Ocean Freigh Rates High, But Still Below Three Year Mid-Point

Consultant believes rates will soften in time, but no one knows just when.

Ocean freight rates hit a new high for the year last week, running approximately $45.58/metric ton from the U.S. Gulf to Japan and about $33.59/ton between the Pacific Northwest and Japan.

Higher fuel costs are only part of the recent increases as Chinese demand for steel and iron ore continues. Despite the $1-$1.50 increase last week, rates are still below the three year mid-point of $53.36/ton.

"It is difficult, if not impossible, to predict where things will go from here," says Jay O'Neil, U.S. Grains Council consultant. "A month ago, I thought rates would begin to decline, but they have climbed higher. I believe the rates will soften in time, but no one knows just when."

High expectations in the freight futures market have been leading the values in physical market. According to O'Neil, freight futures are currently about $1.50-$2.00/ton higher than the current Panamax physical market in the U.S. Gulf to Japan route.

"Some industry analysts have tried to tie the higher markets to increased demand from China and other logistical factors," O'Neil adds. "Frankly I haven't heard any physical rationale for things to have rallied this far, this fast. I have to believe that much of the run up has been on emotion and hype in the paper markets and I do not see how this can sustain the market much longer."

Although annual low freight rates occurred in August and September in both 2003 and 2005, O'Neil predicts the low for 2006 was set in January when ocean freight from the U.S. Gulf was $32.30/ton and $22.84/ton from the PNW.

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