This article has been reprinted from the USDA Oct. 31 Grain Transportation Report.
During the third quarter of 2019, ocean freight rates for moving bulk commodities, including grain, increased compared to the previous quarter, a year earlier, and the 4-year average.
The increase was partly due to strong trading of bulk commodities, especially firmness in India’s coal imports and surging iron ore exports from Brazil during the quarter.
Ocean freight rates for shipping a metric ton (mt) of grain from the U.S. Gulf to Japan averaged $50.05 during the quarter—17 percent above the previous quarter, 11 percent above a year earlier, and 34 percent above the 4-year average (see table and figure below).
The cost for shipping bulk grain from Pacific Northwest (PNW) to Japan averaged $27.90 per mt—18 percent, 12 percent, and 38 percent above the previous quarter, a year earlier, and the 4-year average, respectively.
Ocean freight for shipping bulk grain from the U.S. Gulf to Europe averaged $20.21 during the quarter.
Although this is 3 percent below last year, it is 22 percent and 21 percent above the previous quarter, and 4-year average, respectively.
Bulk ocean freight rates, especially in the Panamax markets, started to increase in July because of strong Indian coal imports.
According to Drewry Maritime Research, Inc. (Drewry), India imported 20 percent more coal during the first 5 months of 2019, compared to a year earlier.
India’s coal imports were fueled by infrastructure development, which generated additional demand for steel, increasing imports of coking coal.
Cement production in India’s fiscal year 2018-19 (April 1, 2018 to March 31, 2019) increased 13 percent over the previous year to 337 million tons.
Because that quantity of cement required 67 million tons of coal to produce, India supplemented its lagging domestic production with imported coal.
Although the country’s domestic coal production increased 5 percent, its imports increased 29 percent (Drewry).
In August, bulk ocean freight rates continued to increase as iron ore exports from Brazil began to return to normal, following the disruption in coal mines caused by collapsed dams earlier in the year. (See April 25, 2019 Grain Transportation Report.)
Brazil exported 34.3 million tons of iron ore in July, an 80- percent increase over the 19.06 million tons it exported in April.
In September, ocean freight rates continued to surge as India’s appetite for imported coal remained strong because of sluggish domestic production. In addition, the approaching winter triggered coal-restocking activities in Europe and Far East.
Current Market Situation and Outlook As of October 24, the rate for shipping a metric ton of grain from the U.S. Gulf to Japan was $50.50, 7 percent higher than the beginning of the year and 3 percent above the same period last year.
The rate from the PNW to Japan was $28.00 per mt, 12 percent and 2 percent more than the beginning of the year and same period a year ago, respectively.
Given the current market indicators, it appears bulk ocean freight rates will remain close to or above the current level, at least in the short term.
For example, easing tensions between United States and China over trade issues and increased liquidity in the Chinese economy could boost trading of bulk commodities, such as iron ore and grains.
According to Drewry, iron ore inventories at Chinese ports were 11.8 million tons at the end of September—14 percent lower than the beginning of the year.
China may need to restock iron inventories to support strong steel production.
In order to boost economic growth, the central bank of China injected about $12 billion into the economy by lowering the required reserved ratio by 0.5 percent.
Lower corn production in China caused by reduced area and yield could also support robust grain imports.
Low domestic coal production in India along with India’s persistently elevated demand for coal will require India to import more coal.
According to some industry analysts, vessel supply growth will decrease because of recent and impending International Maritime Organization (IMO) regulations: Ballast Water Management System (BWMS) Enforcement, which became effective on September 8, and Low Sulfur Emission Mandate, effective January 1, 2020.
These two regulations aim to reduce pollution discharged by oceangoing vessels—toxins that can be harmful to the marine environment and humans.
For compliance, both regulations will require taking steps that may not be cost-effective for aging vessels. The BWMS covers approved ballast water treatment systems and ballast water exchange within open ocean areas.
The Low Sulfur Emission Mandate requires the use of low sulfur bunker fuel for compliance.
However, the price differentials between low sulfur and high sulfur fuels may be too high, making the option not cost-effective to operate older vessels.
Other vessels may be taken out temporarily for retrofitting with scrubbers, which usually take between 1 to 3 months to install, temporarily reducing vessel supply capacity.
Drewry estimated that about 300 vessels are scheduled for retrofitting until December 2019.
Therefore, some vessels may be taken out of operation either temporarily or permanently, thereby squeezing vessel supply capacity.