Capdiamont\’s Weblog

The Economic Times: How Olympics brings down ship freight rates
Saturday 9 Aug 2008, 10:27
Filed under: harbor, Humboldt

Thanks to gCaptain for his post of it.

Swifter, higher and stronger may be the Olympics motto. But the Beijing Games that start on Friday have had the opposite effect on ships carrying men and materials across the planet. After a year of dizzying traffic, global sea lanes have suddenly become quiet. And that’s great news. ET helps you join the dots between the world’s biggest sports fest and the cash you will save importing everything from coal and vegetable oil or exporting Christmas goodies to the US. China will effectively shut down while the Games are on. All factories, workshops, and industrial estates in and around Beijing province will be closed to ensure tourists and deadly serious sportspeople don’t get a whiff of smoke, see ugly machinery or the usual detritus of a country that has become the world’s factory yard.

Since Chinese factories will be shut, they would not need copious volumes of raw material, nor have giant ship-loads of finished goods to move out. Moreover, China had been stockpiling diesel and crude oil before the Games to ensure uninterrupted supplies. That record demand for tankers to carry crude is expected to drop 40% once the Games start. So basically, China needs very few ships right now. That has acted as a sledge hammer on ship freight rates.

As in all market shifts, what you see is usually tip of the iceberg. The Olympics shut-down is actually just one in a set of far more complicated factors. China is expected to reap a very large soyabean crop. This means the world’s top bean importer will need fewer ships to move cargo from South America.

For the last couple of years China appeared to have an insatiable appetite for metals and ores as it built state-of-the-art stadii, apartments, roads, bridges and other jaw-dropping infrastructure. Not any more. The big state-sponsored construction boom is over, at least for now.

China’s partial exit has played havoc with global demand for copper, tin, lead, and iron ore. In addition, production costs (iron ore, coking coal, credit issues) and coke shortages are making it harder for small Chinese steel mills to keep up production.

The trouble is that not only did China reduce shopping overseas, it also closed its own sales counters. From fertilisers, wheat, corn, to aluminium , steel and zinc, Chinese bulk commodity exports have become next to nil. Reports suggest that some importers, who booked copper shipments to arrive in July and August, have been trying to cancel and/or delay the shipments. China’s refined copper imports and semifinished products are down almost 13% against the first six months of 2007.

While the Chinese are booking fewer ships, bunker fuel has also become cheaper in the last few days. That has cooled down spot freight rates further. But the big question is how long can the good times last? For quite some months actually. Freight brokers say prices are getting lower, with rates quoted for the coming quarters much lower than near month prices.

Panamaxes that were ruling at $66,000/day at July-end are now at $58,000. The average August-September rates are $60,000. For the fourth quarter, the average rate is $66,000. But it is rapidly falling. For the first quarter of next year, rates are ruling at $62,000 and for second quarter at $60,000. Industry watchers say freight rates are tumbling also because of the general correction in global commodity prices. Since the heat has cooled down substantially, freight is following suit.

Moreover, shipbuilders from China to the Middle East have been in a frenzy of activity over the last 18 months to encash the boom in global trade. So a large number of new ships are expected to hit the maritime traffic lanes in 2009, helping supply catch up with demand.

Even so, in freight rates timing is everything. “Currently, supply still outweighs demand. Charterers are taking their time. But if cargoes all rush in at the same time, it could stop rates from declining further. And the longer the charterers wait, the chances of everyone rushing in at the same time increases,’’ says a broker in Mumbai. So while you are busy with the Olympics, don’t take eyes off the ball.

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