The notoriously volatile ocean freight market has lived up to its reputation with a sharp – and somewhat unexpected – increase in freight rates this month.
Ocean freight costs have been a big story in the world grain industry in the past year, as rates soared to record high levels during the fall and winter of 2003-04.
Driven largely by huge demand for ocean shipping from China, the benchmark U.S. Gulf to Japan route climbed to $75-$80 US a tonne in February and March from around $40 a tonne last September.
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That was followed by an equally precipitous decline in April and May as the Chinese government took steps to cool down the country’s overheating economy, new shipping capacity came on stream and fuel prices edged downward.
Rates eventually settled down to their previous levels of $37-$38 tonne in June.
Then in the first week of July, they suddenly jumped back up to around $45 a tonne, reacting to indications that import demand from China was again picking up.
Exporters of Canadian grain say they don’t know exactly what to make of the latest increase.
“We don’t know if this is just a blip or is this going to be a lasting trend again,” said Canadian Wheat Board spokesperson Louise Waldman.
“I guess we can just expect continued volatility.”
A Japanese shipping broker quoted by Reuters News Agency said the ocean freight market had received a “psychological boost” from the renewed demand from China and the market could remain strong for some time.
High ocean freight rates last fall and winter disrupted normal trading patterns by exaggerating the freight differentials faced by various exporters when serving different customers.
For example, Canadian exporters such as the wheat board were put at a disadvantage when shipping to some customers in Asia, relative to their Australian competitors. But they also gained a competitive advantage in moving grain to destinations such as Latin America and Europe.
High ocean freight rates also have the potential to dampen overall demand for grain, as importers look to substitute cheaper local grain and oilseeds rather than pay the higher freight.
However, Waldman said that despite all that, the board’s 2003-04 sales program was relatively unaffected by the record ocean freight costs.
“There has not been a significant impact on the board’s sales volumes or returns,” she said, adding that the board’s sales to Asia held up well despite the freight issue.
The board’s sales of wheat, durum and barley to Asian markets in the first 10 months of the current crop year totaled 5.5 million tonnes, representing about 40 percent of total sales of 13.6 million tonnes.
One market to which Canadian exporters can ship by either ocean vessel or rail is Mexico. So far this year the board has shipped almost its entire export program – 562,000 tonnes as of the end of May – to that country by rail, in large part because of the freight savings.
Canola industry officials say that several hundred thousand tonnes of canola also moved to Mexico by rail rather than boat because of the freight savings.
An analysis of the ocean freight market published by the United States Department of Agriculture says that bulk ocean freight rates are expected to “moderate” but still remain above the five-year average for the next several months.
The department said ocean freight rates are expected to drop as new dry bulk vessels enter the fleet beginning later this year and continuing through 2007.
