Shippers Feeling Seasick

March 6, 2009 10:13 AM

At about the same time grain prices crashed last summer, so did rates on oceangoing ships. But the shipping rate bust made the grain market decline look tame.

A ship that cost $86,000/day to rent at the peak in May 2008 dropped as low as $3,600 by late fall, then bumped up above $8,000/day by mid-December, says Ken Eriksen, Informa Economics' senior vice president for transportation. The shipping trade's loss could add up to a short-term positive for U.S. ag exports.

"Shipping costs from Gulf of Mexico ports to Japan are down $70/ton from a year ago," Eriksen says. "With U.S. grain and soybean exports forecast 25% below last year's record, we can hope lower freight will help keep the U.S. competitive on some trade lanes for some commodities.

"Globally, with the economic problems, trade has all but stopped. China is not taking iron ore imports for steel production as it was," he says. "There's a flood of vessels available and cost is a matter of supply and demand."

Adjustments will be made. "Carriers are pulling ships out," says Peter Friedmann, executive director of the Agriculture Transportation Coalition. "We could face reduced ocean capacity just at the time our exports were going to pick back up."

"I don't think these depressed bulk rates will last long," adds Giancarlo Morgera, senior vice president of liner services, Mediterranean Shipping Co. "Carriers will scrap the older fleet that is no longer cost-effective."

Megaships. Long-term, look for big changes in ocean shipping, with the emphasis on "big." Just like bigger tractors, larger ships provide economies of scale. Oceangoing vessels have already grown in recent years, but expect them to get even more monstrously large in the future, advise industry insiders.

That will drive costs lower, says Marc Levinson, a New York-based economist and author of The Box, which examines the development of the containerized freight industry. "The next generation of ships will carry 8,000 40' containers. That's double today's size," he says.

Harbor revisions. Such megaships won't fit into today's harbor facilities. "We'll need to build bigger harbors, bigger and deeper shipping channels, longer docks and bigger container yards. In this sense, size brings dis-economies of scale," Levinson says.

In addition, he says, "megaships will require 30-mile-long trains to unload. Imagine a ship like that coming into port every day. A problem is coming."

Mexico has several big new ports in planning stages, and a widened Panama Canal accommodating bigger ships is scheduled for completion in six years. Those moves could set the table for a North American trade realignment. For one thing, rebuilding the Panama Canal might mean large ships sailing from Asia that now dock on the West Coast could head for Gulf or East Coast ports instead.

Friedmann would like to see the U.S. begin rebuilding port infrastructure now. "There is really nothing in U.S. agriculture that we produce and export that cannot be sourced elsewhere," he says. "We have competition in everything we export."

To contact Charles Johnson, e-mail

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