Rising freight costs causing headaches for metal firms again, but for how long? LME Week

Amid recent headlines about volatile bunker prices, rampant port congestion and a jump in ocean freight costs, metal market participants might be forgiven for thinking they have returned to 2021

Much like two years ago, stress about freight rates is high on the agenda of Europe-based metal firms with LME Week approaching.

In 2023, the freight cocktail causing the nasty taste in market participants’ mouths has been created by a combination of high oil costs, record Brazilian grain exports and an unprecedented drought in the Panama Canal.

The Baltic Exchange’s main dry bulk sea freight index jumped to its highest level in over 11 months on Tuesday October 3 due to strong demand for capesize ships, while the exchange’s capesize index reached a high not seen in more than nine months on the same day.

Fastmarkets’ average freight rate for a 52,000-tonne vessel sailing from Port Elizabeth in South Africa to Tianjin port in China, with one stop in between, was $29.30 per tonne on September 29, unchanged week on week but up by $6.20 per tonne from $23.10 per tonne on August 4.

Costs for shipping a 20ft container of scrap metal from the United Kingdom with a well-known line rose by $100 per container to the west coast of India in October and by $150 per box to the south and southeast of India, according to a major UK-based exporter source. A second UK-based exporter said their costs from the UK to India rose by $125 per container for October sailing – equivalent to around $5-6 per tonne of ferrous or non-ferrous scrap.

Freight rates for handysize vessels carrying 30,000-32,000 tonnes of ferrous scrap from the US West Coast to Bangladesh were heard around $59-60 per tonne this month, up from $51-52 per tonne two months prior. A Singapore-based trader said they had seen freight increases of “generally 10-20%” in October on the routes they track, which includes trade in bulk from Japan to East Asia.

On the East Coast-Turkey handysize route, ocean freight rates were heard at $35-38 per tonne on Wednesday October 4, which was up sharply from $32-33 per tonne in early September and $22-24 per tonne in August. But the rates were down from above $40 per tonne last week, according to market sources.

The slight decrease in bulk ocean freight rates in the last week follows a drop in oil prices from their peak levels in late September. It begs the question of whether this year’s spike in freight rates in some areas will be short-lived or if it will continue in the coming weeks.

And not all popular scrap trade routes have increased. The Australia-Bangladesh scrap route in containers was heard to be stable with even some downward pressure, due to a lack of container trade coming out of China around Golden Week holidays.

Market impact

Manganese ore producers moving material from South Africa to China said higher freight rates this summer have put miners under further cost pressures, with high supply of the product pushing down ore prices in recent months and adding to already tight profit margins.

However, one manganese ore producer said the elevated freight rates had supported a slight upward movement in market levels in the past two weeks by increasing the cost of production for the material. They added that in late September they had even pulled an offer for a vessel sailing the following month due to costly freight rates.

Fastmarkets’ weekly manganese ore index 37% Mn, cif Tianjin was calculated at $3.58 per dmtu on September 29, up 3 cents per dmtu from $3.55 per dmtu on two weeks earlier.

In ferrous scrap, the rising freight costs mean that selling material on longer-haul routes, such as from the UK to Bangladesh, is becoming more difficult.

Due to the higher freight costs, transactions from the UK to Bangladesh now require a premium of at least $25-28 per tonne over the CIF India scrap price for UK material, according to an Indian seller source. This would make selling material to Bangladesh less likely, the source said.

With the higher freight costs in addition to poor demand in Bangladesh and Pakistan, India has been inundated with offers for containerized scrap over the last few weeks, sources told Fastmarkets, pushing down prices in that market.

Fastmarkets’ calculation of the containerized steel scrap shredded index, import, cfr Nhava Sheva, India was $421.25 per tonne on Tuesday, compared with $425.56 per tonne one week before and $434.50 per tonne two weeks before.

These decreases in export prices, in addition to increased freight costs, have squeezed scrap generators from regions like the UK, meaning there are expectations of lower prices for shredder feed soon, a major UK scrap processor said on Friday September 29.

