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Commodities drive ocean freight rates sharply up

G. Chandrashekhar

Baltic dry freight index goes up 40 per cent

Contributing factors
China's iron ore import demand is a key market driver for freight.
Hot weather in Europe is seen depleting coal inventories and freight is being booked in advance ahead of peak winter demand period.

Washington , Aug. 11

Contrary to expectation of what an accelerated supply of ships would put on the ocean freight market, dry bulk freight rates have moved sharply higher over the past one month. Large commodity shipments are causing the rate hike. Ocean freight rates are generally viewed as a key indicator of the broader health of commodity market fundamentals.

The Baltic dry freight index is up 40 per cent from its lows of early June, with capesize vessels, representing the strongest part of the market, rising 64 per cent.

The recovery in rates, which in some routes are now approaching their highest levels since May 2005, was completely unexpected by market participants.

Fleet supply

Many in the market had anticipated that acceleration in supply of ships would continue to put downward pressure on the market, as has been the case for much of the last 12 months, commented an analyst.

Indeed, fleet supply has continued to grow rapidly in 2006.

Delivery of bulk carrier capacity is running at 13 per cent ahead of year-ago levels and fleet size has grown by 7 per cent in the last 12 months, according to a well-known shipping consultant.

Strength of demand

What has taken the market by surprise is the ongoing strength of demand on key routes. In particular, China, because of its imports of iron ore, represents the key market driver for freight.

China's steel production growth had been expected to slow this year. Although it has done so, current growth rates of around 19 per cent are much stronger than expected with a knock-on impact on its iron ore imports, which are running ahead of a year ago levels by almost 18 per cent, the analyst pointed out.

However, China's iron ore import demand is not the only factor.

Hot weather in Europe is seen depleting coal inventories and freight is being booked in advance in anticipation of need for an increased level of shipment ahead of the peak winter demand period.

Robust commodity trade

In addition, agricultural commodity trade is also robust. In recent weeks, seasonally heavy trade in oilseeds and grains, particularly corn (maize), has been strong. No wonder, the London-based International Grains Council in its last report a week ago revised upward its estimate of global corn trade to 79 million tonnes, a three-year high.

The message for the broader commodity environment is that even in a market which has seen a dramatic increase in supply recently, strong growth in demand in a number of different sectors can lead to fresh upward pressure on prices.

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