Exporters share freight rate burden

(Resource News International) — Profit margins of Canadian exporters have
suffered as ocean freight rates increased exponentially in
just three years’ time, according to a senior industry source
with a large international firm.

According to the industry source, a canola shipment from
Vancouver to China currently costs US$103 per tonne, whereas
the price three years ago was roughly US$23 per tonne. The
impact has been huge, he said, and not just for one commodity.

“Let’s say a customer is willing to pay $400 per tonne
for feed barley. Shipping costs from Vancouver to Saudi Arabia
are $130 per tonne, from the Black Sea costs are $100
per tonne and from Germany the costs are $70 per tonne.
Accordingly, the return on the barley from Vancouver would be
$270 per tonne, $300 from the Black Sea and $330 from
Germany.”

Lach Coburn, West Coast manager for Cargill, emphasized
that freight rates affect all commodities evenly.

“You have to understand that freight rates do not move
for one commodity… vessel owners don’t care what they’re
shipping, they just care about their revenue per day
offsetting the cost of the vessel. So we (the canola industry)
have to compete, just like the soybean industry, or corn, or
wheat industry has to compete.”

Coburn said that although freight rates have received a
lot of attention lately, other factors may account for foreign
canola demand.

“If you have a deficit of canola for example, or a
deficit of vegetable oil and you have to import it, the
analysis has very little to do with freight rates and more to
do with the value of the commodity. Different factors
contribute. So, in that sense, I don’t think the impact from
freight rates has been significant.”

In regards to canola exports to China, Coburn said, the
import tariff is more significant. Whereas the Chinese tariff
on soybean imports was recently lowered from three to one per
cent, the tariff on canola remains at nine per cent,
increasing the differential from six to eight per cent.

Coburn’s statements were supported by the senior industry
source who said, “Today we’re about $35 per tonne away from
doing canola business with China. That’s a small gap to narrow
but I still don’t anticipate any Chinese business happening.”

If China wanted canola, the source said, they would import it, but
soybeans are able to meet Chinese requirements.

In regards to the future direction of the shipping
market, Carsten Bredin, director of eastern grains for James
Richardson International (JRI), said that in previous years people
expected rates to fall but instead the last three years have
seen an increase.

“If you look at what is called the forward curve in the
freight indexes it gives you a price for the nearby and a
price for the forward. Prices are typically and still are
today, lower in the forward position than they are in the
nearby which suggests that people expect freight rates to come
down. But if anyone has relied on that forward freight
anticipation, they have been out quite a few dollars as a
result of it. We’ve seen the forward markets come right near
to the nearby markets in terms of the freight values for at
least the last few years.”

Bredin said building yards are working to meet the global
demand for ships but added there is currently a two to three
year wait for ships. He explained that demand for container
and liquid bulk ships have been driving the market and have
taken priority over dry bulk market. As a result, Bredin said,
the dry bulk market rose due to a lack of ships.

“You’d say ‘Well, why wouldn’t we just build new ships?’ but
there is a queue for getting ships built and unfortunately the
building yards build for the highest bidder and that has been
the container ships because there has been a very high market
for containerized goods.”

As the industry source pointed out however, some
customers prefer bulk ships.

“With the container business you can’t even do 15,000
tonnes per month. With a Panamax you can do 60,000 tonnes. So
one Panamax basically looks after four months of shipping. For
a big customer, they don’t want to be bothered with
containers, they want to ship something decent.”

Both Bredin and the senior industry source pointed to the
rapid industrialization of China and India as the reason for
the tight shipping market.

“This started three and a half years ago and has built up
over time,” the industry source said. “I don’t know the exact
statistics but China will import roughly 300 million tons of
raw products such as steel and coal. The entire world ships
roughly 300 million tons of grain. So, China is pretty much
importing the equivalent of the entire world grain trade.”

With a number of ships scheduled for completion in 2008,
2009 and 2010, the industry source predicts freight rates will
decline. He also forecast economic growth in China slowing and
pointed out that much of the import demand in China is due to
preparation for the 2008 Olympic games.

“You just can’t sustain growth like that. We foresee that
sometime in 2008 the freight rates will start coming down. The
market is going to peak and I think we’re within months of
seeing that happen. Prices won’t drop dramatically but they
will slowly erode over time.”