Freight disadvantage reduced | A decline in shipping costs is making the Canadian grain industry more competitive
Canadian grain is more competitive in overseas markets because of a shrinking ocean freight disadvantage.
The cost of shipping a tonne of grain from the Pacific Northwest to Japan was $24.50 as of April 26, down 20 percent from the same time last year.
That is dramatically lower than the $90 per tonne shippers were paying during the peak of the market in 2008 before the global economic meltdown.
Canada is at a significant freight disadvantage to most grain exporters because it takes more days at sea to reach many of the markets where Canadian grain, oilseeds and pulses are sold.
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For instance, it is a lot cheaper to ship wheat from Australia to Indonesia or durum from France to North Africa than it is to transport them from Western Canada.
“When (freight) markets are low, the freight disadvantage narrows, which is positive. It makes Canadian grain more competitive,” said David Przednowek, CWB’s manager of ocean freight.
The good news is he expects rates to remain depressed for a while yet.
“The market is going to trade in a pretty much sideways channel here over the next year or two,” said Przednowek.
New ships that were ordered during the economic boom leading up to the 2008 crash are still hitting the market.
The new cargo-hauling tonnage hitting the high seas every year easily outstrips the demand for seaborne trade that has been growing by three to five percent per year.
The dry bulk fleet grew by 70 million deadweight tonnes (mdwt) last year, according to a Grain Transportation Report published by the U.S. Department of Agriculture.
The fleet is expected to expand another six percent in 2013. An estimated 127 mdwt of new dry bulk capacity is scheduled for delivery between now and 2016, or 18 percent of the existing fleet, according to the USDA.
Grain mainly moves in Handysize, Handymax and Panamax vessels. More than 1,000 of those types of ships will be added to the world’s fleet over the next three years, which is a lot of new grain hauling capacity.
Przednowek said farmers shouldn’t expect rates to fall much further than they are now because ship owners are approaching the break-even point at today’s rates. Any further depreciation and they will start scrapping existing tonnage.
Only one factor could drive rates lower. Freight rates comprise the cost of leasing a ship plus the cost of fuel. The average Panamax ship burns 32 tonnes of bunker fuel a day when steaming.
“That’s a fuel bill of $19,200 per day for that ship,” said Przednowek.
Freight rates could drop even further if the cost of crude oil falls.
Lower rates also mean reduced demurrage bills for the grain industry when loading is delayed.
Przednowek said a typical demurrage bill today is $9,000 to $10,000 per day compared to $80,000 per day during the peak of the market in the summer of 2008.
“Do that math on a month delay. It’s wild,” he said.
The total bill for sitting in port for a month has been reduced to about $300,000 compared to $2.4 million in 2008.
“It certainly has an impact in terms of overall demurrage costs and the type of protection that you might have to build into a trade to cover yourself on demurrage,” said Przednowek.
However, environmental concerns are forcing ships to burn cleaner fuel while in port.
Bunker fuel is only one step above asphalt in terms of environmental pollutants.
“It’s pretty dirty,” said Przednowek.
A typical vessel consumes one to two tonnes of fuel per day while anchored at port keeping its generators running.
The cost of the fuel they burn while at port will more than double when ships are forced to burn the cleaner, more expensive fuel, which in turn will increase demurrage costs.