“[Light iron shredder feed] should have come down with increased freight rates in containers and UK steelworks indicating drops [for the monthly scrap purchase market in] October, however volume is limited and this is keeping prices artificially high,” the processor said.

“The market will need a large downward price correction at some point once stability returns, as [UK light iron] is grossly overpriced at the upper end of the range,” the source added.

Oil costs

Freight rate increases have been underpinned by the rise in oil costs following supply cuts from major producers such as Russia and Saudi Arabia, according to shipbrokers Intermodel.

Brent Crude oil futures rose considerably in recent months, from $71.17 per barrel on June 12 to $93.50 on September 27. Since then, there has been a correction in prices, with the benchmark indicator down to $87.71 per barrel at the end of trading on October 4.

Supply reductions announced by Saudi Arabia and Russia are expected to continue shaping oil prices throughout the year but “the prospect of oil reaching the $100 per barrel mark may be short-lived amidst the current supply constraints and the fragile state of the overall economic environment,” Intermodal said on October 3.

Scrap market participants surveyed by Fastmarkets on Thursday October 5, expected oil prices to remain elevated, and for this to be a major reason for freight rates to remain higher than earlier in the year.

“The only variable in our trading right now is container freight, and we think it will go up again in November. This is due to the oil cost but also because, generally, after the Diwali festival period in India, there is lots of buying activity,” the major UK-based scrap exporter said on Thursday.

Panama Canal drought

Drought in the Panama Canal has also added to issues faced by market participants this summer, raising freight costs further.

An extended dry season over the summer and an El Nino weather event have led to water levels in Gatun Lake, which provides vital freshwater for the country of Panama, as well as the 80 kilometer-long canal, reaching lows not seen since 2016.

Since each vessel transiting the waterway displaces millions of gallons of water from the lake, the canal authority says it has been implementing procedures to save water, including the reduction of the number of vessels passing through the canal.

Vessel congestion, [meaning] less vessels in the market as they are stuck in the canal and can’t deliver goods or offload them and be back in the market to load.

These measures to manage operations and save water in the Panama Canal led to “vessel congestion, [meaning] less vessels in the market as they are stuck in the canal and can’t deliver goods or offload them and be back in the market to load,” a freight source told Fastmarkets.

In September, the average days in queue for a northbound vessel without a reservation peaked at seven days, with a maximum wait of 15.8 days on September 19. Southbound September vessels peaked at an average of seven days, with a maximum of 13.3 days on September 29.

Non-booked Northbound vessels heading towards the Atlantic Ocean had an average waiting time of three days on October 4, while non-booked Southbound vessels en route to the Pacific Ocean had wait times of 5.6 days.

While canal authorities have announced that the number of vessels waiting is now below last year’s level at the same time, Fastmarkets has heard from market participants that the disruption has led to some vessels taking alternate routes with longer lead times to avoid the canal entirely. This can lead to congestion popping up at other places in the world.

Measures will be maintained into and throughout 2024, “unless weather conditions change significantly from current forecasts,” with vessels without reservations mainly impacted, according to the waterway’s authorities.

Soybean exports

Another factor contributing to heightened freight rates due to lesser availability of vessels has been the high demand for Brazilian grain exports, leading to a greater number of vessels needed to fulfill demand.

Soybean exports from Brazil reached 6.4 million tonnes in September, while corn shipments totaled 8.7 million tonnes, both record volumes from the country in that month, Fastmarkets reported on October 3.

Soybean shipments have risen sharply amid huge demand from China and a drought in Argentina, meaning the South American nation has had to supplement its crushing demand with Brazil-origin imports.

Soybean shipments per working day averaged 383,990 tonnes in August, up 48.5% year on year, and corn exports averaged 373,204 tonnes per working day in the same month, up 15.2% from 323,743 tonnes the year before.

Demand for the grain is expected to remain high until the end of the year, with a record number of exports forecast by consultancy firms.

Declan Conway in Galway, Cem Turken in Mugla, and Amy Hinton in Pittsburgh, contributed to this story.

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