Rising ocean freight rates are unlikely to disrupt trade patterns unless they keep escalating, says a Canadian grain industry official.
The Baltic Dry Index, which measures changes in the cost of transporting bulk goods by sea, soared from a low of about 600 in early February to a high of 2,170 in mid-July, a 262 percent increase.
The index has since fallen back to around 1,700 by the end of last week but that is still nearly triple where it was at the beginning of the year.
Wade Sobkowich, executive director of the Western Grain Elevator Association, said the increase has to do with pending environmental regulations facing shipowners.
The United Nations’ International Maritime Organization is instituting a cap that will limit marine fuel sulfur emissions to 0.5 percent starting in 2020, down from 3.5 percent today.
To meet the new standard, ship owners will either have to install expensive scrubbing equipment, use liquefied natural gas or switch from using heavy, thick bunker fuel to a form of diesel.
The regulations are going to make shipping commodities like grain more expensive.
Michael Broad, president of the Shipping Federation of Canada, a trade association that represents all ocean going ships that carry Canada’s imports and exports, told The Western Producer in a September, 2018 interview that the environmental regulation is going to be costly.
He noted that 3,800 of the 55,000 cargo vessels sailing the world’s oceans have indicated they will be installing scrubbers. The vast majority of the remainder will switch to diesel as there are storage and other problems when using liquefied natural gas.
Diesel fuel that is compliant with the new regulation was costing $150 to $200 per tonne more than the high sulfur bunker fuel at the time of that interview.
Sobkowich said the market is factoring in the new cost prior to implementation of the new regulation but the impact on the grain trade shouldn’t be too pronounced.
“Rates are still relatively low compared to historical levels,” he said.
The Baltic Dry Index peaked at 11,800 in 2008, so 1,700 doesn’t seem that bad. Rates are still in the bottom one-third of the long-term range because they started the year at rock-bottom levels.
Ocean freight rates can become a major market factor like they did during the global economic meltdown.
“As the rates climb it does advantage exporters that are closer to their markets,” said Sobkowich.
Australia gains a further competitive advantage over North America in the Pacific Rim, while product out of the European Union and Black Sea region increase market share in places like the Middle East and North Africa.
But he doesn’t believe that is the case this time around.
“(Freight rates) will affect grain flows but moreso when you see wild extremes. The change we’ve seen recently probably wouldn’t have much of an impact on the flows,” said Sobkowich.
The grain companies he represents are not overly concerned about the rapid rise in ocean freight rates in 2019.
“It’s business as usual for them. There is no panic about this,” he said.