Shipping Rates Triple

Jon Flanders jonathan.flanders at
Tue Nov 4 13:42:49 MST 2003

A Surge in Ocean-Shipping Rates
 Could Increase Consumer Prices


 A recent surge in ocean-shipping rates to their highest levels in
decades is adding upward pressure on already rising commodity prices
that could push up the cost of imported goods in the U.S. and other

 With the demand for seafaring vessels far outstripping supply, the cost
of shipping iron ore, soybeans, coal and other commodities used in the
 manufacture of a wide range of goods has nearly tripled this year. The
 Baltic Dry Index, the key industry indicator for commodity freight
rates, has doubled in just the last two months. Industry officials say
there are no signs of relief on the horizon in terms of lower prices or
additional supplies of vessels.

 China's surging economy is creating a huge demand for ships to import
the basic raw materials the country needs to build infrastructure,
supply its massive manufacturing sector and satisfy a growing consumer
market. As more ships go to China, fewer are available to ferry goods
between other countries, causing a supply shortage that helps to boost

 Compounding the squeeze, shrinking mining industries in the Americas
and Europe have increased those regions' imports of coal, while the
summer drought in Europe is boosting grain shipments from the U.S.

 "We are at a price spike that has never been seen before, the
highest-rate market of all time," said Tom Cutler, a shipping analyst
for Clarksons, a big London-based shipbroker. "It has caused a total
disruption in the way that ships are being positioned." Clarksons has
kept records on shipping rates for about 30 years.

 Economists say the high shipping rates could be felt by consumers
within months. The impact will come in the form of higher prices on
goods made of steel, aluminum and other metals, and on certain food
products derived from livestock, such as cattle and pigs, that feed on
soybeans, grains and corn.

 Robert Dunn, professor of economics at George Washington University in
 Washington, said the inflationary pressure will be keenest in countries
 that import more than they export, such as the U.S., China and
countries in the European Union. "For products that are heavier and
bulkier, like textiles and metals, the effect on prices would be
larger," as much as 3% next year, Mr. Dunn said. But for lighter items,
such as electronic gadgets, the effect on prices shouldn't be as strong
because transportation costs are less of a factor, he said.

 Already commodity prices are heading higher. Copper is trading on the
 London Metal Exchange at six-year highs of about $2,083 a ton. The cost
 for alumina, the basic ingredient to produce aluminum, has nearly
doubled in the last year. Cotton prices have been trading at near
five-year highs of about 84 cents a pound, in part because of increased
demand from China. The growing use of the world's sea lanes has followed
rising demand from China. This year, China has increased its imports of
iron ore, a basic material to make steel, by nearly 40 million tons, or
33%. Meanwhile, coal exported from China, Indonesia and Australia is
making its way to Europe in strong numbers, up about 35%, according to
industry statistics.

 As Chinese consumers' incomes grow, Brazil, a major supplier of
soybeans, is shipping greater quantities of them to China, where they
are used for animal feed and human food products, such as soybean oil.
 Higher ocean-going freight rates are mainly hitting bulk-shipping
vessels, specialized carriers that transport commodities in their raw
form and which account for about a third of all commercial ocean-going
trade. More than a third of all bulk ships carry iron ore and coal. The
other classes of freight ships are container vessels, which carry
semifinished and finished goods, such as electronic devices and
appliances, and tanker vessels used for oil.

 Although ships come in different sizes and shapes, the current spot
cost to rent a typical bulk ship -- the length of between two and three
 football fields -- to ferry coal or iron ore is about $75,000 a day,
say traders and shipbrokers. That compares with $20,000 to $28,000 a day
in January. About 40% of goods are transported in ships hired on the
spot market. Companies that locked in contracts with ship owners before
the recent price run-up are paying about $30,000 a day, but those prices
are likely to increase as the contracts come up for renewal.

 "It's been outrageous," said Leon Goldenberg, president of Fremak
 Industries Inc., a world-wide metals trading company based in New York.
 "You can't continue to absorb costs when the freight rises higher than
 your profit margin." He said that in some cases his shipping costs have
 risen $10 a ton at a time when his profit margin is only $9 a ton.

 Shippers shouldn't expect newly built vessels to ride in on the waves
to deal with the demand anytime soon, analysts say. The shipbuilding
 business, centered in South Korea, Japan and China, is backed up and
the lead times for taking new deliveries are almost twice as long as
normal. Shipbuilders, the vast majority of which are privately held,
usually jump at the chance to build more ships when demand is so high.
But the world's shipbuilders are busy building new oil tankers to
satisfy more stringent safety requirements called for by European
regulators. Also, previous orders for new container ships have pushed
any new orders for bulk ships to the back of the line. A new ship that
used to take 18 months to two years for completion, now requires as much
as three years for delivery.

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