The Hindu Business Line : Ocean freight rates shoot up

Mumbai May 7 Freight rates for bulk carriers (bulk and panamax vessels) hit all-time highs recently. The spot rate to ship a tonne of iron ore from Brazil to China rose to $51.50 a tonne. This is three times the rate that prevailed in early 2003 and close to 150 per cent increase from $20.80/tonne exactly a year ago.

The severity of the cost escalation may be gauged from the fact that for most of the 30 years to 2003, Brazil-Japan rates averaged $10/tonne and are now almost five times higher.

For buyers of iron ore, the steel producers, this represents a significant cost escalation. At current spot rates, the delivered price for iron ore to China is just above $96/tonne, up 56 per cent year-on-year, while the actual f.o.b. contract price is up only 9.5 per cent year-on-year, industry experts pointed out.

Indian rate

On a year-on-year basis, there is approximately a rise of $50/tonne in the cost of making a tonne of steel from Brazilian iron ore (assuming it takes 1.5 tonnes of iron ore to make a tonne of steel), said Macquarie Research in its latest report, adding that the rise in freight rates had been large in percentage terms from Australia, but lower in absolute terms.

The India rate rise (mainly for smaller vessels) has been moderate by comparison. This has enabled Indian spot suppliers to raise the spot f.o.b. fines price by 33 per cent (from $52.50/tonne to $70/tonne) over the past year while the contract price has risen by only 9.5 per cent.

Interestingly, the effect of the massive rise in freight rates on buyers (steel companies) is not as bad as it appears since most major steel-makers have long-term leasing arrangements for ships, which provide for much lower rates.

Port congestion

Many Brazil-Asia contracts are still in the $15-25/tonne range, Macquarie pointed out. For those who did not lock-in, times are tough.

The rise in rates has been caused mainly by port congestion in Australia rather than by any fundamentally driven factor. Coal ports in Australia are choc-a-bloc with ships. At the last count, there were 161 vessels waiting, including 43 cape vessels (1,70,000 dwt average) and 91 Panamax vessels (75,000 dwt).

The ships waiting at Australian ports represent 4 per cent of total tonnage of all vessels, while the total waiting outside Australian iron ore and coal ports, and Brazilian and Chinese iron ore ports, at around 27 million DWT, represented 7 per cent of the total fleet, the report pointed out.