Shipping consultant Stephen Pyne came to Winnipeg and landed a body blow to the Canadian grain industry, already reeling from big increases in ocean freight rates.
“In my opinion, freight rates will remain generally at these levels for at least the next four years,” said Pyne in a speech to the Canada Grains Council’s annual meeting.
Pyne said the rates, which began rapidly increasing in September 2003, will probably not fall until mid-2008 – the earliest that new ships ordered today will be able to hit the waves.
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International trade flows will probably be affected if rates stay high, said Greg Arason, a former Canadian Wheat Board and Manitoba Pool Elevators chief executive officer, and now a member of the Port of Vancouver’s board of directors.
“It obviously impacts the competitive environment,” said Arason. “Shorter distances have much lower costs at these kinds of rates.”
Canadian Wheat Board director Ian McCreary said Asian buyers of wheat board grains will begin finding Canadian grains more expensive.
“It means we have an ocean freight disadvantage against the Aussies,” said McCreary.
“What was a $3-$4 (per tonne) disadvantage is now a $10-$15 disadvantage.”
Pyne said the sudden run-up in rates was partly due to an increase in ocean freight demand and partly because a longtime surplus in ocean freight blinded ship owners to the looming shortage.
For years, he said, ship owners made little money on their vessels because supply exceeded demand. Shippers, including those moving grain, in effect got discount rates for years. Now that demand has shot past supply, rates have jumped.
Pyne said the sudden surge in demand for ocean freight is due to one factor: China.
Chinese economic expansion has bounded along at such a rate that it is tying up large amounts of world shipping to bring to it raw materials and haul away manufactured goods.
In 1990, China produced 66 million tonnes of steel, Pyne said. In 2002, it produced 181 million tonnes and is forecast to produce 266 million tonnes in 2004.
Chinese government experts expect their country’s demand for iron ore and coal that are used to produce steel will not stabilize until about 2010.
“Clearly this massive expansion is unparalleled in modern history,” said Pyne.
The problem has been compounded because the ship operating and building industries did not expect it.
“China either forgot to tell anyone, or no one was listening,” said Pyne.
