By John Kemp

 

LONDON, May 29 (Reuters) - Freight rates continue to rise sharply, on Thursday reaching the highest level since Sept. 2008, led by strong increases for the largest Capesize bulk carriers on the coal and iron ore routes from Brazil (C3) and Australia (C5) to China.

 

The cost to charter a Capesize vessel to carry iron ore from Brazil to China has risen 275 percent from $9.30 to $34.938 per tonne since the start of the year.

 

While rates are still far below levels experienced during the boom years of 2003-2008, they are high compared with the more modest standards of the previous decade.

 

The Baltic Exchange's main sea freight index, which remained below 2,000 points for most of the time between 1985 and 2003, hit 3,298 points on Thursday

.

* http://graphics.thomsonreuters.com/ce-insight/BALTIC-DRY-FREIGHT-INDEX.pdf

 

* http://graphics.thomsonreuters.com/ce-insight/BALTIC-INDEX-HISTORY.pdf

 

The rise is being driven by record iron ore imports into China and lengthening vessel queues off its east coast ports.

 

China has been importing huge volumes of ore since February, with volumes hitting a new peak of 57 million tonnes in April, up 33 percent from year-ago levels. Strong inflows are expected to continue in the near term with high forecast arrivals in both May and June

(http://graphics.thomsonreuters.com/059/CN_IRNORE0509.jpg).

 

But the country's ports are struggling to cope. There is growing congestion around the main unloading terminals at Tianjin, Qingdao and Rizhao on the north-east coast serving the country's steelmaking heartland on the Shandong peninsula.

 

Some 80 Capesize carriers are now queued off the coast waiting to unload, up from 34 in mid-March, absorbing almost 10 percent of the world Capesize fleet.

 

Queues are lengthening at the other end of the supply chain as well. The number of vessels of all classes waiting outside Australia's giant Newcastle coal loading terminal has swelled from 15 in the middle of February to 35. Port Waratah Coal Services (PWCS), which operates Newcastle, has cut loading allocations in a bid to ease congestion and reduce the queue, which is costing users a fortune in demurrage (late penalities).

 

The run up in freight rates is a sign of the continued resilience of China's economy, especially the heavy industrial sector, as stimulus spending on infrastructure offsets some of the loss in exports, as well as problems hitting domestic ore production.

 

As ore prices fall, China's high cost mines, which produce a relatively low-grade ore, are struggling to compete with lower-cost competitors in Australia and Brazil. The fall in global ore prices, which favours overseas production, is being partly offset by a rise in carriage costs.

 

But there are good reasons to think record ore imports, and the strength in freight rates, will not prove sustainable.

 

Inventories at the main ports have risen almost 30 percent from 58 million tonnes to 75 million tonnes over the last three months. Stocks at the two largest ports on the Shandong peninsula are close to maximum capacity.

 

Volumes will have to slacken at some point this summer, and when they do, freight rates will fall back. (Edited by David Evans)