WSJ -- Commodity-Freight Rates Slip As Global Growth Slows Down .....................
The latest data point that Alan Greenspan and the rest of those brain-dead F.O.M.C. members will probably ignore at their next interest rate setting meeting.
Jon.
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June 13, 2005
Commodity-Freight Rates Slip As Global Growth Slows Down
China's Cutback in Imports Plays Big Role in Decline; Shippers Await Better Prices
By TIMOTHY AEPPEL
Staff Reporter of THE WALL STREET JOURNAL
Rates for shipping iron ore, grain, coal and other commodities have fallen nearly 25% in the past six weeks, reflecting a slowdown in the movement of many raw materials around the globe.
While the slowdown reflects a softening of world economic growth, the silver lining is lower transportation costs for a multitude of industries such as appliance makers, chemical producers and even bakeries, which use such materials in production processes.
Surging demand and a shortage of ships pushed freight rates to record highs in December. But since then, the Baltic Dry Index, the main indicator for commodity-freight rates, has fallen by more than half, with the slide accelerating in recent weeks. Industry officials point to a recent cutback in China's imports, particularly of iron ore used in steel production, as the driving force behind the precipitous decline. But the downturn has broader roots.
"The reason these prices are coming down is because world growth is slowing and U.S. growth is slowing," says Nariman Behravesh, chief economist at Global Insight, an economic forecasting and consulting firm in Lexington, Mass.
There also is a psychological element. When shipping prices turn sharply downward as they have lately, many shippers sit on the sidelines, hoping to snare even better prices if they wait. That magnifies downturns, and adds to the notorious volatility of shipping rates. At the peak of the market last year, it cost more than $100,000 a day to charter a ship to carry material from Brazil to China. That same ship cost about $80,000 a day in mid-April and now can be had for $31,000 a day.
Abstoss International Steel Holding Inc., a steel-trading company in Stamford, Conn., is among those waiting for better deals. Klaus Abstoss, the company's president, says the roller coaster will eventually change direction. The trick is figuring when to climb on. "Once we commit, it will be not only us, but everyone else -- and then you'll see the market strengthen very quickly," he says.
Industry analysts expect shipping rates to recover later this year, but not to 2004's levels. The commodity boom of recent years sparked a binge of ship building, increasing supply. Softer economies also mean less congestion in ports, fewer ships tied up in traffic and more available on any given day from the existing fleet.
Although ship owners stand to lose the most, many insist the current downdraft is a passing phenomenon. They point out that prices made a similar, though less pronounced, dip in the middle of last year before roaring back.
Christopher Georgakis, chief executive of Excel Maritime Carriers Ltd. in Piraeus, Greece, says economic fundamentals remain strong. Growth is slowing but will remain relatively healthy in most major industrial regions, he says, and China is still on track to increase imports of coal for power generation by 80% or more this year. "If you look at the world economy, we're entering a period of sustained growth for four or five years," Mr. Georgakis says.
But others insist current conditions are very different from last year. The slump in China's steel sector is being accompanied by a downturn in the steel market in the U.S. and Europe, for instance, while last year demand outside China remained relatively strong.
More than half of all so-called dry-bulk cargos -- items shipped in bulk on huge ships -- is steel-related, either raw materials for steel's production or final goods. So a global slump in that sector has a huge impact on shipping.
"The Chinese government is keen to curb overinvestment in the steel sector, and that seems to be having a substantial impact on demand for steelmaking raw materials," says Peter Norfolk, a market analyst with Simpson Spence & Young, a shipping consulting firm in London. The slowdown also is affecting other types of shipping. Besides bulk-shipping vessels, global trade relies on container ships and tankers.
While the demand for tankers remains strong, largely reflecting high oil prices, container shipping is also hitting a soft patch, mainly as a result of slower consumer spending. Consumers in Europe, for instance, are buying less footwear, household goods and clothes, cutting into the flow of containers. Analysts recently cut their projection for 2005 growth of Asia-Europe trade to between 7% and 8% from about 17%.
Write to Timothy Aeppel at timothy.aeppel@wsj.com
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