China led-dry bulk rally hits a rough patch
The dry bulk ocean freight market has seen a good deal of volatility over the past year year. After rising to record highs last summer, dry bulk ocean freight rates plunged in the fourth quarter of 2008. However, the market then posted a strong recovery in the first half of 2009, led by the speedy rebound of the Chinese steel market. But in recent weeks, the outlook for dry bulk ocean freight has soured somewhat, as Chinese iron ore imports have been losing steam.
The main driver of dry bulk's recovery this year has been record iron ore imports from China. Despite China's finished steel exports sinking 75 percent, year over year, in July, China's steel production figures for August are expected to reflect a record high. These data are largely reflective of the trend of unwaveringly high steel production amid paltry steel export volumes which China has followed throughout most of this year. To maintain these high production levels, China has ramped up its iron ore imports this year too, with iron ore import volumes setting another historical high in July.
However, it is becoming more apparent that China's domestic steel demand is not strong enough to maintain these record-high iron ore imports or steel production levels, and this is evidenced by rising stockpiles of both iron ore and steel, particularly hot rolled coils and wire rod, in China. For this reason, China's iron ore imports are expected to drop in September, taking Capesize (large ships that transport commodities like iron ore and coal) freight rates along with them. Already, iron ore spot prices to China have fallen in recent weeks and spot iron ore vessel bookings to China and August by Australia and Brazil reportedly hit a nine-month low in August.
Rates for Handymax ships (smaller ships used to transport steel) have been less volatile as compared to Capesize this year, and have mostly trended sideways in the last couple months. Still, demand is not showing much signs of improvement as steel traders are still not fixing very many import tons. Furthermore, the projected slowdown in Capesize demand as well as the hefty number of newbuilds set to enter the market in the second half of this year into next year are expected to prohibit the North American Handy market from rebounding for at least the next six months, despite recent improvements observed in some sectors of the North American steel markets.
For now, most Handymax freight rates to the US for large tonnage (i.e. At least 15k tons of HRC or wire rod) of steel are as below:
Baltic Sea to East Coast: $50 to $55/mt
Baltic Sea to Gulf Coast: $45 to $50/mt
Black Sea and Mediterranean Sea to East Coast: $55 to $60/mt
Black Sea and Mediterranean Sea to Gulf Coast: $50 to $55/mt
East Asia to Gulf Coast: $55 to $60/mt
East Asia to West Coast: $50 to $55/mt
North American rail traffic edging upward in August
With increasing domestic scrap and flat rolled steel prices, North American railroads have been getting busier after traffic hit a yearly low in May.
The American Association of Railroads (AAR) reported last week that rail traffic continues to show slight improvement, with a rise in steelmaking inputs including coal and scrap driving railcar loads up, in the week ended August 22, to their strongest traffic level since early March. Rail shipments of scrap and metallic ores rose to their highest level of 2009, presumably spurred by the cash for clunkers program and improving flat rolled steel market. Still, North American rail freight still has a long ways to catch up before a full recovery can be declared as import container business remains down and it is still too soon to tell whether the demand generated by the recent improvement in the automotive sector will be lasting. The AAR reports that combined North American rail freight volume for the first 33 weeks of 2009 on 13 reporting US, Canadian and Mexican railroads totaled 11,063,767 carloads, down 19.6 percent from last year, and 7,642,421 trailers and containers, down 17.1 percent from last year.
On the fuel surcharge side, despite the rising trend of diesel prices in the spring and summer months of 2009, carload surcharge rates are still at less than half of their year-ago levels. Major carriers Union Pacific and Burlington Northern Santa Fe will keep their respective carload fuel surcharges, based on July national average diesel prices, at 13 percent in September, unchanged from their August surcharges. For comparison, both of these carriers had fuel surcharges of 35 percent in August 2008.
Trucking demand showing signs of bottoming
The North American trucking sector, which is fueled primarily by demand for consumer goods, has taken a sharp hit from the recession, and despite some slight improvement as of late, the outlook for this sector is weaker than that for rail freight or other modes of transportation.
The American Trucking Association's (ATA) Chief Economist Bob Costello said last week that although he is hopeful that truck tonnage finally hit bottom (ATA's July truck tonnage index increased by 2.1 percent in July on a seasonally adjusted basis) after bouncing around at a seven-year low for the last few months, he does not anticipate a strong rebound in the near-term. “While I am optimistic that the worst is behind us, I just don’t see anything on the economic horizon that suggests freight tonnage is about to rise significantly or consistently,” Costello said. “Still, even small gains are better than the February 2008 through April 2009 cumulative tonnage reduction of 15.5 percent,” he concluded.
The Bureau of Transportation Statistics of the US Department of Commerce also recently reported that surface trade of the US with Canada and Mexico increased by six percent in June over May. Import shipments from Canada and Mexico by truck were up 3.9 percent, while export shipments to Canada and Mexico were up by 8.4 percent in June from May.
Although the US' $50.8 billion of NAFTA trade in June was still down by 31.5 percent compared to that of June of 2008, last year's June total represented a near-record high. Furthermore, June's improvement compared to May is one of many indicators that suggest the economy, and as a result, trucking demand, likely bottomed out in May.
US average fuel surcharges for truck transportation as of August 26, based on the national on-highway diesel fuel average of $2.668/gallon on August 24, stood at 17 percent for LTL (less-than-truckload) and at 27.5 percent for TL (truckload).
Barge system still vulnerable to infrastructure upsets amid slight demand up-tick
The North American barge market, like other modes of inland transportation, has seen some up-tick as of late along with improvements in the steel market. However, rates are still down sharply from last year and infrastructure issues continue to dog the industry.
The Lake Carriers' Association (LCA) reported in August that even though iron ore shipments on the Great Lakes in July were 53 percent below year-ago levels, the trade did show some signs of life, with loadings totaling 3.5 million net tons, an increase of 635,000 tons compared to June. LCA said the up-tick in shipments reflects a slight increase in production rates among North American steel mills. However, year to date iron ore trade on the Lakes stood at 12.8 million tons, which is down 60 percent from the first seven months of last year. In addition to lower demand, LCA also noted the lack of adequate dredging of the Lakes, which has also impacted traffic volumes.
Some funds from the $787 billion US stimulus package will be used to dredge and resurface inland rivers and harbors, but the entire inland water system is in need of a major overhaul, carriers say, as antiquated locks and dams as well as inadequate dredging present big hurdles for barge transportation. These underlying infrastructure issues may be exacerbated by the Atlantic hurricane season, which is currently underway. Thankfully, this year's storm season is projected by the National Oceanic and Atmospheric Administration of the US DOC to be “below normal” in severity, though floods have resulted in the temporary closure of major rivers and other upsets in years past, which led to stoppages in the flow of barge traffic. Time will tell whether such issues will arise this year.
Looking at North American barge demand as a whole, the market remains depressed and the so-called “grain season” in which the majority of US cash crops shipped for export, is expected to be late this year. So, at this point, there is no upward pressure on rates. However, that should change soon as the harvest gets into full-swing. The fuel surcharge largely remains a non-issue for the barge market as most business is being done on a spot basis in which fuel is included in the rate. As far as contract business is concerned, carriers say fuel has remained lower than the contract base, resulting in a low or absent surcharge in most cases.