Markets

Ocean freight rates bunker down…

Peter McMeekin, Nidera Australia, May 2, 2017

OCEAN freight is seldom mentioned when we talk about factors impacting grain values in Australia, but it is certainly worthy of discussion. Put simply, ocean freight is the cost to transport the product from the port of loading through to the port of destination, either in large bulk vessels or containers. It is a critical component of price and one which quite often determines Australia’s competitiveness in the export market place.

There are many things which impact the ocean freight market and, like agricultural commodities, the good old supply and demand equation is foremost. The supply of ships is determined by the ratio of construction to destruction. If more new ships are built and become available in the market compared to the number sent to the Asian scrap yards then supply obviously increases.

Peter McMeekin, Nidera Australia

The demand for ships is determined by state of the world economy and the trade activity it generates. The more demand for imported goods across the globe, the more demand there will be for the ships to move those goods from the export origin to the import destination.

The other major component to consider is the operating costs of the vessel and the most significant in this category is the cost of bunker fuel. Bunker fuel is the generic term given to any fuel poured into a ship’s bunkers to power its engines. Deep sea cargo ships typically burn the heavy, residual oil left over after gasoline, diesel and other light hydrocarbons are extracted from crude oil during the refining process.

As you would expect, supply, demand and operating costs are continually changing and impacting prices, but never more so than in the last five years. Ten years ago ocean freight rates were very high, driven by the strong Chinese demand for mining products such as coal and iron ore. This of course drove the Australian mining boom. However, this also coincided with a period of high oil prices price, and consequently high bunker prices.

Nevertheless, ship owners were partying big time as profitability had never been so high. Thinking this would never end, they commissioned the construction of many new builds and delayed the scrapping of the older vessels in their fleet.

As we all know, the party ended, and since 2012 we have seen a dramatic downturn in the demand for mining products globally. This slump coincided with a collapse in the price of oil, taking bunker fuel prices sharply lower. While this was happening, all those new builds commissioned by the ship owners during the boom started to complete and arrive in the market further increasing supply at a time when demand for ocean freight was poor.

To put this into perspective, at the market peak a typical voyage from Australia to China for a panama size vessel of around 50-60,000 metric tonne (MT), would have cost US$40/50/MT. At the market low, 12/18 months ago, the cost of that same voyage was under US$10/MT. A significant fall in anyone’s language, and realistically, unsustainable as this this was well below the cost of construction and operation of the vessel. During this period we even saw shipping lines go bankrupt, the most notable being Hanjin Lines in South Korea.

In the past six months we have seen a resurgence in values with our example voyage above now back up to around US$20/MT, or double what it was at the lows. The dominant driver in this market rally has been the resurgence in demand for mining products, strong global demand for agricultural products and increased bunker fuel costs with the oil price well up trading off its lows. And, of course, the last of the new builds came into the market, with much fewer to follow as orders decreased due the poor market conditions.

The market appears to have found some level of stability around current values, but as demonstrated above, ocean freight is a market which, like many things, is at the mercy of uncontrollable global economic factors. To be fair, current values represent reasonable profits for owners and a sustainable cost for exporters, but then again, when have the markets ever been fair?

 

Source: Nidera Australia. Peter McMeekin is Nidera Australia’s origination manager.

HAVE YOUR SAY

Your email address will not be published.

Your comment will not appear until it has been moderated.
Contributions that contravene our Comments Policy will not be published.

Comments

Get Grain Central's news headlines emailed to you -
FREE!