May 7, 2007

 

Rising freight costs delays South Korea's corn purchases

 

 

Skyrocketing freight prices have hampered purchases of South Korean corn importers even though global grain prices have drawn back from multi-year highs.

 

Strong raw material demand from China and India has shipping costs recently hit a record and crippled port congestion at Australian iron ore and coal export terminals.

 

An official at a member company of the Korea Feed Association (KFA) said a dilemma on lower grain futures prices and soaring freight rates pull away importers to enter the market.

 

Prices on the Baltic Exchange's Dry freight index for shipping goods as varied as grains, coal and iron ore on major export routes, rose to 6,276 points on Thursday, after surpassing last week the previous all-time high of 6,208 hit in December 2004.

 

Panamax dry bulk rates, usually for grains, have been up 35 percent so far this year. The freight rate for modern Panamax ships sailing to Asia from the US Gulf Coast jumped to US$73 a tonne from US$55 a tonne in early January, according to shipping brokers.

 

An official at Nonghyup Feed Inc, South Korea's biggest feed maker said the recent drop in corn prices is not enough to counter soaring freight costs as the total importing cost is too steep.

 

Increased demand for corn from the ethanol industry drove corn futures prices to 10-year highs in late February, promoting outlooks for a huge rise in 2007 US corn seedings.

 

Corn futures on the Chicago Board of Trade (CBOT) have fallen about 15 percent since then as US farmers prepare to plant the largest amount of their land to corn since 1944.

 

But offer prices by international grain houses to South Korean feed makers are more than US$230 per tonne including cost and freight, higher than in February.

 

An official at Major Feedmill Group confirmed it could take one to two months for importers to start buying corn again.

 

South Korea's feed makers have not issued any corn tenders since the KFA had failed on April 17 to buy a total of 495,000 tonnes of US corn for October and November due to high freight costs.

 

But shipping analysts said freight rates aren't likely to fall heavily in the coming months due to strong demand.

 

An official at a South Korean shipping company said though freight rates would ease after a strong rally, it would not last long.

 

Investment bank Merrill Lynch also recently predicted high freight prices were here to stay, with only a slowing of global economic growth threatening to sink the freight rally.