Dry bulk market in "unchartered" waters
Dry bulk ocean freight rates have continued to slip in the last month, as tight credit lines and weak demand have taken their toll on the market.
Steel shippers in the US say that the market is still very quiet due to the lack of international trade, and that Handymax rates have dropped by at least $15 to $20/mt since last month. Since the peak of the market, prices are down by an incredible amount -- The Dry Bulk Index, which measures bulk shipping rates across the world, is down over 90 percent from its peak reached last summer. Dry bulk freight rates are still trending down as there is still an oversupply of ships and a lack of demand. Chinese iron ore price negotiations have not yet concluded, and there are fears that iron ore prices will fall, which is also putting downward pressure on the market.
On the bright side, Chinese steel prices are improving, and Chinese iron ore inventories are slowly shrinking. Still, many analysts do not expect the dry bulk shipping market to recover until at least 2010 because of the credit crunch and depressed economy. Additionally, with the incredible decrease in freight rates and ship values, many ocean freight companies are losing a lot of money and will not survive the current storm. Some firms have already fallen victim- Facing losses of $3 million a day, Atlas Shipping, a dry-bulk operator that charters vessels from ship owners, was forced to declare bankruptcy in December.
Current per metric ton Handymax rates for large tonnages (i.e., minimum 15k tons of rebar, wire rod, hot rolled coils) are as follows:
Baltic Sea to US East Coast: $30/mt to $35/mt
Baltic Sea to US Gulf Coast: $30/mt to $35/mt
Black Sea and Mediterranean Sea to US East Coast: $42/mt to $47/mt
Black Sea and Mediterranean Sea to US Gulf Coast: $32/mt to $37/mt
East Asia to US Gulf Coast: $40/mt to $45/mt
East Asia to US West Coast: $30/mt to $35/mt
Ports reeling from cargo slowdown
With maritime traffic slowing around the world, the outlook for US ports in 2009 looks somewhat bleak. The second half of 2008 saw a major decrease in imports to the US as the recession and credit crunch adversely affected shipments of everything from containerized consumer goods to steel. In the first part last year, however, some steel ports saw decent demand --The Port of Houston reported that more than 4.7 million tons of steel entered the port through the first 10 months of 2008, with over 900,000 tons discharged in October alone. This represents a 25 percent increase over the first 10 months of '07, which the port attributes to projects put in place before the economic downturn began.
Many ports were hit hard in the second half of the year, however, after the financial crisis accelerated and demand collapsed, pushing volumes down and, in some cases, leaving a glut of devalued steel cargo at the ports. The Port of Brownsville, for example, has reported that has been dealing with high stocks of steel and steel scrap since steel prices dropped in October. According to the US DOC, total imports of steel products in November fell by 28.1 percent against the October import total, and finished steel imports fell by 17.3 percent. In the first 11 months of 2008, total imports of steel amounted to 29,694,045 tons, a decline of 4.9 percent compared to the same period of 2007.
On a positive note, many North American ports have used the slowdown and resulting lack of congestion as an opportunity to improve and expand facilities to allow for higher volumes and new lines of business, such as wind energy and other green technologies.
US freight customers push for re-regulation
Due to the impact of the economic downturn, US rail freight saw its worst year since 2004, according to the Association of American Railroads. Then again, 2008 was still its fourth-best year ever - the years 2005 through 2007 were consecutively US rail freight's best years in history. Despite the reduced demand in 2008, particularly in the fourth quarter, the long-term outlook for North American Railroads is bright.
In fact, some rail customer's think the industry is doing a little too well -- a growing number of railroad customers are pushing for the incoming congress to re-institute tighter federal regulation of the industry. The customers, represented by a group called the Consumers United for Rail Equity, argue that railroads have instituted unfair rate hikes in recent years and are not happy that railroads still made record-high profits in 2008 despite their drop in volumes. However, the industry argues that the rise rail rates in recent years were due mostly to higher costs, and that the profits are essential to help the industry meet the growing demand. Rail is also "greener" compared to other forms of freight, Ed Hamberger, president of the AAR, argues. "As Congress is wrestling with how to lower the nation's carbon footprint, we're part of the answer," Mr. Hamberger said.
While American rail rates may still be higher than customers find palatable, at least the fuel surcharges for rail freight are coming down. Major carriers Burlington Northern Santa Fe and Union Pacific both lowered their on-highway diesel fuel price (US average)-based carload fuel surcharge to 16.5 percent as of January 1 (from 23.5 percent in December), and will lower it further to 12.0 percent in February. The last time these carriers' fuel surcharges dipped as low as 12 percent was three years ago, in February 2006.
Trucking sector has uphill climb in '09
The trucking segment has been particularly hard-hit by the economic downturn, with the drop in volumes coupled with new environmental, labor and homeland security regulations. After being slammed by high fuel prices in the first half of the year, and seeing cargo volumes plummet, a total of 785 trucking companies went out of business in the third quarter, idling over 6.5 percent of the nation's freight trucks. While emissions standards for trucks are tightening, orders for trucks are still down as operators can ill-afford the more expensive new rigs due to the slump in demand. Unless demand picks up, there are many other trucking companies that face going out of business. Trucking groups are pressing the incoming US administration to improve freight-related infrastructure investments, such as highway construction, which would help ease traffic congestion, possibly even allowing for new "truck only" lanes; however, the lack of demand for trucks remains the main issue that is negatively affecting the industry.
On the fuel surcharge side, as of January 12, based on the national average on-highway diesel price of $2.314 per gallon, effective January 14 average fuel surcharges for LTL (less than truckload) stabd at 13.5 percent, while TL (truckload) is 24 percent.