China's growing appetite for raw materials stabilizes ocean freight market
The dry bulk ocean freight market has leveled out in the last six months after nearly a year of volatility, and appears to be following the trends of the Chinese steel market. While dry bulk ocean freight rates weakened slightly in the second half of January, they are up overall since the fourth quarter of 2009.
Dry bulk's slight recovery is largely attributed to the upward momentum of China's steel industry. The world's most populous country continues to increase its steel consumption, along with its appetite for raw materials. Accordingly, Chinese iron ore imports are getting stronger, with January levels reported at 46.62 million metric tons, which reflects a +56.7 percent increase from the same time last year. Finished steel exports from China reached 2.89 million mt in January, up +51.3 percent from the same time last year. Chinese steel production also increased, with a 2009 year-end total of 568 million mt, up +13.5 percent from 2008.
Freight rates for Capesize ships (large vessels that transport commodities like iron ore and coal) have trended down slightly since peaking in January, and are now more stable. Iron ore spot prices to China have been on a gradual uptrend for the last few months, and have leveled out slightly along with spot iron ore vessel bookings to China from Australia and Brazil.
Rates for Handymax ships (smaller vessels commonly used to transport steel) have enjoyed a gradual uptrend since last fall, with average rates as of late February up +48.2 percent from the same time last year. Most steel freight rates to the US for large tonnage of steel (i.e. at least 15K tons of HRC or wire rod) were as follows:
Baltic Sea to US East Coast: $55 to $60/mt
Baltic Sea to US Gulf Coast: $50 to $55/mt
Black Sea and Mediterranean Sea to US East Coast: $55 to $60/mt
Black Sea and Mediterranean Sea to US Gulf Coast: $50 to $55/mt
East Asia to US Gulf Coast: $60 to $65/mt
East Asia to US West Coast: $55 to $60/mt
North American rail traffic continues gradual recovery
Limited supplies of steel scrap, due primarily to harsh winter weather, have pushed prices up and resulted in cost-based rather than demand-based price increases for many steel products. Nevertheless, rising shipments of raw materials and finished steel on North American railroads have helped the rail transportation market experience a gradual recovery.
The Association of American Railroads (AAR) reported last week that rail traffic continues to show improvement with a rise in metallic ore, metals and products, and scrap shipments. As of February 27, 2010, year-to-date metallic ore shipments rose +26.0 percent from the same time period in 2009; metal and metal product shipments rose by +28.7 percent; and waste and scrap materials (primarily steel scrap) increased by +9.7 percent. The improvement in the automotive sector spurred by the Cash for Clunkers program last fall has seemed to keep demand afloat through the New Year, driving railcar loads up.
According to the AAR, North American rail freight volume for the first eight weeks of 2010 on 13 reporting US, Canadian and Mexican railroads totaled 2,818,429 carloads, up +2.1 percent from the same time period last year, and 2,001,824 containers and trailers, up +6.5 percent from the same time last year.
As for fuel surcharges, despite the neutral trend of diesel prices in the winter months, carload rates are significantly up from the same time last year. Major carriers Union Pacific and Burlington Northern Santa Fe reported respective carload fuel surcharges, based on January national average diesel prices, at 16 percent for March. This reflects a slight increase from the 15 percent surcharge in February and a stronger increase from 10.5 percent in March 2009.
Trucking sector maintains moderate increase in demand
Although the North American trucking sector took a hard hit in the recent recession, the outlook is looking brighter in anticipation of a federal spending surge for transportation projects. The Jobs for Main Street Act of 2010 passed by the US House of Representatives in December will allocate $27.5 billion for highways and $8.4 billion for transit in order to strengthen the nation's infrastructure and relieve congestion. According to the American Association of State Highway and Transportation Officials, there are nearly 7,500 highway projects throughout the US that could be started immediately. Even though funding for the bill has not yet been allocated, the North American trucking sector has already shown signs of continuous recovery.
Last week, the American Trucking Association (ATA) reported a seasonally-adjusted truck tonnage index increase of +3.1 percent from December and +5.7 percent from January 2009, representing the highest index levels since September 2008. ATA Chief Economist Bob Costello is confident the latest tonnage reading indicates clear evidence of recovery in both the industry and economy at large. "While I don't expect tonnage to continue growing as robustly as it did in January, the industry is finally moving in the right direction," Costello said. "Although there are still risks that could throw the rebound off track, the likelihood of that happening continues to diminish."
The Bureau of Transportation Statistics of the US Department of Commerce recently reported that while surface trade of the US with Canada and Mexico decreased slightly from November 2009 to December 2009, overall surface trade was up +10.5 percent from December 2008 to December 2009. Import shipments from Canada and Mexico by truck rose +6.5 percent and export shipments to Canada and Mexico increased by +10.9 percent from December 2008 to December 2009.
Additionally, the US' $58.5 billion of NAFTA trade in December 2009 was up by +10.5 percent compared to December 2008, already an improvement from the -2.9 percent decrease comparing November 2009 with November 2008.
Current US average fuel surcharges for truck transportation, based on the national on-highway diesel fuel average of $2.78/gallon on February 2, stand at 18 percent for LTL (less-than-truckload) and at 28.5 percent for TL (truckload).
Barge traffic grows along with steel mill capacities
The North American barge market started 2010 on a strong note, attributed to the rebounding steel industry. Operating rates at steel mills have steadily climbed, and as of February 6 the industry was using 67.3 percent of its capacity when in February 2009, mills only had 45 percent of their capacity on line.
The steady climb in operating rates at steel mills dramatically increased iron ore shipments on the Great Lakes in January; loadings totaled 1.9 million tons, a +168 percent increase from the same time last year. Coal cargos also registered a significant increase, at 495,000 tons in January, representing a +65 percent increase from January 2009. As for finished products, rebar and wire rod shipments have re-emerged recently after nearly disappearing from the barge market for over a year.
Federal stimulus funds have already been allocated to dredge and resurface inland rivers and harbors, providing some relief for barge transportation. However, Douglas B. Mackie, President and CEO of Great Lakes Dredge & Dock Corporation, the largest provider of dredging services in the United States, said that a significant amount remains to be completed by the industry in 2010. "The domestic bid market, a key measure of dredging activity in the US, topped $1 billion in 2009, a +45 percent increase from the 2008 bid market," said Mackie. "Although federal stimulus funding certainly had a positive impact on the market, there was an underlying need for many projects that spurred the market even before the stimulus funds started flowing."