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Freight-rate boom could mean smooth sailing for shippers

Ocean freight rates are up as much as threefold on year, and the firmness of pricing could remain and help Korea’s shippers for the rest of 2021.

The Shanghai Containerized Freight Index (SCFI) averaged 999.3 in January 2020. It is now about 2,870 points. Since Oct. 9, the figure has been climbing every week on resumption of manufacturing in China.

“Strong freight rates are projected to persist until China’s New Year holiday in February,” analyst Bang Min-jin from Eugene Investment said. “Even after that, it is possible that strong demand and tight capacity could keep prices firm.”

Demand for ship transportation usually surges ahead of the Lunar New Year holiday because exporters tend to transport products for the long holiday, and the rush pushes up the shipping prices.

Both container shippers and bulk carriers are seen benefitting.

If the demand continues to stay high, lack of containers and congested ports could further drive up freight charges.

Once containers arrive at port, they are delivered to the destination on trucks or by railroad — meaning it takes time to retrieve those containers. The delivery period is longer in countries with vast areas, like the United States and China, where shipping demand is concentrated.

Also, the number of containers a port can process a day is limited, meaning there could be delays in unloading containers even after they arrive at port.

“Since around June last year, relief funds from the United States resulted in skyrocketed overseas purchases, which coincided with China’s resumption of manufacturing activity after its recovery from Covid-19,” said Kim Seong-min, a spokesperson for HMM, Korea’s largest shipper. “Because supply of ships can’t be adjusted in the short term, the sudden surge in demand on the Asia-U.S. route has resulted in a lack of supply for other routes, like Europe, ultimately pulling up the freight rates for all routes.”

Uncertainties in the second half of the year are less of a concern for shippers because they usually renew service contracts in the spring.

As of April last year, the average transportation price signed on a service contract for the Shanghai-West Coast America route was $1,579 per forty-foot equivalent unit (FEU) — a similar level as the previous year, according to Eugene Investment. Recently, the freight charge for the route surged above $4,000, which will likely raise the fixed price for the upcoming annual service contract.

Bang added that this might allow shippers to lock in relatively high rates despite economic uncertainty.

Prices for bulk carriers, which ship unpackaged cargo like grain, coal, ore and steel coil, have also started to climb.

The Baltic Dry Index (BDI), a benchmark index of average prices paid for the transport of dry bulk materials, hit 1,849 Tuesday, up 5 percent from the previous day. It is 35 percent higher than the figure on Dec. 24, the last day the index was measured in 2020.

A total of 5.3 billion tons of bulk cargo is projected to be transported this year, up 3.8 percent from the previous year, according to a report from NH Investment & Securities. The increase in supply of ships, however, is estimated at 1.5 percent.

“The demand for bulk cargo transportation is driven by the increasing price of key raw materials, like coal, iron ore and grain, which is pushing commodity owner demand for transport,” said analyst Jung Yeon-seung from NH Investment & Securities.

A spokesperson for Pan Ocean, a bulk carrier based in Korea, said the rise in freight rates is a seasonal factor.

“Bulk carriers are largely affected by demand from China,” said Jung Jae-yoon from Pan Ocean. “In winter, transportation for grain and coal, which is used as fuel, is frequent. Once China reduces the demand, the freight rates will fall.”
Source: Korea Joongang Daily

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