Bulk shipping cost index sinks to 30-year lows

CNS Canada –– The Baltic Dry Index, which tracks global bulk shipping rates, has fallen to its lowest levels in 30 years, which should make North American grains and oilseeds more competitive in the international market.

The index (BDI) was quoted Monday at 554 points, the lowest reading since records start in 1985. The index was trading above 1,400 as recently as November, but has found itself in a steady decline over the past three months.

The BDI is compiled daily by the London-based Baltic Exchange and provides an assessment of the price of moving major raw materials by sea, including grain.

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A overcapacity of ships, a slowdown in Chinese demand for building materials, weakness in crude oil and declining commodity prices have all been cited as contributing factors to the lower freight rates.

“It’s symptomatic of the weaker global economy,” said CWB market analyst Neil Townsend on the low shipping costs. The long turnaround time in building ocean vessels means that ships ordered a number of years ago, when there was more optimism on the economic front, are now entering the global fleet and contributing to the oversupply, he added.

As far as grain and oilseed exports are concerned, lower freight rates even the playing field in some cases, by lessening the importance of shipping costs in the final price to the buyer.

Competitive

Ukrainian grain is ending up in places it never did before, because the ocean freight is no longer prohibitive, Townsend said, noting cheaper freight means Ukraine can sell for a few dollars less and its landed price is still competitive.

In another example, Egypt recently purchased wheat from Romania in a tender. “Their prices were a bit higher, but their ocean freight was a bit lower, so they were able to displace a bit of French wheat and be competitive into Egypt,” said Townsend.

As Canada can also be at a freight disadvantage to some of its competitors, exporters are also able to take advantage of the lower ocean freight, to some extent.

However, Townsend added, “Canada derives less of a benefit (from the lower ocean freight), because we rely so heavily on rail.”

The cost of moving grain from the Prairies by rail to export positions accounts for the larger freight component in moving Canada’s grain, he said.

The cyclical nature of the freight sector means rates will eventually rise again. However, the timing of that shift is unknown.

Ship owners will usually increase their pace of scrapping ships when rates are low, Townsend said, but with more new ships still coming online, there may be fewer available ships to be scrapped.

Phil Franz-Warkentin writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

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Phil Franz-Warkentin writes for MarketsFarm specializing in grain and commodity market reporting.

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