Australian agriculture is export dominated. The majority of our value will be sent to overseas markets, and conversely, most of our inputs will be imported. We, therefore, have a significant reliance on seaborne logistics.

Global supply chains have been highly efficient for the past fifty years, with “just-in-time management” allowing consumers access to the products they require when they require them. This all changed in 2020 with the COVID-19 outbreak.

Containers

The chart below shows the freight rates as of August for some of the major routes around the world versus the same time one and two years previously.

Container rates have fallen significantly from the same period last year. They remain extremely high compared to two years ago for many major routes.

Let’s delve deeper into the numbers.

In life, all is not equal. The same applies to freight and routing. There is a big difference in freight rates and whether they are into or out of China.

The chart below shows the average cost of containers going to or leaving China. China has always had a premium in the longer term. In the past two years, it has gone into the stratosphere.

This has been due to the demand for trinkets and gizmos from the manufacturing plants in China, as the world struggled through continual lockdowns.

It all comes down to supply and demand. There was a huge demand for movements from China, but less from around the world to China.

Container rates are still high globally but are showing some downward movement. What is the big driver? Inflation is starting to hit hard around the world, there is the beginning of reduced consumer spending, which causes a fall in demand for the trinkets and gizmos previously mentioned.

There is the old adage of “high prices are the cure for high prices”. The freight rates of the past two years are unsustainable, but shipping companies are still making big money at current levels.

If, as many predict, a major downturn is on the cards then we will see container rates fall. This will be beneficial for reducing the cost of our exports. On the flip side, it may reduce the demand for those exports.

Bulk Freight

Australia is massively reliant on bulk vessels. We export most of our big commodities in bulk, iron ore, coal and grains. We also import the majority of our fertilizer in bulk.

The price of bulk freight has a significant impact on our competitiveness. Let’s look at what has happened.

The Baltic Dry Index (BDI) is used to show the trend in bulk freight costs. The BDI has been following a similar trend to last year and is sitting above the typically expected range experienced over the past 12 years.

The cost of bulk freight has however diverged from the pattern experienced last year, when freight costs continued to increase into the second half of the year.

Iron ore is one of the largest commodities moved in bulk, and we see a correlation between price movements of ore and the BDI. When iron ore prices rise, we tend to see an increase in the BDI and vice-versa. The chart below shows the relationship between the two when iron ore is lagged for four periods.

If this relationship maintains, we may start to see bulk freight rates begin to decline over the coming weeks, based on the current weakness.

Freight as a leading indicator

While the freight indexes provide an insight into the cost of moving goods worldwide in bulk and containers, the cost of freight has a secondary and potentially more important purpose  – as a lead economic indicator.

As mentioned previously, the BDI represents bulk cargoes, which typically require further processing. A good example is iron ore, which is shipped to other nations to produce steel. Demand for steel is typically tied to construction.

A higher BDI signifies increased demand for bulk vessels and as a proxy for the materials which they transport.

Therefore, a higher BDI points to an indication of future economic growth and vice versa.

This can be seen in the early 2000s during the commodities boom. During this period of accelerated economic growth there was a massive demand for bulk carriers which drove the BDI to a record 11793.

This boom was followed by a bust, as the global economy went into slowdown.

A slowdown in the global economy would likely see iron ore demand fall, especially in the event of a Chinese slowdown.

During the global financial crisis of the late 2000s, Australia was cushioned by strong demand for Australian commodities by China as they went through a growth phase.

The current environment may not see the same protection offered if the economy slows down.

This article first appeared in Agribusiness Australia. Data visualisation provided by Thomas Elder Markets.