Increases in tonnage, traffic, and rates in most cases indicate a gradual, but strong recovery in the transportation sector.
Ocean freight rates sail through volatile waters
The surprising conclusion to the annual iron ore talks between Asian steelmakers and the three major ore producers (Vale, BHP Billiton and Rio Tinto) has already had significant implications in the worldwide ocean freight market. Now that iron ore is sold on quarterly contracts, with prices more closely reflecting the volatile spot market, ore producers are favoring CIF prices instead of FOB prices, which will result in steelmakers losing their power to determine ocean freight prices. China remains the driving force of the dry bulk ocean freight market, and once April import data from the country becomes available, the actual repercussions of the negotiations, which ended near the beginning of the month, will become clear.
According to March data, China once again boosted iron ore imports by almost 20 percent from February, totaling 59.01 million metric tons (mt). The country's crude steel production also increased significantly, with March totals of 55 million mt surpassing February levels of 50.4 million mt. Even Chinese steel exports, which had fallen earlier in the year, were back up, at levels of 3.33 milllion mt in March, a significant increase from February's total of 2.49 million mt.
After the initial announcements regarding the new iron ore contract policy, freight rates began a cycle of relative instability. Rates for Capesize ships dropped 18 percent in the first week of the month, followed by an increase of 5.2 percent in the second week and another rise of 7.7 percent in the week ending April 23. The rates have not recovered from that initial drop, which was especially unusual in that it brought Capesize rates lower than Panamax rates, and in some cases, even lower than Handymax rates.
Handymax rates, on the other hand, experienced shorter spikes and dips, registering a decrease of 0.2 percent during the first week of April, an increase of 1.7 percent increase during the second week, and then another decline of 1.5 percent for the week ending April 23. The drop in rates during the last reported week was due to ship owners fixing lower rates in order to fill available vessels that suffered from low business volume. As was the case last month, rates for parcel shipments of steel did not experience the fluctuations of full-cargo rates, therefore April rates to the US for large tonnage of steel (i.e. at least 15K tons of HRC or wire rod) remained the same from March. It should be noted, however, that most parcel steel shipments are closer to 5,000 tons each.
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
US rail industry on track for sustained recovery
The recovery of US freight rail traffic has continued to gain momentum, with carload volume recently reaching its highest level since early December 2008, according to the Association of American Railroads (AAR). As of April 17, the AAR reported that year-to-date shipments of metallic ore rose 49.5 percent from 2009; metal and metal products increased by 50.3 percent; and waste and scrap shipments improved by 22.5 percent. The aforementioned increases are all several percentage points higher than levels reported last month.
North American rail freight volume for the first eleven weeks of 2010 on 13 reporting US, Canadian and Mexican railroads totaled 4,175,722 carloads, up 4.0 percent from the same period last year, and 3,040,683 containers and trailers, up 9.2 percent from the same period last year. These numbers also reflect higher increase percentages from those previously reported, which further supports the claim that the US rail industry is experiencing a sustainable recovery.
A recent sideways move in the price of scrap leveled out many steel product prices, including wire rod, rebar and other structural items, but it did not affect the flats market, which doesn't use as much scrap in the steelmaking process as longs. Worries that rapidly rising steel prices would hinder rail's recovery seem to have calmed, as orders are still being booked and transported on North American rail lines.
As for fuel surcharges, May levels will be slightly higher than April. Major carriers Union Pacific and Burlington Northern Santa Fe reported respective carload fuel surcharges, based on February national average diesel prices, at 17.0 percent for May based on March fuel prices of $2.915 per gallon.
Trucking sector on the road to improvement
Although the US trucking sector is not improving as rapidly as rail, it is steadily growing from record low levels during the recession. Besides the usual tracking methods of trucking activity, another report has emerged to further demonstrate the market's improvement. The Ceridian-UCLA Pulse of Commerce Index (PCI), which tracks fuel purchases at more than 7,000 truck stops throughout the US, recently reported that March marked the fourth straight month that the index grew year-over-year, after seeing declines for 22 consecutive months.
Additionally, the American Trucking Association (ATA) recently reported that the seasonally-adjusted truck tonnage index increased by 0.4 percent in March, compared to a 0.3 decrease in February. This also represents an increase of 7.5 percent compared to March 2009, the fourth consecutive year-over-year gain and the largest increase since January 2005.
ATA Chief Economist Bob Costello attributed the recent improvement in the motor carrier industry to the overall strengthening economy as well as different sectors boosting their bare-bones inventory levels from 2009. "For most fleets, freight volumes feel better than reported tonnage because the supply situation, particularly in the truckload sector, is turning quickly," said Costello. "Freight is moving in the right direction and I continue to hear from motor carriers that both the demand and supply situations are steadily improving."
As would be expected, surface transportation trade with NAFTA partners has improved this year over last year. According to the Bureau of Transportation Statistics (BTS) of the US Department of Transportation, trade using surface transportation between the United States and its NAFTA partners Canada and Mexico was 24.1 percent higher in February 2010 than in February 2009, the largest year-over-year rise on record.
As of April 28, 2010, based on a national average HDF price of $3.078, most US trucking companies were charging a 21.6 percent fuel surcharge for LTL (less than truckload) and 43.2 percent for TL (truckload).
US barge fleet surges in spring
Although most Midwestern steel distributors and service centers get their product from domestic mills, and steel imports prices have been too high lately to compensate for inland transportation costs, the rising demand for domestic iron ore has helped the US barge sector's recovery stay afloat.
According to the Lake Carriers' Association, 2.16 million mt of iron ore was shipped on the Great Lakes in March, an increase of 342 percent from March 2009. Additionally, more than 2.2 million tons of steel and coal cargo shipments moved last month, nearly 2 million tons more than March 2009.
The demand for iron ore in March was so great, that the locks at Sault Ste. Marie, Michigan, which connect Lake Superior to the lower Great Lakes, were opened four days ahead of schedule on March 21.
While the LCA credits the revival of the US steel industry for the improvements, it also cites the importance of the US and Canadian Coast Guards' icebreaking efforts, which made significant contributions to the flow of cargos in March. Although some lake vessels have ice-strengthened hulls, icebreakers are vital in maintaining the shipping lanes.
Not only did tonnage on the lakes increase in March, but more vessels were in service compared to last year. As of April 1, 32 vessels were in service, compared to 17 in April 2009.