Ocean freight rates have risen in the past few weeks but they are still cheap relative to historical levels and should remain that way well into 2010, say grain industry analysts.
Canadian exporters and producers are among the biggest beneficiaries of that development.
“On average, we’re trading into markets that are further away from us physically relative to our competition,” said David Przednowek, senior manager of ocean freight and terminal operations with the Canadian Wheat Board.
When freight rates are high, Canada is at a competitive disadvantage to other grain exporting regions like the Black Sea, which is closer to North Africa, and Australia, which is closer to Asia. The more rates fall, the narrower that disadvantage becomes.
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“On the whole it’s net positive,” said Przednowek.
And freight watchers think cheap rates will be around for the foreseeable future. Ian Flagg, market analyst with U.S. Wheat Associates, expects rates will remain “relatively low” well into 2010.
“World trade is expected to be negative in 2009. We’re in a huge global recession. We’ve got excess capacity in ship building,” he said.
“Both the supply and demand picture for the freight market is fairly negative. It doesn’t seem to me that there’s a huge reason for freight rates to rebound anytime soon.”
Rates peaked a year ago and then went on a downhill tumble along with the rest of the global economy.
The weekly close of the Baltic Exchange Panamax Index, which peaked at 11,018 on May 16, 2008, fell to a low of 442 on Dec. 11.
Last week, it was at 2,373, which is up considerably from the December low but still only about one-fifth of where it was a year ago.
“Relative to where it has been over the last four or five years it is still well below its historical norm,” said Flagg.
Przednowek said the indexes provide an indication of what has happened to grain freight rates, but they only measure the cost of chartering a ship and don’t take into account factors like fuel, canal tolls and port fees.
The United States Department of Agriculture tracks grain transportation rates. A year ago it cost $140 US per tonne to ship a load of grain from the Gulf of Mexico to Japan and $70 from the U.S. west coast to the same destination. Today’s rates for those routes are $50 and $25 to $30 respectively.
Przednowek agreed with Flagg’s assessment this isn’t the beginning of a big hike in ocean freight. There are simply too many new ships on the market to be swamped by the demand.
During the incredible run-up in freight rates between 2003 and 2008, shipping companies began ordering new ships. By the end of 2008, there were 825 ships in the Capesize fleet and another 800 being built or on order.
Shipping companies are trying to wriggle out of those commitments but more new boats will continue to reach tide water in 2009 and 2010.
“What is going to put a damper on any strength in the (ocean freight) market in the longer term is going to be the sheer size of the number of new build vessels that is going to be coming onto the market,” said Przednowek.
