Rising ocean freight rates signal pressure on consumer prices

Ocean freight rates are expected to rise further in the short term, a new report showed, presenting mixed fortunes for commodity consumers and shipping lines.

Freight rates in all the three main segments — Panamax, Capesize and Handysize — are fast returning to their optimal levels, an outlook report by the UN Conference on Trade and Development(UNCTAD) showed. For instance, the Baltic Exchange Dry Index — a benchmark for dry bulk carriers under all the three categories — averaged about 1,153 points, reaching a peak of 1,619 points in December 2017; the highest level since 2018 when it clocked 2,178 points.

As a result, earnings increased in all fleet segments averaging $10,986 (Sh1.1 million) per day in 2017, an equivalent of a 77 per cent jump from the depressed levels of 2016.

“Reflecting positive trends in demand and management of the supply side, global shipping freight rates improved despite some variations by market segment.

“The overall outlook remains positive in view of improved market fundamentals,” UNCTAD said in its maritime transport review report for 2018. Mombasa port is mainly serviced by Capesize vessels — the largest dry cargo ships which are too large to transit the Suez Canal or Panama Canal and so have to pass either through the Cape of Good Hope or Cape Horn.

The dry bulk carriers handle commodities such as iron ore, clinker, and grain which form a big chunk of Kenya’s imports. The carriers account for the largest share of the world fleet in dead-weight tonnage and the largest share of total cargo carrying capacity, at 42.5 per cent.

They are followed by oil tankers, which carry crude oil and its products and account for 29.2 per cent of total dead-weight tonnage.

The third largest fleet is that of container ships, which account for 13.1 per cent of the total.

The ships carry goods of higher unit value than dry and liquid bulk ships and usually travel at higher speeds, they effectively carry more than half of total seaborne trade by monetary value.

A rise in freight rates in the dry bulk category could impact on consumer prices of Kenya’s key import items such as food, fertiliser and clinker. Kenya’s major food imports include maize, unmilled wheat and wheat flour, rice and sugar, according to the Economic Survey 2018.

An increase in freight costs leads to a marked rise in consumer prices — meaning extra cost for buyers of various imported commodities.

Kenyan consumers bore the brunt of a sharp rises in freight costs about seven years ago following heightened piracy activity off the coast of Somalia.

The peak in piracy attacks came with an additional cost for consumers such as increased insurance premiums, longer freight routes as vessels avoid hot spots, and the additional cost of hiring private armed guards.

The UN agency said that in 2017, the overall global ocean freight rate improved significantly and, with the exception of the tanker market, reached levels above the performances recorded in 2016. The recovery in rates reflected strengthening global demand combined with a deceleration in fleet capacity growth.

“Together, these factors resulted in overall healthier market conditions. Despite the marked improvement, the sustainability of the recovery remains at risk,” UNCTAD said, citing the high volatility and relatively low levels of freight rates as well as the potentially dampening effect of downside risks weighing on the demand side and the risk of inadequate supply capacity management.

“However, it is unlikely that in 2018 the industry will report the healthy profit estimated in 2017; despite the improvements observed in freight rates, the latest increase in fuel prices might affect the profitability of shipping lines,” the report added.

Seaborne trade expanded by four per cent in 2017, the fastest growth in five years, while UNCTAD forecasts similar growth this year, according to its Review of Maritime Transport 2018 report.

Volumes across all segments are set to grow in 2018, with containerised and dry bulk commodities expected to record the fastest growth at the expense of tanker volumes.

“While the prospects for seaborne trade are positive, these are threatened by the outbreak of trade wars and increased inward-looking policies.

“Escalating protectionism and tit-for-tat tariff battles will potentially disrupt the global trading system which underpins demand for maritime transport,” Mukhisa Kituyi, Secretary-General of UNCTAD, however warned.