Ocean freight takes a tumble
With the ongoing weak bulk freight demand, credit crunch, falling oil prices and global economic crisis, dry bulk ocean freight rates have dropped dramatically in recent months. Shipping prices have essentially been cut in half from the historically high levels they reached just a few months ago.
Additionally, up to a third of the orders to build dry ships could be canceled and others delayed due to the same primary reason that rates have plummeted - the financial crisis. As the reduction in bulk trade activity, especially from China, and tight credit availability have cut demand for ships, freight rates and ship values have come down significantly, making it extremely difficult for shipping companies to acquire adequate financing to build the numerous ships on order.
In normal economic times the reduced ship supply would help bolster the market; however, given the tremendous drawback of demand, it is unlikely that the inevitable pruning of the massive ship order book will send rates upward again, at least not until the global financial crisis subsides. At the same time, many bulk shippers are unable to take advantage of the low freight rates as they are facing increasing difficulty in obtaining letters of credit. Some shipping lines are even denying cargo because the going rates are at below-cost levels.
While funding will eventually be funneled back into the sector, the industry faces serious insolvency problems for the time being. However, once the credit market eases and the importing and exporting machine that is China ramps back up, the market should eventually recover.
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: $50/mt to $55/mt
Baltic Sea to US Gulf Coast: $50/mt to $55/mt
Black Sea and Mediterranean Sea to US East Coast: $55/mt to $60/mt
Black Sea and Mediterranean Sea to US Gulf Coast: $55/mt to $60/mt
East Asia to US Gulf Coast: $60/mt to $65/mt
East Asia to US West Coast: $50/mt to $55/mt
Barge rates to slide in '09
Barge owners are feeling the downturn in trade as well, and while rates spiked this fall with the increase in grain activity, lower rates are expected across the board for next year. Also, the fuel surcharge from most carriers is still about 40 percent for the fourth quarter, as it is based on third quarter fuel prices, although, as with all sectors of transportation, the fuel surcharges for barges will go down considerably once they reflect the reduction in fuel prices that has taken place over the last few months .
Weather-related damage to the US' inland river system have incurred this year, including damage from hurricanes and flooding, which continues to cause some traffic disruptions for barges. Additionally, while the North American grain harvest is still underway as of the end of November (the larger than expected crop this year has extended the normal season), many barges have stalled due to the reduced export demand for grain and other commodities. It is reported that a large portion of the US barge fleet is idling in the Gulf of Mexico.
In the long run, given that the economic conditions improve, the outlook for the North American barge market is still positive because of its cost advantage over other forms of transportation, and, not unlike bulk ships, US barges have an aging fleet profile. However, for the sector to become more efficient, massive infrastructural changes need to be implemented to the nation's antiquated lock system.
Rail freight: Down but not out
North American railroads are also suffering with the slowing economy, which has resulted in substantial drops in freight volumes. The American Association of Railroads reported that for the first 47 weeks of the year, metals volumes were down 2.5 percent from 2007, and coke volumes down 19.2 percent. Volumes for lumber & wood and motor vehicles & equipment have also taken a major hit this year. With the weakened demand, railcar availability is plentiful, and there has been a big reduction in new railcar orders. However, total rail freight volumes are not down tremendously from last year - total shipments on US rails are down only 0.8 percent for the first 47 weeks of the year. Financial analysts also expect that, despite the economic conditions which will cause even lower freight volumes in 2009 than in 2008, liquidity in the railroad sector will remain strong. The rail sector is also hopeful about President-elect Barack Obama's plans to rebuild the nation's infrastructure, which includes expanding the freight rail network.
Fuel surcharges for rail continue to decline on a monthly basis. Major railroads including Burlington Northern Santa Fe (BNSF) and Union Pacific (UP) will lower their fuel surcharge to 23.5 percent in December, compared to 28 percent in November. The fuel surcharge from these carriers will drop to 16 percent in January 2009. Carload rate fuel surcharges like BNSF's and UP's, which are based on on the Department of Energy (DOE) On-Highway Diesel Fuel Price (US Average), peaked in August 2008, at 35 percent.
Trucking challenges continue to mount
The trucking sector has been hit particularly hard by the financial crisis, with significant reduction in volumes - the American Trucking Association reported this week that total volume is down 6.3 percent for the past four months - as well as by other issues, like driver shortages and new government worker and environmental regulations. These challenges are expected to continue through 2009, putting significant pressure on trucking companies.
On the bright side, fuel costs have continued to decline for truck carriers.
Trucking fuel surcharges have seen even larger decreases than other forms of transportation as decreases in fuel prices are reflected in the trucking surcharge on a more immediate basis. Based on the National Average On-Highway Diesel price of $2.664 per gallon as of November 24, 2008, the average fuel surcharge for trucks dropped to 17 percent for Less-Than-Truckload and to 27.5 percent for Truckload. Trucking fuel surcharges peaked in late May of this year, when the national average diesel price was $4.723 per gallon.