Freight Rates Rewrite Shipping Rule Book
Shipping costs have plunged to 22-year lows, skewing global grain trading patterns to the point where U.S. hog farmers are importing wheat from Britain and Japan has eschewed U.S. corn supplies to buy from the distant Ukraine.
In some countries, it is now cheaper to ship grain thousands of miles across the ocean rather than move supplies hundreds of miles by barge or railroad cars.
"Ocean shipping costs are so low that it would be cheaper for south Indian buyers to import Russian wheat than move wheat from north India by train," one European trader said.
Collapsing ocean shipping costs have leveled the playing field for wheat exporters -- who now compete solely on the price of the grain.
Russia and Ukraine have been able to make sales far beyond their traditional markets in Europe and the Middle East, reaching out to Asia, European traders said.
In a recent and closely followed international tender for wheat shipped to Egypt, U.S. wheat freight was $11 per tonne, an insignificant difference from Russian freight at $12. French and German wheat were also offered at $11-$12 per tonne to Egypt.
"Ship owners are giving away bulk carriers at operating costs just to generate cash flow and to pay crews' wages," another European trader said. "This will expand the selling range of U.S., Argentine and Australian wheat in the Middle East market if they can compete against the Russians on (free-on-board) prices."
And while the export season in the Black Sea region is quickly closing, dirt cheap freight rates will allow countries such as Argentina and Australia to be more competitive going forward.
"It is happening all because of the freight rates and I think it will go on for a longer period as the freight market doesn't show any signs of improving," said Vijay Iyengar, managing director of the Singapore-based grains trader Agrocorp International Pte Ltd.
Argentine wheat could makes sales to Morocco and Algeria, which typically buy wheat from nearby France.
"Argentine wheat -- whose quality is slightly better than French -- could very well make it on our traditional markets," said a European trader. "We could see switches on existing deals from European wheat to Argentine wheat.
Baltic Dry Index Falls To Lowest In More Than Two Years
The Baltic Dry Index, a measure of shipping costs for commodities, fell to its lowest since June 2006 as slowing economic growth curbed demand for raw materials and led to a surplus of vessels for hire. The index fell 5.4 percent, to 2,764 points, according to the Baltic Exchange in London. It's 77 percent lower than the record on May 20.
Baltic Dry Index Falls To Lowest In More Than 2 Years
Weakening demand for raw materials has led to a drop in freight costs. The Baltic Dry Index, a measure of shipping costs for commodities, fell 1.2 percent to 2,990 points Thursday, according to the Baltic Exchange in London. That's the first time the index has fallen below 3,000 points since July 2006.
Freight: Atlantic Panamax Rates At 18-Month Low
The Atlantic market for panamax bulk carriers is experiencing a sharp fall as rates hit their lowest levels so far this year, and charterers hold back grain, iron ore and coal shipments, according to Lloyds List.
Panamax fronthaul and transatlantic voyage rates have retreated to levels last seen in early 2007, with the hammering seen this month forecast to continue, they say.
The transatlantic voyage rate has dropped from around $60,000 per day in late August to under $35,000 per day yesterday. Fronthaul rates are also down to $48,000 per day, well off the highs seen in late May of $112,000 per day, and around $70,000 per day commanded a month ago.
Even during the crash in dry bulk freight rates last January, transatlantic rates held up at around the $50,000 per day mark.
Shipowners who have redirected their panamax tonnage from the Pacific region into the Atlantic since August have contributed to the decline.
Will freight rates continue to rise? It all depends on China
International Herald Tribune -- The prices of wheat, soybeans and iron ore have surged in the last two years, but that is nothing next to the surging cost of shipping goods like these.
Since mid-2006, a confluence of powerful forces - from a shortage of ships to the seemingly unquenchable thirst by China for raw materials - has sent the global benchmark for shipping rates soaring 365 percent.
The meteoric, and at times volatile, course of shipping costs has grabbed the interest of Wall Street and focused attention on the tiny Baltic Exchange in London, where ship brokers set the price for ferrying goods each day. As the exchange's Baltic Dry Index of rates hovers near record highs, investment banks and hedge funds are entering the fast-growing market for financial instruments linked to the index.
The market for ships has heated up, too. For the first time, prices of vessels designed to carry dry goods like iron ore and grain have eclipsed those for some oil tankers. Some owners are converting tankers to dry-cargo ships. Others have begun trading slots in shipyards where new vessels are built. And prices of second-hand merchant vessels are leaping.
''It's absolutely out of the ordinary,'' said Nikos Nomikos, a professor of shipping risk management at Cass Business School in London and a former Baltic Exchange analyst. ''Five years ago, nobody would have predicted that the market would go up by that much.''
The booming economy of China has transformed the once sleepy exchange. Because most of the dry goods transported by sea are somehow linked to the steel industry, and China is the biggest producer of steel, the Baltic index has become a proxy for the state of the Chinese economy.
But China is not the only reason freight rates are soaring. As global demand for raw materials rises, many goods must be shipped further than in the past, keeping ships at sea longer. Recent strikes at ports and infrastructure problems have delayed loading. The credit squeeze and the reluctance of banks to lend will make it more difficult to raise the $350 billion needed to finance an estimated 10,000 ships on order.
Shipowners have ordered ships in record numbers. But many shipyards are already working at capacity. Some of the Chinese shipyards that have agreed to build vessels have not even been constructed. Most of the ships on order will not be delivered until 2010. The backlog is raising concern about a possible oversupply of ships in the future.
''There's no doubt that 2010 is a risk point,'' said John Luke, head of shipping at KPMG in London. ''The big question is, will China keep buying bulk?''
For some in the industry, the large order books are bringing back memories of the 1980s, when a recession and an oversupply in vessels kept thousands of ships in port.
''Shipping has a very bad record when it comes to boom and bust, and that's because shipowners always get too excited when there is a shortage of ships,'' said one broker.
Shipping rates may come down if growth in China slows, too many ships flood the market, or the United States economy sinks into a deeper downturn.
