Ocean freight rates continue to trend down but may rebound in Q4
The dry bulk market has continued to weaken since last month, with Handymax rates coming off by $5 to $10 /mt depending on location, and further weakening of at least $3 to $5 /mt expected to be seen shortly. Softening of ocean freight rates is very typical for the summer months, and this summer is no exception. Other factors causing this summer's dry bulk slowdown are the softening steel consumption and weakening of commodity prices, including, most notably, oil. The raw materials trade has also slowed down due mostly to the slowdown in Chinese raw material purchases, which is at least partly due to the Beijing Olympics. Raw material buying from India has also slowed somewhat because of the monsoon season.
Dry bulk market players hope that the factors causing the current soft trend are only temporary and that the market will follow its historical pattern of fourth quarter recovery, with rates bottoming out in October and rebounding in November or December. The "grain season", or North American harvest season, that takes place every fall may certainly provide a strong boost to bulk ship demand -- the US Department of Agriculture expects the US to harvest the second-largest corn crop and fourth-largest soybean crop in history this year, much of which will be exported to meet global food demand. However, some market watchers expect the downtrend in the dry bulk market to continue past summer and into the fourth quarter due to the spreading global economic problems.
Another issue in the shipping market is the staggering number of dry bulk newbuilds that are facing cancellation due to the global credit crunch. In late August, US investment bank Morgan Stanley said $22.7 billion of newbuilding dry bulk contracts face cancellation over the next three years due to financing problems, with delivery delays also expected to impact about 20 percent of the scheduled order book. Then again, other expert predictions say that depending on how long the current soft economy and tight credit environment lasts, cancellations will not be that great and the market could even face overcapacity by 2010.
Current per metric ton Handymax rates for large tonnages (i.e., minimum 15k tons of rebar, wire rod, hot rolled coils are as follows:
Baltic Sea to US East Coast : $85 /mt to $90/mt
Baltic Sea to US Gulf Coast: $80 /mt to $85 /mt
Black Sea and Mediterranean Sea to US East Coast: $95 /mt to $100 /mt
Black Sea and Mediterranean Sea to US Gulf Coast: $83 /mt to $88 /mt
East Asia to US Gulf Coast: $90 /mt to $95 /mt
East Asia to US West Coast: $83 /mt to $88 /mt
Port business still depressed from weak import activity
Conditions at the major US steel ports generally remain relatively quiet and uncontested. The LA Times recently reported that of the 10 busiest seaports in North America, only two are doing more business this year than last year (Vancouver, Canada, and Savannah, Georgia). Due to the continuing gloomy economic conditions, the Times said, total imports at the five top West Coast ports -- Los Angeles, Long Beach, Oakland, Seattle and Tacoma -- were down by as much as 13 percent through the first seven months of the year.
In other port news, the Port of New Orleans announced Thursday that it has started working cargo vessels that arrived in the Port before the arrival of Hurricane Gustav.
"The opening of the Mississippi River on a limited basis and the return of cargo operations at the Port of New Orleans is a very encouraging sign," said Gary LaGrange, Port President and CEO, in an official press release. "As sounding and dredging activities take place at the mouth of the river, we hope to restore cargo operations fully in short order so that we can continue to meet the needs of our customers."
More NOLA Port laborers, including longshoremen, are expected to begin working shortly as a mandatory evacuation has been lifted in New Orleans and the surrounding parishes. On Thursday, the Port said that Empire Stevedoring was already handling some steel cargo on board a ship at the First Street Wharf.
Barge market beset by infrastructure woes as grain season begins
The barge market is relatively tight as grain activity starts ramping up, with delays expected in the short term because of Hurricane Gustav. The US Coast Guard said Thursday that the entire Mississippi River is now reopened to barge traffic, with a few restrictions on vessel speed and depth of draft, after being closed for several days near New Orleans. Major grain companies were still awaiting electricity to be restored to their grain export terminals, though grain loadings were expected to resume Friday.
Aside from Gustav, another factor affecting the US barge market is the aging infrastructure controlling the traffic of the nation's rivers, made especially apparent by the increased grain traffic as the outdated locks and dams can cause significant delays. Although congress authorized the Army Corps last year to update locks and dams along the Mississippi, Congress must approve funding for the project, which is estimated to cost $2.21 billion over at least 20 years.
One area where barge transportation should finally catch a break, though, is on the fuel surcharge. With oil prices registering a significant decline this summer, the fuel surcharge for barges in the fourth quarter (most large carriers calculate their fuel surcharges on a quarterly basis), is expected to be significantly down from the third quarter. Third quarter surcharges range from about 40 percent to as much as 90 percent for the four largest carriers (Ingram, ACBL, Memco, Artco).
Rail and truck finally see some fuel surcharge relief
Rail customers will finally see some relief in their fuel surcharge, if only slightly. Based on the $0.04 per gallon drop in the HDF average monthly price in August from July, major rail shippers Burlington Northern Santa Fe (BNSF) and Union Pacific (UP) will lower their fuel surcharge to 31 percent as of October 1, compared to 35 percent in September and 34.5 percent in August. As the HDF price has come down further since August, it is likely that carriers will lower their surcharge again in November. Still, while the September to October fuel surcharge drop is the largest month-on-month decrease seen this year, it has nearly doubled in the last year -- BNSF and UP were charging a 16.5 percent fuel surcharge in both September and October of 2007.
On the trucking side, the average fuel surcharge is also slightly down, but again, it is still significantly higher than it was last year. As of September 3, the average fuel surcharge in the US for LTL (Less than Truck Load) was 31.5 percent, while TL (Truck Load) was 42 percent. These surcharges are based on September's average on-highway diesel price of $4.121 per gallon. For comparison, on September 5, 2007, the nation's average on-highway diesel price was $2.893 per gallon.