Ocean freight rates make general gains despite Chinese iron ore squabbles
Last month's transportation report wondered about the continued affect that quarterly iron ore contracts would have on the international ocean freight market, especially in regards to China. According to April data, the world's most populous country and largest consumer of steel is still on a production streak, but its imports of iron ore have dropped slightly since March. China imported 55.33 million metric tons (mt) of iron ore in April, reflecting a 6.2 percent decrease from the previous month. Because China's crude steel production increased in April (55.4 million mt, a 0.8 percent increase from March), the decline in iron ore imports cannot be blamed on decreased demand for the raw material; it can likely be attributed to the China Iron & Steel Association's (CISA) boycott of the top three iron ore producers (Vale, BHP Billiton and Rio Tinto) in response to the new pricing policy. As an alternative to Brazilian and Australian ore, China has recently diversified its imports by delving into the South African and Canadian iron ore markets. However, those markets cannot satisfy China's appetite for raw steelmaking materials, leading many to believe that the boycott is unsustainable.
Until China settles its grievances with the Iron Giants, it is unclear what direction ocean freight rates will take. After dropping in the beginning of April, Capesize rates slowly gained, hitting a 35.4 percent weekly increase in the last week of the month. Rates in the following weeks still showed week-on-week gains, but by lower and lower percentages; by the third week of May, the trend reversed, with rates dropping 11 percent from the previous week.
Handymax rates have shown overall gains since fluctuating in April, with May rates increasing by 3.8 percent in the first week, 4.4 percent in the second week, and 2.0 percent in the week ending May 21. Improving demand for Atlantic and Eastbound destinations helped the rate increases along. Parcel shipment rates had been relatively stable for the last three months, but rates increased for certain routes in May. Current Handymax rates to the US for large tonnage of steel (i.e. at least 15K tons of HRC or wire rod) are now as follows:
Baltic Sea to US East Coast: $65/70mt (up $10/mt)
Baltic Sea to US Gulf Coast: $60/65mt (up $10/mt)
Black Sea and Mediterranean Sea to US East Coast: $75/80mt (up $20/mt)
Black Sea and Mediterranean Sea to US Gulf Coast: $70/75mt (up $20/mt)
East Asia to US Gulf Coast: $60 to $65/mt (no change)
East Asia to US West Coast: $55 to $60/mt (no change)
US rail's recovery chugs along
US freight rail traffic has continued to improve when compared to 2009, by ever-increasing percentages. According to the Association of American Railroads (AAR), North American rail freight volume for the first 20 weeks of 2010 on 13 reporting US, Canadian and Mexican railroads totaled 7,356,876 carloads, up 9.6 percent from the same period last year, and 5,133,470 containers and trailers, up 10.9 percent from the same period of 2009.
While year-to-date shipments of some products such as coal, paper and farm products decreased, steel-related shipments continued to gain. As of May 22, the AAR reported that cumulative shipments of metallic ore rose 54.3 percent from 2009; metal and metal products increased by 50.1 percent; and waste and scrap shipments improved by 27.7 percent.
Overall, major US rail carriers are doing well, even though there is still availability on the tracks. Union Pacific, for example, reported record profits in the first quarter of 2010; the company's $516 million in net income reflected a 13 percent increase in business volume from the same quarter of 2009.
As for fuel surcharges, June levels will be slightly higher than May. Major carriers Union Pacific and Burlington Northern Santa Fe reported respective carload fuel surcharges at 18.5 percent for June based on April fuel prices of $3.059 per gallon.
Truck availability woefully disproportionate to available freight
The US trucking sector is currently in the grips of frustrating irony: while overall economic demand is picking up and increasing the need for truck cargo along with it, there are simply not enough trucks and drivers to accommodate the growth. Many trucking companies and individual owner/operators went out of business during the recent recession, and are no longer available now that they are needed again. Other factors restricting truck availability are stricter environmental regulations, more expensive insurance, heightened requirements to become a driver, and the current bounty of produce cargo taking priority over non-perishable goods. Truck shortages are most severe in the Southeast and parts of the Midwest, and flatbed trucks, which steel products use almost exclusively, are the hardest to acquire. Rates are also on the rise, with trucking firms in the driver's seat when it comes to price control.
Nevertheless, the American Trucking Association (ATA) recently reported that the seasonally-adjusted truck tonnage index increased by 0.9 percent in April, following a 0.4 increase in March. The current index level surged 9.4 percent when compared to April 2009, representing the largest increase since January 2005.
According to ATA Chief Economist Bob Costello, the latest tonnage reading reflects a sustained economic recovery. "Truck tonnage volumes continue to improve at a solid, yet sustainable, rate," Mr. Costello said. "Tonnage is being boosted by robust manufacturing output and stronger retail sales."
Another development of note is the increased number of new truck orders, which jumped 91 percent in April and can be partially attributed to replacing old trucks that are not compliant with new federal emissions rules. Hopefully, fleets of brand new trucks will help relieve the current backlog of trucking cargo.
US barge shipments surge in April
The US barge market has continued to show substantial improvement, especially in southbound cargo, which is garnering rates that are above average for this time of year. Northbound traffic, primarily imports, is not as busy, and rates are very competitive.
Cargo traffic on the Great Lakes increased significantly since last month; according to the Lake Carrier's Association (LCA), 7.6 million tons of dry bulk cargo was hauled in April, a 50 percent year-on-year increase. The resurgence of the steel industry is mostly attributed to the improvement, with 4 million tons of iron ore alone shipped in April.
Limestone, another raw material in steelmaking, totaled 1.7 million tons in April, a 47 percent increase since the previous month. Coal cargos, on the other hand, decreased about 15 percent in April, partly due to later sailing dates for some vessels, according to the LCA.