Despite Global Demand Concerns, Freight Charges Climb Across Major Trade Routes

In the US market, Freight charges surged this week in August as the expenses related to Freight are continuing their upward trajectory due to supply disruptions. The low water levels in the Mississippi River and the ongoing backlog of ships in the Panama Canal have contributed to increased transportation costs. On the other hand, the Chinese economy has followed the opposite trend as the economic outlook has become increasingly bleak, with the Central Bank unexpectedly reducing interest rates last week.

The North American East Coast to North Europe Freight charges have increased by 3% (during the last week of August 2023) from the previous week, while North America to the West Coast of China increased by 2%. Low water levels in the Mississippi River in the United States are causing concerns for the country's Gulf export center, a crucial source of export goods. The water levels are historically low for August and September, and weather forecasts predicting dry conditions in the upcoming weeks are exacerbating worries. This is contributing to a significant increase in barge transportation costs since the end of last week.

The primary driver behind the rising barge transportation costs is the fear among Freight sellers that water levels may continue to decrease, especially with the forecast indicating dry conditions for most of the Midwest in the first half of September. This situation in the Mississippi barge market can potentially undermine US Gulf exports' competitiveness in terms of FOB and CFR pricing, as higher costs are ultimately passed down the supply chain.

The recent surge in transportation costs is due to disruptions caused by low water levels, which posed significant challenges to US exporters during last year's peak export season. Concerns about low water levels in the Mississippi and disruptions in the Panama Canal due to low water levels could also negatively impact US Gulf exports, potentially leading businesses to consider shifting their operations to Brazil or the US Pacific Northwest (PNW) hub.

If barge Freight rates continue to rise, it could significantly increase the shipping expenses for commodities originating from the Gulf region. Additionally, the ongoing issue of low water levels in the Panama Canal, where waiting times have reached an average of 21 days, adds to the challenges and may further impede the competitiveness of US Gulf exports.

Conversely, a weakening Chinese economy could put downward pressure on Freight rates in the months ahead. The economic outlook has become increasingly bleak, with the Central Bank unexpectedly reducing interest rates last week in response to a deteriorating property market, declining confidence, and rising unemployment. This downward pressure on rates was already evident in the coal shipments from Indonesia to China, and its effects are likely to extend in the coming months.

Seaborne iron ore prices, an important economic indicator, have not yet followed the downward trend seen in coal prices but have fluctuated in recent months due to mixed economic data and expectations of government stimulus. If the economy weakens, especially in the property sector, it could impact the shipments of these key commodities and, consequently, Freight rates.

As per ChemAnalyst, the Freight rates are anticipated to rise amid the expected surge in global demand, and drought may impact water levels in the Panama Canal. Furthermore, as economies recover from inflationary pressures, a worldwide surge in buying activities is expected. With increased demand, shipping companies might face challenges in offering sufficient cargo space.