North American transportation and logistics

Wednesday, 29 April 2009 02:40:01 (GMT+3)   |  
       

Ocean freight rates slightly up from last month but market recovery dependent on China

As the economy continues to falter, analysts do not expect an ocean freight turnaround in North America or elsewhere this quarter, and probably not for the rest of the year. Even with the rising tide of bulk freight ship order cancellations and delays, the supply of ships still exceeds the demand. The slowdown in global trade is expected to continue throughout the year, with the WTO forecasting an overall nine percent drop in trade for 2009. And as long as the global economy remains weak, trade, especially for dry bulk, will remain at reduced levels.

The number one driver of dry bulk ocean freight rates, China, has yet to see a lasting steel market recovery and despite the surge of iron ore exports to China registered in March, steel demand has not risen in turn. In fact, it is now believed Chinese steelmakers, encouraged by some slight improvements at the start of the year,  overestimated their iron ore needs in February, causing iron ore imports to spike in March and thus creating an oversupply. The 52.08 million mt of iron ore China imported in March was an all-time monthly record, but as it was not met by strong demand, stockpiles began to expand again. By the end of March, Chinese ports' iron ore stockpiles reached 70 million mt – also a near-historic high. The 12 percent increase in Chinese steel production in March (from February) may have also been premature and could result in expanding steel inventories. With Chinese steel demand only lukewarm at best, and its export prospects for the year looking increasingly bleak, it is unlikely that China will be able to bring life back to the global ocean freight market this year.

Nevertheless, the BDI (Baltic Dry Index) rebounded significantly in March, due to the increase in Chinese iron ore and grain activity that month. But unless the March increase in Chinese iron ore activity levels is sustained in April and beyond, a lasting recovery for dry bulk is not expected.

In North America, steel traders and logistics providers comment that there are still very few transactions taking place, despite some inquiries from traders for smaller parcels. After plunging in December, Handymax rates rebounded slightly in March and remained mostly stable in April, and posted a minor post-Easter rebound, following the slight improvement in rates for larger ships; however, given China's aforementioned situation, the ongoing tight credit markets, and weak demand, dry bulk ocean freight rates are not expected to trend strongly up again anytime soon.

Current Handymax rates for large tonnage (ie; 15,000 mt) are as follows:

Baltic Sea to East Coast: $42 to $45/mt
Baltic Sea to Gulf Coast: $38 to $43/mt
Black Sea and Mediterranean Sea to East Coast: $45 to $50/mt
Black Sea and Mediterranean Sea to Gulf Coast: $40 to $45/mt
East Asia to Gulf Coast: $40 to $45/mt
East Asia to West Coast: $38 to $40/mt


Ports face another tough year as trade slowdown continues

Trouble persists for North American maritime ports due to the continued slowdown of import and export activity. Activity at the ports is very quiet and there is a good amount of steel cargoes from canceled orders sitting on the docks as well. Ports that have relied on steel imports in recent years, like the Port of New Orleans, are having a particularly hard time. The Port of New Orleans reported a 32 percent drop in steel and iron imports in 2008 over 2007 and with steel imports having yet to return in 2009, the port is now in the process of expanding its container operations to offset its steel losses. The Port of Cleveland is another example of a US port that's been heavily impacted by the falloff in steel and iron ore trade, especially with ArcelorMittal idling its Cleveland blast furnaces. The port has cut its iron ore shipment forecast for 2009 to  only 400,000 tons, down from 900,000 tons last year. Its estimate for steel tonnage shrank to 300,000 tons from 378,000 tons.

The latest preliminary US DOC data show that steel imports to the US in March, totaling 1,362,188 mt, declined by 5.5 percent from February, and were down a severe 41.6 percent from March 2008.

Container business at US ports, while not as weak as bulk, is also significantly down due to the economic conditions. Retail import volume at US container ports dropped to a seven-year low in February, falling below the one million twenty-foot-equivalent (TEU) mark. March container imports were expected to be up 9.7 percent from February but down by 19.7 percent from March 2008.


Rail freight volumes still depressed but future looks “electric”

While there are some positive long-term indications for the rail industry on the horizon, rail freight volumes are still tremendously down from last year as demand remains weak. The Association of American Railroads reported that in the first 14 weeks of the year, North American rail freight was down 17.7 percent from the same period of last year, including a 16.1 percent decrease in the US. All of the major railroads have had to lay off workers due to the downturn in business, and further reduction of workforce in the coming months is expected.

On the bright side, the Obama Administration continues to show interest in expanding and improving US'  capacities for both freight and passenger rail. In fact, North American railroads may be in for an entire system overhaul – officials are currently discussing using electricity to power freight railroads, replacing diesel locomotives with new, electric trains. While this would be an expensive and time-consuming endeavor to fully “electrify” the nation's railroads, fleets could be transitioned into “dual mode” locomotives that consume both diesel and electricity, for which the technology already exists. As expanding the country's electricity grid and capping carbon emissions remain high priorities under the current administration, it may only be a matter of time before locomotives go electric, giving rail freight a strong advantage over less energy-efficient forms of transportation, namely, trucks.

For now, railcars are still running on diesel, and due to the continued decline of diesel prices in recent months, carriers' fuel surcharges are still trending downwards. Burlington Northern Santa Fe  and Union Pacific will both downwardly revise their fuel surcharges to 8.5 percent in May, based on the March 2009 US average diesel fuel cost of $2.092 per gallon in March 2009. These surcharges are down from the carriers' respective surcharges of 9.5 percent in April 2009, and down from a staggering 26.5 percent in May 2008.

New port safety, environmental programs progress for US cargo trucks

New truck orders and freight volumes remain at low levels, while diesel prices have recently leveled off. Although the sharp drop that diesel prices have taken since last year brought some relief to the trucking industry, overall, 2009 is not shaping up to be a good year for trucking. The poor economy means less freight demand, while the sector likely faces stricter carbon emission standards going forward. However, a positive development is that the the recent implementation of the TWIC (Transportation Worker Identification Credential) program at major ports across the US seems to be going smoothly so far, and has not been as big of a problem for truckers as was feared. One upshot of the downturn in cargo has been the smoother-than-expected TWIC transition, which many in the industry were afraid would cause congestion and labor issues.

In other trucking news, a federal judge in Washington earlier this month upheld the Clean Truck Program at the Ports of Los Angeles and Long Beach, rejecting the request by the Federal Maritime Commission for a preliminary injunctions at the ports. Accordingly, the Clean Truck Program will proceed with its plans phase out 17,000 big rigs and replace them with less-polluting rigs. While the trucking industry is none too happy about this development, the ports argue its necessity, citing the 2,400 people in the area who die prematurely every year from port-related pollution. The ports will also pay out millions in incentives, and a fee imposed on cargo owners will also help finance the new rigs. The program may also pave the way for further green initiates in trucking that will make the sector more competitive in the long run.

On the fuel surcharge side, after remaining steady for four consecutive weeks at about $2.22 per gallon, US diesel prices dropped by about $0.02 this week. Current US on-highway diesel prices are down by nearly half from their $4.18 per gallon price tag a year ago. Due to the recent drop in crude oil prices, further declines in diesel prices are likely. Based on the current national average on-highway diesel price of $2.201/gallon, the national average LTL (less than truckload) fuel surcharge is at 12.5 percent, while TL (truck load) fuel surcharges average at 23 percent.

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