The index is a simple measure of charter rates for dry cargo on 25 of the world’s most important trading routes. It has quadrupled over the last year to an all-time high. Much of this strength can be attributed to China’s economic boom.
As with any commodity, shipping lines should respond to the price rise by ordering new vessels. That’s the theory, but unfortunately for mineral exporters, most of the world’s shipyards are currently occupied building giant new container ships and double-hulled oil tankers (a result of recent EU legislation banning single-hulled tankers from European ports). New dry-bulk carriers may therefore be slow to arrive and freight rates may remain high for some time.
Observers expect dry-bulk shipping capacity will only rise 2.5% this year and 3% in 2004, while demand growth is forecast to rise as much as 10% per annum over these years. The current daily rate for a cape-size bulk carrier is around US$70,000, compared to a typical level around $15-20,000.
Chinese demand for iron ore and coking coal is certainly responsible for some of the upward pressure. We all know Chinese iron ore demand is surging. Iron ore imports doubled between 1999 and 2002 and there is no sign of a slowdown. Rio Tinto recently suggested China could require an additional 150 million tonnes of iron ore per annum by 2010, so it’s not hard to paint a bullish long term picture for bulk carrier demand and freight rates.
Some of the freight rate strength is due to the recent hot weather in Europe, which boosted electricity consumption and caused a surge in thermal coal imports from South Africa and even Australia. Additionally, the northern hemisphere grain season is just getting underway, and with good harvests in Canada and the US and a poor harvest in Europe, there is greater than usual demand for shipping on the main transatlantic routes.
On some sectors, such as iron ore from Brazil to east Asia, freight charges now comfortably exceed the value of the raw material itself. As long as China lacks sufficient domestic infrastructure to transport its own mineral production from inland mines to the industrialised coastal provinces, it may be easier and cheaper for Chinese importers to simply pay the higher transport charges.
As with the recent strength in industrial commodity prices, higher freight rates are a sign the global economy is recovering. All the major developed economies are looking up; even slow-growth Europe and Japan are improving. Having said that, it’s hard to be optimistic about the longer term outlook for these regions. They are shackled with a host of micro-economic constraints which inhibit growth and discourage investment. Although the consensus forecast for 2004 German GDP growth is 1.5%, fully 0.6% of that upside can be ascribed to a higher than normal proportion of public holidays falling on weekends! That kind of growth is hardly the basis for long term recovery.
While on the subject of freight rates, its worth mentioning the new breed of giant container ships currently under construction throughout Asia. Able to carry twice the load of a conventional container ship, over 100 of these vessels are currently being built to serve the rapidly growing east Asia - US west coast shipping routes. These ships are too big to fit in the Panama Canal, but that doesn’t matter, since the US rail network is now able to haul containers from the west coast to eastern markets for less than the cost of sending a ship through the canal to an east coast port.
These new ships will carry around 8,000 of the ubiquitous sea containers, compared to 4-5,000 for a standard container vessel. Container freight rates are expected to fall by up to 40% on routes where these giant ships can be used, so Asian exports could become even more competitive into the US and Australia.
MiningNews.Net Premium News.
