The Debts of the Lenders: Ocean Freight Rates Projected to Fall on Lower Chinese Demand

Sea Freight Rates Seen Falling On Lower China Demand


Ocean freight rates are expected to recede in the third quarter as supportive dry bulk commodity buying by China declines and the other major world economies fail to compensate.


In August, the Baltic Dry Index - a barometer of shipping costs for commodities such as iron ore, coal, grain and fertilizer - saw its sharpest slide since October, when freight rates were heading below break-even levels. The index is often seen as a key leading indicator for commodities and global trade.


The BDI was down 90 points Wednesday to 2614, well off its yearly high of 4291 on June 3, although still about four times higher than December’s 22-year low.


China’s demand for iron ore and coal, key ingredients in steel production, had helped the BDI rise sharply in the first half of 2009. As of July, China was importing nearly 55% of globally traded iron ore, and about 10% of coal. Massive queues outside major ports have crimped supply and helped elevate freight rates, but this situation isn’t likely to continue.


“There is no doubt the last few months have been unprecedented and unsustainable when it comes to China’s appetite for iron ore imports,” said Peter Hickson, UBS AG’s managing director of global materials strategy.


While rates could rise again as early as the fourth quarter, Hickson expects a 30% fall in the BDI in the third quarter compared with the second quarter. He recently increased this forecast from 15% in early June, as China’s appetite for iron ore showed signs of slowing.


Capesize ships, the largest of the four vessel classes calculated into the BDI, are the primary transport method for iron ore on the major routes to China from Australia and Brazil, the largest producers.



Source CME News For Tomorrow