Freight rates of sea transportation have been climbing, and are forecast to see further escalation unless an overall trade war erupts between the United States and China, said a Montreal freight broker.
Average Panamax vessel earnings climbed to about $14,000 per day by the end of 2017, which is approximately double of the daily income they gained at the beginning of the year.
The upward trend is continuing in 2018, although freight rates have slipped in recent weeks because of growing nervousness over a brewing trade war between China and the US.
In spite of this, the long-term outlook remains bullish. Freight futures are showing a premium to the spot market in the third and fourth quarters of 2018.
Bruce Burnett, director of markets and weather with Glacier MarketsFarm, said rising freight rates are slightly advantageous for Canada’s agricultural exports.
It makes their crops more competitive into neighboring markets such as Mexico, South America and the eastern side of the Asian basin.
However, it all depends on the crop and the destination. For instance, a lot of Canadian durum has been moving through Vancouver to North Africa and the Mediterranean Basin. If rates continue to climb, it may push the trade flow back through Canada’s eastern ports.
One possible impact of higher freight rates is that it will reduce Russia’s ability to ship its grain as far and wide as it has been doing. Russian wheat may not be able to continue displacing Canadian and Australian wheat in countries such as Indonesia.
Good news is the increase has been gradual, and rates are still well below where they were when there was a shortage of ocean vessels. “Ocean freight rates have gone up, but they haven’t gone crazy high by any means,” Burnett said.
One reason for the increased freight costs of seaborne bulk cargo is the rise in commodity prices. While grain prices are in the doldrums, grain accounts for only about 10 percent of overall bulk freight volumes.
Iron ore and coal are the two big commodities, and they have performed well over the last few years. Freight rates typically rise when commodity prices are improving.
Another factor behind escalating ocean freight rates is rising oil prices. Brent crude oil futures prices were nearly $73 per barrel as of April 18, the highest level it has been since late 2014.
One other factor likely to have a significant impact on freight rates is the expected increase in bunkering costs faced by the shipping industry from 2020 onward when ships will be banned from burning high-sulfur bunker fuel under the provisions of the International Convention for the Protection of Pollution from Ships (MARPOL), without the use of scrubber technology.
Since fuel is the biggest operating cost for shipping, and there is no way that ship owners are going to swallow those increased costs, they will finally pass the additional costs onto charterers through adjusting freight rates.
Shipping analysts believed that the only thing that will bring ocean freight rates down is a full-on trade war between the US and China. If both countries follow through and implement tariffs on various commodities, that will have a substantial impact on trade flows and freight rates.