Global sea freight rates are on the rise - with the Baltic Dry Index (BDI) posting its largest ever weekly gain last week, underpinned by a rebound in global commodities trading.
The index affords a glimpse into the future by providing a real-time indicator of global demand for commodities and raw materials.
The 35-year-old index is issued daily by the London-based Baltic Exchange and is a composite of the time charter averages for Capsize, Panamax and Supramax vessels used to ferry commodities such as coal, iron ore and grains.
It is a measure of the correlation between the supply of large bulk cargo ships and the demand to use those ships on 20 of the world's busiest dry bulk shipping routes.
In March 2018, the BDI vessel ratios were re-weighted to 40 per cent Capsize and 30 per cent for both Panamax and Supramax. Handysize vessels were excluded.
The index climbed a modest 1.8 per cent, or 28 points, last Friday to cap a record weekly gain of 68.5 per cent and it closed at a six-month high of 1555 points (see Figure 1).
It has soared almost 300 per cent since the low of 393 points set on May 14, in the wake of a halt in global trade due to coronavirus lockdowns.
A revival in iron ore demand from Chinese steelmakers, coupled with increased production and exports of iron ore from Brazil, are the key drivers of the recent strength in the index.
China's crude steel output hit a record high in May and iron ore inventories have dropped steadily in June to under 108 million tonnes, the lowest level since October 2016.
The length of the BDI rally will most likely depend on how resolutely China replenishes depleted raw material stocks, as well as the ongoing COVID-19 recovery and government stimulus activity across the globe.
The worst of the impacts on trade appears to have passed, and the gradual reopening of economies will boost the dry bulk market.
The Panamax index, which is the vessel size most relevant to the global grains market, increased 61 points - or 5.5 per cent - last Friday to close at 1178 points. This index surged 38.3 per cent last week, its biggest weekly rise since July 2014.
Average daily earnings for Panamax vessels, which usually carry cargoes of about 60,000 to 70,000 tonnes, rose US$2,934 across the week to close at US$10,598 on Friday.
And it is not only iron ore on China's shopping list.
China is quietly buying-up soybeans in astounding quantities. It has sucked Brazil dry in a little over three months of marketing and is now turning to the United States.
Official export data suggests Brazil shipped almost 31 million tonnes of soybeans in April and May, with 22.2 million tonnes of that going to China. This is about 66 per cent more than in the same period in 2019.
And it appears that this may be more than restocking.
There have been persistent market rumours that China is seeking to double the size of its bean reserve, from an estimated seven million tonnes in recent years to 14 million tonnes - or even 15 million tonnes.
With a weekly crush of more than two million tonnes, the current stockpile doesn't buy China much security if something happened to interrupt the soybean pipeline.
The trade war has demonstrated that the supply chain can be disrupted, not only by natural causes such as drought and flood, but also by political issues. Add a global pandemic, and China is rightly concerned.
It is in the interests of the Middle Kingdom to increase its reserves, and that is precisely what appears to be happening at the moment.
China reportedly pledged to ramp-up buying of US agricultural commodities after the Hawaii summit last week between the US Secretary of State and the Chinese Foreign Minister.
Rumours suggest that, in addition to soybeans, Beijing will grant quotas for five million tonnes of corn and three million tonnes of wheat in the near future.
The rise in sea freight rates was evident last week when the result of the latest Egyptian (GASC) wheat tender was announced.
On June 10, GASC purchased 120,000 tonnes of Russian wheat for mid-July delivery with a freight rate of US$10.
Last week, it purchased 240,000 tonnes for late July-early August delivery - 50 per cent of which was Russian origin, with an average freight rate almost 20 per cent higher at US$11.82.
And that business was put on before last week's surge in sea freight values.
This is certainly the type of market where getting the consumptive business on the books and going short on the freight could get very messy.
On the other hand, higher sea freight rates tend to increase the competitiveness of Australian agricultural exports into Asia.
The sailing time from key origins, such as the Black Sea region, the US, Canada and Argentina, is much more than the sailing time from Australia.
If winter crop production prospects remain buoyant here in Australia, and the sea freight rally is sustained, it could provide a welcome boost to the prospects of rebuilding export relationships and supply pathways into critical Asian markets late this year and in the first half of 2021.
The story Australian grain may be more competitive in Asia as global shipping costs rally first appeared on Farm Online.