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Shipping industry cautious on outlook, despite rallying freight rates

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The shipping industry is not banking on a “super-strong” year despite the price rally prompted by market “upheaval” which has seen the benchmark rate hit an 18-month high, industry group Bimco said.

 

Peter Sand, chief shipping analyst at Bimco, highlighted ath there were some “spectacular tailwinds” in sections of the market, which had for instance seen handysize ships, with capacity of 15,000-35,000 tonnes, cost the same on a per-tonne basis as panamax vessels, carrying 50,000-60,000 tonnes.

 

“That’s an abnormal market,” he said, terming it “unseasonally strong” for a time of year when transport levels tend to be lower.

 

“I think it’s fair to say rates are certainly outperforming,” Mr Sand told the Agrimoney webinar, Covid, one year on: What’s next for agricommodities?

“Demand seems to be very, very strong.”

 

‘Easing’ ahead

However, while the “current upheaval in the market is not going anywhere anytime soon”, the market “will see an easing”.

 

While investors would not see panamax freight rates “falling from $23,000 down to $5,000 in the time span of a week… result assured that the current off-seasonal spike is not going to last forever”.

 

Indeed, for the shipping sector, “we’re not necessarily betting on a super-strong year,” Mr Sand said.

 

“We just cross our fingers that it will be close to breakeven levels for the global shipping industry.”

 

Abnormal patterns

Rates may come under pressure as the sector sees an unwinding of some of the unusual conditions behind the rally, which saw the benchmark Baltic Dry index this week hit its highest levels since September 2019.

 

He cited as one of the key anomalies behind the strength in rates trade outside typical patterns – for example, “grains exports out of the Black Sea going into the Far East”, rather than as normal into North Africa or Europe.

 

China has, for example, snapped up barley from Ukraine, as well as Argentina, Canada and France, in the face of a trade dispute which has seen Beijing slap an 80.5% tariff on imports of the grain from Australia, historically China’s default origin.

 

“Swapping short hauls with much longer distances is definitely something that the shipping industry benefits from,” Mr Sand said, while noting too the impact of rates as ships are tied up longer at sea.

 

“We have basically not been capable of bringing back those ships to the main exporting regions fast enough.”

 

“It does take a significant amount of time from one ship to travel half-way around the globe for discharge and then back into position.”

 

‘Prefer exporting fresh air’

Also boosting capacity shortages, notably in the container market, is the imbalance in trade, spurred by the pandemic, which has created large differences in rates for inbound and outbound traffic.

 

“When the market is red hot as it is for container shipping right now you pay one-10th of the freight rate going from US to the Far East, then shippers pay from going from Far East to the US.”

 

For a shipper this means that “there is simply no economic point in in in waiting” for containers to backhaul, but instead to “prefer exporting fresh air” and race back as fast as possible to Asia.

 

He quoted CNBC analysis this week which showed that from the US ports of Los Angeles, Long Beach, and New York and New Jersey alone in the second half of 2020 a total of 370,505 containers containing agricultural products, with a value of $1.3bn, were denied vessel space.

 

Ag market impacts

The comments come amid concerns in many ag markets over the squeeze in shipping capacity, which some observers have linked to factors from a fall in US port warehouse coffee stocks of 52,600 bags last month, to a five-year low, to soaring Oceania dairy prices.

 

“The container shipping market continues to run up against capacity constraints that are worse in some parts of the world (like Europe) than others (New Zealand, apparently),” said Tobin Gorey at Commonwealth Bank of Australia in a report, explaining unusually high premiums of Oceania product.

 

“How long those capacity constraints last for is highly uncertain, and thus so too is New Zealand whole milk powder’s premium status,” he added.

 

The sugar market is another where tight shipping capacity is seen as having boosted prices, with FocusEconomics this week reporting that a rise in sugar prices last month “came amid lower exports from India due to the continued shortage of shipping containers.

 

“A continuation of the current container shortage in India poses an upside risk” to sugar price expectations, the group added.

 

For more on the webinar, please click here.

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