Strong Bulk Shipments Push Ocean Freight Rates Up in 2017

This article has been reprinted from the Feb. 8 USDA Grain Transportation Report.

Ocean freight rates for shipping bulk commodities, including grains, increased in 2017 as compared to 2016 amid strong bulk shipment volumes. 

The average ocean freight rates for shipping bulk grain from the U.S. Gulf and
Pacific Northwest (PNW) to Japan in 2017 were $39.33 and $21.05 per metric ton (mt); 39 and 32 percent higher than the previous year, respectively. 

The cost of shipping grain from the U.S. Gulf to Europe was $15.47 per mt, 12
percent more than the previous year. 

However, with excess vessel supply still in the market, a slower pace of vessel
deliveries is shrinking the gap between vessel supply and demand.

A Synopsis of 2017 Ocean Rates:

First Quarter - Ocean freight rates for shipping bulk grains increased during the first quarter of 2017 compared to the previous quarter, and the same period a year earlier, but were lower than the 4-year average. 

The rates for shipping bulk grain from the U.S. Gulf to Japan averaged $36.45 per metric ton (mt); an 8 and 57 percent increase from the previous quarter and the same period last year, respectively, but 6 percent lower than the 4-year average.

The cost of shipping from the Pacific Northwest (PNW) to Japan averaged $19.02 per mt;3 and 43 percent above the previous quarter, and the same period last year, respectively, and a 10 percent decline from the 4-year average. 

The rise in ocean rates during the first quarter was partly due to strong grain movements and increased demand for other bulk commodities, such as coal and iron ore. 

Grain inspected for export, and ocean-going grain vessel loading activity in the U.S. Gulf and the PNW during the first quarter, surpassed the previous year’s levels (March 23, 2017 Grain Transportation Report (GTR)). 

In addition, there was increasing demand for coal and iron ore/steel due to
“restocking” in China (April 6, 2017 GTR).

Second Quarter - Ocean freight rates for shipping bulk grain for grain routes continued to increase during the second quarter, surpassing the previous quarter and the same period a year earlier. 

While rates from the Gulf to Japan were higher than the 4-year average, the rates from the Pacific Northwest (PNW) to Japan and the rates from the Gulf to Europe were less than the 4-year average. 

The rates for shipping a metric ton (mt) of grain from the United States Gulf to Japan averaged $38.08; 5 percent above the previous quarter, 44 percent above same period last year, and 2 percent above the 4-year average. 

The rates for shipping from the PNW to Japan averaged 19.93 per mt, which was 5 and 29 percent more than the previous quarter and same period a year ago, respectively, but 3 percent less than the 4-year average. 

It cost $14.49 per mt to ship grain from the U.S. Gulf to Europe. 

This was 2 percent less than the previous quarter, 6 percent more than last year, and 15 percent less than the 4-year average. 

The increase in ocean rates during the quarter was partly due to continued strong grain movements and grain vessel loading activity. 

Grain (wheat, corn, and soybeans) inspected for exports from all major U.S. ports reached 29.8 million metric tons; 2 percent above last year and 37 percent above the 5-year average (July 20, 2017 GTR). 

The U.S. Gulf loaded 447 ocean-going grain vessels during the quarter, compared to 437 during the same period last year. In the PNW, 272 ocean-going vessels were loaded or waiting to be loaded, compared to 172 vessels during the previous year.

Third Quarter - Strong iron ore, coal, and grain shipments continued to push up ocean freight rates during the quarter. 

Ocean freight rates for shipping a metric ton (mt) of grain from the U.S. Gulf to Japan averaged $39.23 during the quarter. 

This was 3 and 31 percent more than the previous quarter and same period a year ago, respectively, but unchanged from the 4-yr average. 

The cost of shipping from the Pacific Northwest (PNW) to Japan averaged $20.71 per mt; 4 and 25 percent more than the previous quarter and same period a year ago, but 4 percent less than the 4-yr average. 

The cost of shipping from the U.S. Gulf to Europe, at $15.03 per mt, was 4 percent higher than the previous quarter, unchanged from a year earlier, and 20 percent less than the 4-yr average. 

In August, increased construction activities in China led to high steel production, as steel prices reached their highest level since 2014 (October 26, 2017 GTR). 

The increased steel production depleted iron ore inventories at the ports to
about 124 million tons at the end of August. 

This in turn led to increased demand for iron ore and coking coal imports by China. Steel consumption also improved in India and Europe. 

In addition to increased demand for iron and coking coal, there was also increasing demand for grains and other bulk products in some Asian countries, such as Japan and South Korea. 

In addition, United States corn exports to the European Union (EU) almost doubled during the first-half of 2017 compared to the same period last year due to high demand induced by low global corn prices.

Fourth Quarter - Ocean freight rates continued to increase through the fourth quarter (see table and graph below).

The robust thermal coal and grain trade boosted the demand for Panamax vessels and pushed up the rates. 

The winter season increased the demand for thermal coal imports for restocking in European and Asian countries.

Amid higher domestic prices and rising demand for heating in China, the demand for thermal coal imports remained strong. 

There was also increased demand for thermal coal imports in Japan and South Korea, which contributed to higher ocean rates. 

In October 2017, South Korea imported 27 percent more coal than in 2016. The grain trade was also strong during the fourth quarter. 

According to Drewry Maritime Research, Russian wheat exports to Saudi Arabia increased 20 percent in October 2017 compared to 2016. 

In addition, lowered import duties boosted corn, sorghum, and rye imports by the European countries.

Market Analysis and Outlook

Thus far in 2018, the ocean freight rates for shipping bulk grain from the U.S. Gulf and PNW to Japan during January averaged $44.25 and $24.50 per metric ton, respectively. 

These were relatively the same levels as the end of last quarter in 2017. 

Many factors potentially may influence the direction of ocean rates in 2018. 

For instance, policy in China will play a crucial role in the direction of dry bulk ocean freight rates, as they undertake efforts to curb pollution and restrict steel and aluminum production. 

Lower production levels will reduce imports of low grade iron ore and bauxite, at least in the short term. 

In addition, amid strong production and supply from the United States, Brazil, and Russia, there is a positive outlook for global grain trade, which may boost rates for Panamax ships. 

According to Drewry Maritime Research, there is a positive outlook for the dry bulk market in general.

This may affect ship owners’ decision for scrapping their ships even though scrap prices are high. 

Despite the currently low scheduled delivery of new ships, the slow rate of demolition and attractiveness of investments in newly built vessels may continue to tilt the demand-supply balance towards excess vessel supply. 

The dry bulk fleet remained relatively stable through December 2017 at about 817 million deadweight tonnage. 

The orderbook as a percent of fleet was also stagnant at 10 percent, indicating a stable growth rate in vessel fleet. 

However, the demand-supply gap may shrink in the long run as International Maritime Organization regulations speed up demolition.