by Professor Ross Kingwell, AEGIC Chief Economist
Freight rates for bulk shipping seem destined to remain high.
Since the mid-2000s the bulk freight capacity of international shipping has grown strongly (Figure 1), on the back of a huge ship-building program in the period 2006 to 2012 (Figure 2). However, in very recent years new construction of bulk ships as a proportion of the trading fleet has been very low (Figure 2), despite the volume of grain traded globally continuing to grow as has demand for other main bulk commodities (iron ore and coal).
Accompanying the marked reduction in ship construction and the implied constraint on the supply of new ships have been recent COVID-related port closures in China that have created problems of shipping congestion (Figure 3), disrupting sailing schedules and reducing the number of effective sailing days for many ships. Coupled with the growing demand for bulk ships; the outcome has been greater competition among buyers for the reduced service levels from bulk shipping. The end result for grain exporters has been higher costs of sea freight (Figure 4).
The higher costs of bulk freight seem unlikely to dissipate quickly, returning to the lower levels observed in previous years. Although these high rates incentivise the building of more bulk carriers, most shipyards already are busy over the next few years mostly building container ships, not bulk carriers, further reducing the availability of bulk carriers over the next few years. Plus the heightened cost of building a new ship is encouraging many potential bulk carrier investors to wait until economic conditions are even more conducive for ship replacement. Meanwhile, grain exporters face the prospect of high freight rates, relative to recent years; and consumers also face the prospect of higher landed prices for food and feed grains.
Expert grains industry analysis and commentary from AEGIC’s Economics and Market Insight Team on a range of big-picture topics that affect Australia’s export grains sector.