts have so far brushed aside similar pull-backs on short-term freight market volatility."All other indicators seem to show commodities demand still being very strong...growth is slowing but it is still firm because of China and Asian demand generally," Henton said.