Last updated: August 23, 2010 10:28 pm

Freight rates rise to two-month high

Freight rates surged to a two-month high on Monday as the global scramble for grain imports combined with resurgent demand from Chinese steelmakers.

The Baltic Dry Index of shipping costs for dry bulk commodities – including iron ore, coal, grains and cement – has risen 67 per cent in just over a month after it slid to its lowest since early 2009. Yesterday, it gained 3.1 per cent to 2,841 points, the highest since mid-June.

As uncertainty over the strength of the economic recovery is making investors wary, the BDI’s rally will be seen as a bullish factor by some, who view it as a barometer for the health of the global economy.

The index was propelled into the international spotlight during the financial crisis of late 2008 when it plunged close to record lows as the world economy was widely seen to be heading for depression. Its subsequent recovery was hailed as proof that government stimulus measures were successful.

But analysts warn that the rally is likely to be short-lived – even if the global economy recovers strongly. That is because the cost of freight is influenced by supply and demand, and, while demand may be picking up, supply is set to surge.

Jim Lennon, head of commodities research at Macquarie, said the global fleet of Capesize vessels would rise by about 20 per cent both in 2010 and 2011. “The problem for the freight market is that seaborne trade cannot grow to anywhere near this rate due to a limited growth in mine supply in the main exporting countries,” he said.

The BDI’s sharp rally this month comes after Russia imposed a ban on grain exports, forcing consumers in the Middle East and north Africa to seek supplies from further afield and so increasing demand for freight. The rate for a transatlantic grain-carrying Panamax vessel is up 17.5 per cent since the start of August at $26,800 a day.

At the same time, purchases of iron ore by Chinese steelmakers – the main driver of rates for Capesize vessels, the largest bulk carrier – have picked up after grinding to a halt earlier in the summer.

Daniel Brebner, analyst at Deutsche Bank, said: “Our traders are seeing significant Chinese buying and shipping queues are rising again.”

Capesize rates have doubled in less than a month, while benchmark spot iron ore prices – 62 per cent iron content – have risen 25 per cent since mid-July to $147.50 a tonne.

Traders expect a seasonal increase in demand for ore and grain shipments to boost freight rates into the fourth quarter. Russia’s export ban has put pressure on the US to supply food and feed grains.

Peter Norfolk, research director at Freight Investor Services, a broker, said any congestion later in the year as US ports attempt to export bumper crops of wheat, soyabeans and corn at the same time could push the BDI higher. “If you do get these short-term pressures on the logistics, that could be another bullish factor,” he said.

Elsewhere, ICE December Arabica coffee surged to a fresh 12-year high of $1.8865 a pound before falling back to $1.8330, down 0.95 per cent on the day. Nymex October West Texas Intermediate crude oil fell 72 cents to settle at $73.10 a barrel.

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