With the exception of North American rail, most transportation sectors (ocean freight, trucking and barge) are finding their short-term improvement susceptible to various availability issues.
China's increasing reliance on domestic ore influences ocean freight rates
The Chinese steel industry continued their quest to gain control of their raw material supply, by producing more iron ore domestically and importing less internationally in June. Consequently, ocean freight rates weakened under the effect of so much availability, a trend that continued well into July.
China's iron ore imports fell 9 percent month-on-month in June 2010 to 47.2 million metric tons (mt), also reflecting a 15 percent decrease from June 2009. Domestic iron ore production, on the other hand, increased 22 percent year-on-year to 103.1 million mt. While monthly crude steel production fell slightly in June, by 4.5 percent, the overall trend continues to be up-steel production was still 9 percent higher than June 2009, and finished steel exports from China also rose from May, by 13.8 percent.
The effect of China's trade situation has been apparent on Capesize freight rates. Booking prices began falling in the middle of June, and continued throughout the first half of July, with weekly prices dropping up to 29.2 percent as of the week ending July 16-too many ships were on the market chasing too few cargoes. Rates ticked up in the second half of the month after ship owners refused to fix at lower rates (reaching a price increase of 17.3 percent by the last week of July), but an unforeseen consequence of their actions was some Chinese steel mills refusing to accept iron ore cargoes with hefty freight costs attached.
Handymax freight rates saw less volatility than Capesize in July. The first half of the month saw slight dips in pricing, balanced with even slighter gains by the end of the month. Parcel shipment rates did not fluctuate throughout the month, and rates reported in the beginning of July remained the same in early August. Current Handymax rates to the US for large tonnage of steel (i.e. at least 15K tons of HRC or wire rod) are as follows:
Baltic Sea to US East Coast: $60 to 65mt
Baltic Sea to US Gulf Coast: $55 to 60mt
Black Sea and Mediterranean Sea to US East Coast: $60 to 65mt
Black Sea and Mediterranean Sea to US Gulf Coast: $55 to 60mt
East Asia to US Gulf Coast: $60 to $65/mt
East Asia to US West Coast: $55 to $60/mt
US rail industry maintains steady improvement
While North American rail traffic still has a ways to go to reach pre-crisis volume levels, the overall gradual improvement, especially in steel-related freight, continues to highlight rail's relative stability in the transportation sector. According to the Association of American Railroads (AAR), North American rail freight volume for the first 30 weeks of 2010 on 13 reporting US, Canadian and Mexican railroads totaled 11,040,572 carloads, up 10.2 percent from the same period last year, and 7,892,484 containers and trailers, up 14.1 percent from the same period of 2009. Cumulative shipments of metallic ore as of the week ending July 31 rose an incredible 72.2 percent year-on-year, while shipments of metal products increased by 51.5 percent and metal scrap and waste rose 22.7 percent.
The US rail sector continued to improve and invest in the future of freight, and was subsequently honored by the US House of Representatives, which passed a unanimous resolution in July that stated: "Freight rail has played a critical role in the economic development of the United States and has helped to build cities and strengthen infrastructure throughout this great Nation. Freight rail continues to play a vital role in the United States' growth, job creation, and economic recovery."
According to the AAR, freight railroads generate nearly $265 billion in total annual economic activity, and directly or indirectly support more than 1.2 million US jobs. Since 1980, railroad productivity has increased 144 percent, rail rates are down 49 percent, rail accident rates are down 75 percent, railroad fuel efficiency is up 104 percent, and railroads have reinvested some $460 billion back into their systems.
Fuel surcharges for August are slightly less than July's 18.5 percent. Major carriers Union Pacific and Burlington Northern Santa Fe reported respective carload fuel surcharges at 17.0 percent for August based on June fuel prices of $2.948 per gallon. Surcharges will remain stable in September, still at 17 percent, based on July fuel prices of $2.911.
US trucking availability shows signs of improvement, but companies are still apprehensive about the future
The availability shortage that the US trucking industry faced in the first half of the year seemed to ease up in June, but trucking companies are still apprehensive about investing long-term after being caught with an oversupply of trucks and drivers during the recent economic crisis. Many companies have started to gradually fill out their fleet, and many drivers are re-entering the market, albeit cautiously. High rates have stopped spiking in many areas, due in part to the seasonal slowdown of the produce sector, opening up availability and reasonable rates to non-perishable freight such as steel. Despite the significant seasonal drop in traffic, the month-on-month decrease in the American Trucking Association's (ATA) seasonally-adjusted truck tonnage index was slight: compared to May, the index dropped 1.4 percent in June. However, compared to June 2009, the index reflected a 7.6 percent increase.
ATA Chief Economist Bob Costello expected the growth in truck tonnage to moderate in the months ahead to reflect the currently slow momentum of the economic recovery. Additionally, Costello believes that tonnage doesn't have to grow very quickly at this point since industry capacity has declined so much. "Due to supply tightness in the market, any tonnage growth feels significantly better for fleets than one might expect," Costello said.
Another signal of the dips and spikes in the trucking industry was June's 1.9 percent decrease in the Ceridian-UCLA pulse of commerce, a reversal from May's 3.1 percent increase. The index is designed to measure the daily consumption of diesel by shipping companies. However, Ed Leamer, chief economist for the index, qualified the results: "Part of the apparent strength of May and weakness in June is the result of the Memorial Day holiday occurring on the last day of May, allowing the negative Memorial Day effect which is usually confined to May to leak into June," Leamer said. "More importantly, the June weakness was confined to the first two weeks, and by the second half of June, we were seeing strong growth again."
US barge market prepares for upcoming busy season
The US barge market is currently experiencing a sort of "calm before the storm", the storm being, of course, the grain season. Barge lines are already positioning empty vessels up North, so as of the beginning of August, availability is low in the South. Rates have not started their seasonal spike, but as soon as the end of August, rates are expected to increase significantly through October/November, and if the forecasts for this year prove accurate, the barge sector's busiest season might even run into January. Northbound imported steel products will doubtlessly be affected, but it remains to be seen if Midwestern steel companies have prepared and planned for imports to come in ahead of grain season.
As for traffic on the Great Lakes, overall shipments increased in June by 5 percent over May, 39 percent compared to June 2009. Iron ore cargoes, on the other hand, registered a monthly decrease-June's 5.9 million net tons (nt) was 6.4 percent less than May levels-but compared to June 2009, the increase of 109 percent is more than substantial. Regarding other steel-related cargoes, coal shipments boasted a 21.5 month-on-month increase in June; additionally, the 3,874,216 nt shipped in June 2010 reflects a 7.2 percent increase from June 2009.