Mr. Gloom:
I am having a hard time comprehending what's happening to freight rates today. I remember the time when we were paying ocean freight from Europe to US at rates as low as the low teens. Now we are easily paying over $65 or $70 /mt for the same voyage, the same cargo, the same discharge rates, and the same stevedores. What's going on? Who is filling up their pocket with the expense of trade to the US? Importing to the US is difficult enough as it is; we don't need another negative factor working against our business.
Mr. Bull:
You are right; ocean freight rates to US ports have gone up spectacularly in recent months and it has led to more regional trading activities of steel. Apart from the high energy prices, a distinct lack of shipping space for break bulk cargo is responsible for the steep increase. The situation will turn around, though. Worldwide, a number of ships are under contract, and that should alleviate the situation in the near future. Even shipyards in the US, from Philadelphia to Mobile, are busy and will deliver around 15 product carriers before the year ends. These may be smaller ships but they will add to the new capacity coming on stream from overseas ship yards.
And the endless demand for ship space coming out of China will probably undergo a correction as well, since the Chinese government is really struggling to cool off the economy a bit. In a few months' time, freight rates are destined to come down.
Mr. Gloom:
The current situation seems to defy the rule of supply and demand. It is no secret that steel imports are down significantly. The volume of some imported steel products such as wire rod, rebar and flat rolled are down by almost 50 percent in 2007 compared to last year. I don't know how the other breakbulk products are faring, but steel trade to North America is not doing well. You would think that since there is no trade or demand for freight (at least on the steel side), the rates would come down. However, we are seeing the opposite. Is anyone manipulating the freight market?
You might say, sure, steel imports are down, but US exports of scrap, billets and coils are up. This is obviously a function of the weak US dollar and weak consumption. However, high freight rates have started to curtail exports as well. It is much cheaper to ship these goods to nearby countries. The US is losing business and is becoming more and more like an island.
I wish freight rates would start to come down right now to give the frustrated traders some relief. We don't need rates to go down to the teens, but they need to come down by a good $20 to $30 /mt before they start making some sense.
Mr. Bull:
Breakbulk shipments to the US are not the deciding factor in international freight rates any longer. The demand coming out of China and now even India and other Asian markets has been the prime mover of ocean freight rates. As I said before, this situation will be relieved once new shipping capacity comes on stream. And if the US market is still as influential as you think it is, then the drop of shipping volume to the American ports should, in due time, cause the freight rates to go down as well.
Mr. Gloom:
I think that this is one thing we both agree on for a change. We all want freight rates to come down. Thanks for not arguing. If the rates stay high, we might as well pack up and do something else. The US dollar is weak, and importing business is already down. These freight rates are also stealing our only consolation, exports. Please rush those ships into the fleet soon. We especially need more Capesize ships for the increased volume for raw materials. If they are in tight supply, no matter what we do on the steel trade side, rates will remain high.
Mr. Bull:
Yes, you are right: the import business in the US is going through a difficult phase, and a number of factors have helped to bring this situation about. Despite all the encouraging news about exports and a shrinking trade deficit, we cannot lose sight of the fact that the US needs a lot of imports to sustain its economy. And steel is included in this notion. That is why imports will be back, and as other markets take a breather, freight rates will be adjusted down again. We may not reach the lowest level seen a couple of years ago, but freight rates will get back to a realistic market level.