Low ocean freight rates likely to stick around

CNS Canada –– Ocean freight rates are at some of their lowest levels ever and will likely stay that way for at least the next two years, according to an industry analyst.

“We’re near hitting bottom, but just because we hit bottom it doesn’t mean we won’t scrape along it for awhile,” said Jay O’Neil, senior agricultural economist with the international grains program at Kansas State University.

The Baltic Dry Index (BDI), which provides an assessment of the price of moving major raw materials by sea, was quoted at 498 points on Friday (Nov. 20) — the first time the index dipped below 500 since records began in 1985.

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The BDI was trading above 1,200 as recently as the beginning of August, but has found itself in a steady decline over the past three months.

The index has shown some recovery off of its lows, hitting 528 on Tuesday, and O’Neil said rates may not have much lower to go from current levels.

While prices might not keep trending down, that doesn’t mean a larger correction higher is likely either, as “it will take a while to bail out” and the environment of low rates may last for another two years.

An oversupply of ships and a slowdown in the global economy were the major drivers behind the cheap freight, with both factors likely slow to change, he said.

“It will be tough sailing for the next couple of years… we’ll need a real uptick in the global economy before there will be an increase (in freight rates),” said O’Neil.

Cheaper freight may be good for buyers and grain exporters but is hard on boat owners and manufacturers. O’Neil said a number of shipyards have already slowed down or closed completely, while “a string of bankruptcies” is likely among shipping companies.

The majority of the fleet is relatively young, built over the past decade, and will be operational for a long time. As a result, the fleet size won’t be reduced by the bankruptcies, but it will put some cheaper freight into some stronger hands.

Looking specifically at grain movement, the sector only constitutes about 12-14 per cent of ocean freight, which means an increase in grain prices won’t be enough to pull freight rates off their bottom.

As a result, O’Neil said, there was a likely scenario brewing that would see higher grain prices while freight was still low.

Beyond the current story of low rates, the expansion of the Panama Canal also has the potential to impact the flow of grain out of North America.

The expansion is expected to be complete this spring, which will allow larger ships to traverse the Atlantic-to-Pacific shortcut. U.S. shippers will then be able to move 75,000- to 80,000-tonne cargoes out of New Orleans, instead of the current Panamax 60,000-tonne boats.

That will improve the competitiveness of grain moving down the Mississippi destined for Asia, but o’neil was skeptical that the flow of grain out of North America would change in any major way.

Some industry analysts forecast an expansion of the draw area into the Mississippi River. However,O’Neil said it was unlikely railways transporting grain to western ports would just roll over and allow that to happen without adjusting their own rates to remain competitive.

Also, he noted, the vast majority of the buyers in Asia don’t even have ports that can handle the larger vessels anyway, which will leave China as the bigger boats’ primary destination.

Major competitor Brazil will also be able to ship larger cargoes out of its newly built northern ports.

Phil Franz-Warkentin writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting. Follow CNS Canada at @CNSCanada on Twitter.

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

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