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| At the macro level, the rise in ocean freight, like the rise in the cost of any other mode of transport, will lead to inflation and push up cost of operations and products.
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| Analysts said the increase in commodity and freight prices would have a positive impact on producers with captive raw material supplies, with no impact on refiners and adverse implications for import-based marketing companies.
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| With demand for vessels outstripping availability, the Baltic Freight Index (BFI), which represents dry bulk freight rates for iron ore, coal, grain and other commodities, is currently at a 10-year high and continues to rise further.
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| Demand has been strong for nearly a year now. Major projects, like the one being set up through a joint venture between Baoshan Steel and Hamersley Iron, and a project by CVRD in Brazil, have led to increased demand in the related sectors.
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| Analysts said freight rates was pushed up by the surge in iron ore imported by China, which rose by more than 30million tons in 2003. At the same time, ton miles (tn/km) went up as shipments between Brazil and China rose sharply.
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| There was also displacement of coal cargo from Capesize to Panamax carriers because of high utilisation of Capesize vessels for coal.
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| Some analysts have also attributed the freight rise to what is called the fifth survey tonnage theory, which pointed to a rise in freight after a higher than average number of vessels were withdrawn from the market.
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| Adding to the pressure of higher imports of coal by US and Europe was higher grain imports by Europe, a report by a foreign brokerage house has pointed out.
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| Analysts have warned that steel prices may go up further as the cost of shipping steel seemed poised for a rise. The demand supply mismatch was the highest in the dry bulk carrier segment and soaring freight rates appeared inevitable.
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| The implication for Indian companies was clear. If Asian steel prices rose on the back of higher marine transportation cost, blast furnace based producers such as Tata Steel and Sail would gain as they operated plants linked by land based transport modes to captive iron ore mines.
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| In contrast, many Asian steel plants were shore based and dependant on ore and other consumables being brought in by ships.
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| Grasim and other sponge iron producers were also likely to benefit as Indian selling prices were linked to global scrap prices.
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| Higher freight charges would push up scrap prices, permitting landbased producers to charge more for sponge iron prices.
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| Indian iron ore exporters such as National Mineral Development Corporation (NMDC) and Sesa Goa could hope to gain partially because they were closer to Chinese ports than competing suppliers from for example Brazil.
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| Iron ore freight in the Brazil-China sector has increased to more than US$30/tonne, the highest ever, from US$15-16/tonne at the beginning of 2003. The cost of shipping ore from Brazil to China was today more than the cost of ore itself.
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| This was expected to drive up demand for Indian ore significantly. If Indian ore producers were permitted to increase exports, there could be significant gains in volume terms on spot sales of iron ore.
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| In the case of oil and petrochemicals, analysts pointed out that transportation cost had shot up, particularly in the very large crude carrier (VLCC ) segment.
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| If firm prices continued for another six months, the impact for refiners would be around Rs 2.5-4 billion in additional costs.
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| Analysts said pure refiners would not feel the pinch as they would get tariff-adjusted prices for their products.
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| However, marketing companies would have to absorb part of the higher freight cost. However, ONGC is likely to benefit, as its crude price was linked to import parity prices. |
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