Freight costs drop sharply

THIS year’s sharp fall in sea freight costs is a mixed blessing for developing countries, making it cheaper to ship their exports but signalling waning demand for their goods, a United Nations agency said recently.

And the fall in demand for shipping from recent record levels spells trouble for countries like China, South Korea and Vietnam that have built up shipbuilding industries, the UN Conference on Trade and Development (UNCTAD) said.

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Demand for shipping hit a record high earlier this year in a global boom that saw prices of food and fuel soar. The financial crisis has punctured that boom and demand is down.

The Baltic Exchange Dry Index which measures the cost of moving raw materials by sea, has plummeted more than 11 fold to an eight-year low since peaking in May this year at 11,793, UNCTAD said in its 2008 Review of Maritime Transport.

The index, a composite of shipping prices for various dry bulk products such as iron ore, grain, and coal, closed on Monday at 827, a level last seen in February 1999.

“This shows that the unfolding financial crisis has spread to international trade with negative implications for developing countries, especially those dependent on commodities,” UNCTAD said.

Economists point out that freight charges can be a more significant barrier to trade than tariffs are, so a fall in shipping costs should be good news for exporters, especially as bulk commodities are more sensitive to transport costs.

UNCTAD noted that both exporters and importers of food and other commodities were benefiting from the lower freight costs, which also eased inflationary pressures.

But a rapidly falling index also reflected reduced demand for shipping services and the commodities they transported, negatively affecting many developing countries, it said.

International seaborne trade rose 4.8% to surpass a record eight billion tonnes in 2007, while demand for shipping services jumped 4.7% to 32.93 trillion tonne miles.

World container throughput rose 11.7% to 385 million twenty-foot equivalent units (TEU) a measure of containerised cargo equal to a standard 20-foot container.

”However, port investment, will now be curtailed until the international trade flow situation becomes clear,” UNCTAD said.

Trade experts say that investment in ports and similar infrastructure is vital for developing countries to help them take advantage of more open trade conditions.

The total capacity of the world’s merchant fleet had grown to a record 1.12 billion deadweight tonnes by early 2008, with record orders for 10,053 ships with further capacity of 495 deadweight tonnes on the books, UNCTAD said.

By the middle of this year some of these orders were being cancelled, hurting major shipbuilding nations, it said.

UNCTAD added that the collapse in shipping rates could force operators to scrap older vessels. That would put further downward pressure on steel prices but boost employment in ship-breaking nations such as Bangladesh and Pakistan.

Source: Star Online