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Strategies & Market Trends : Booms, Busts, and Recoveries

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To: energyplay who wrote (39520)	10/12/2003 8:51:50 PM
From: elmatador	Read Replies (1) of 74559

Freight prices (ascent would put many former dotcom darlings to shame.) Freight prices Published: Oct 12 2003 18:10 \| Last Updated: Oct 12 2003 18:10 Dry by name, but not by nature. The Baltic Dry Index's current rate of ascent would put many former dotcom darlings to shame. The index - a basket of prices paid for chartering freight vessels for dry cargo on 25 of the world's most important trading routes - is rising at an unprecedented rate. The index has quadrupled in the last year and has soared 62 per cent in the last three weeks alone, putting it at an all-time high since its inception in 1985. China's demand for iron ore and coking coal to feed its rapidly expanding steel industry is the main driver behind the meteoric surge, although a confluence of shorter-term factors has exacerbated the upward pressure. Hot weather in Europe this summer was one, increasing electricity consumption to an extent that imports of thermal coal from Australia were necessary. Freight charges for iron ore have now outstripped the cost of the raw material itself. The price of iron ore in Brazil is about $20 per tonne, while one vessel was recently chartered for the voyage to China at $34 per tonne. The near vertical ascent in the Baltic Dry Index suggests a bubble, but one that is unlikely to be pricked in the near future by new tonnage coming on to the market. Available shipyard capacity is largely taken up with meeting the growth in demand for container vessels and the shift to double-skinned hull oil tankers. Substitution away from imported products to home production should occur in industries sensitive to freight costs, such as cement and fertilisers. But Chinese iron ore demand is relatively price-inelastic, with ore costs comprising only about 20 per cent of the price of the finished steel. Demand is surging. China's annual iron ore imports doubled between 1999 and 2002, and have accelerated since. There is little sign of economic slowdown - official Chinese gross domestic product figures may even underestimate growth. The pace of Chinese expansion may be unsustainable, increasing the risk of an eventual crash, but a near-term collapse of the freight bubble appears unlikely.

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