Rising Freight Costs

From the FT today:

Shipping costs rise on Chinese demand

By Javier Blas in London

Published: August 5 2007 18:48 | Last updated: August 5 2007 18:48

The cost of shipping dry bulk commodities, such as coal, iron ore and cereals, has surged to a new high boosted by strong demand, port congestion and a significant lengthening of trade routes.

The Baltic Dry Index, the best gauge of the world’s dry bulk shipping costs, last week rose above 7,000 points for the first time – an increase of 103 per cent in the past year. The index, which closed at 7,007 on Friday, has jumped almost fivefold since 2000.

The sharp increase threatens to add to already rising prices for agriculture, base metals and ore commodities.

Although analysts anticipate some price easing, they predict that freight costs will remain high.

As trade routes expand, vessels are spending longer sailing from more distant ports, reducing the capacity available at any time and pressuring prices, according to shipbrokers.

Severe port congestion, forcing vessels to wait for up to four weeks to load their cargo, is adding to the strain. It is particularly acute in the Australian port of Newcastle, the world’s largest coal terminal, but is also a factor across Latin America.

The average daily cost of hiring a Panamax vessel – a medium-sized ship – last week rose to a high of $58,500, more than double the $25,400 rate a year ago. In 2005, the daily cost was about $10,000.

Peter Norfolk, of London-based shipbrokers Simpson Spence and Young, said that the annual growth of the tonnes-miles indicator – which tracks the weight of commodities transported and the length of the routes – had jumped to 6 per cent from an historical average of about 2.5 per cent.

Bangladesh recently bought US wheat for the first time since 1999 after Australia’s cereals crop was hit by drought. Japan and South Korea are relying more on South African coal as China, one of their traditional coal sources, has turned into a net importer.

Meanwhile China, which a decade ago bought just 5m tonnes of iron ore from Brazil, is now importing close to 80m. “The main driver of the length in trade routes is the Chinese factor,” said Mr Norfolk.

The backdrop to rising freight costs is strong commodities demand as the world economy continues to expand at a rapid rate, its best performance since the late 1960s.

The shipping fleet is struggling to adapt to the new conditions. Shipyards are focusing on producing high margin vessels, such as carriers of liquified natural gas, rather than taking orders for simple dry bulk vessels, further squeezing capacity.