International freight rates have increased over H1 2010 due to reduced transport capacity and increased freight demand, a trend that has been reflected in upswings in price indices such as the Baltic Dry Index and Danske Bank's European Freight Forwarding Index. However, forecasted overcapacity and sluggish growth in freight volumes are expected to reduce rates in H2 2010.
Freight volumes rebounded in 2010, with the strongest recoveries being seen in North America and Asia Pacific. Various macroeconomic indicators have registered an upswing, confirming that economic activity has been in traction. According to the World Trade Organization, merchandise exports grew by 7% in Q2 2010 compared to Q1, primarily driven by the resumption of industrial activity and global trade, and the restocking of inventory. JPMorgan Global Manufacturing PMI has also signaled a recovery in global manufacturing by registering consecutive monthly growth since July 2009. However, the rate of expansion is expected to ease slightly due to the slower recovery seen in Europe and Japan.
Augmented international trade and manufacturing activities in H1 2010 have triggered increased demand for transportation services. However, with carriers maintaining their post-crisis reduced capacity and cautiously investing in new fleet, an imbalance in the demand and supply of transportation services has been created, thus leading to a hike in freight prices. In addition, labor and diesel costs have also fueled price hikes, although these factors have had less of an effect.
Price indices such as the Baltic Dry Index (BDI) have shown an upswing, reflecting these freight rate hikes; for example, the BDI rose by 67% in August, after reaching its lowest levels in early 2009. This rise has been instigated by the increasing global consumption of food grains and the resurging demand for iron and coal from the US, Europe, China and India.
Similarly, Danske Bank's European Freight Forwarding Index also rose to 61 against a level of 50 recorded in August 2009. The index is expected to reach a level of 74, displaying signs of stronger recovery in freight volumes in Q3 2010. In addition, European road transport prices increased by almost 14% in Q2 2010 compared to Q1 2010, with the price reaching pre-crisis levels.
However, in Q3 2010, freight rates have started sliding due to the introduction of additional fleet and services to cater for the growing economic activity. Furthermore, freight volumes are expected to decelerate due to slower recovery in demand and manufacturing activity during the rest of the year. This, in turn, is expected to create overcapacity in the market, thus bringing down the freight rates in the second half of 2010. This has already been seen in some markets; for example, the Shanghai Containerized Freight Index indicated that the overall index for 15 routes from Shanghai declined by 27.7 points compared to the week before, while according to the Drewry Air Freight Price Index, the average air freight prices out of Asia declined by 10.1% in July 2010, marking the second consecutive monthly decline in the past year.