Trade Battle Looks Set to Roil Container Shipping
Date: Wednesday, May 15, 2019
Source: The Wall Street Journal
Latest round in the escalating U.S.-China tariff fight targets consumer goods at the heart of the shipping sector
The escalating U.S.-China tariff tensions could curtail growth in trans-Pacific seaborne trade this year if no settlement is reached, and container ships that carry consumer goods likely will be directly affected.
Jonathan Roach, a container analyst at London-based shipbroker Braemar ACM, expects demand growth in the sector to be reduced to around 2% this year from 4.5% in 2018, hitting the finances of carriers that are still trying to recover from a steep downturn.
“The increase in tariffs from 10% to 25% on Chinese products to the U.S. could severely reduce current and future growth on the trans-Pacific trade and immediately create significant overcapacity of ships in the water,” Mr. Roach said.
The higher levies the Trump administration plans to impose on Chinese products starting June 1 include finished electronics, furniture and a host of other retail goods that move on the world’s big container vessels. Other parts of the shipping industry such as dry-bulk carriers and tanker operators will be hit less as China will continue to import products like grain and crude oil from countries other than the U.S.
Mr. Roach said if the U.S.-China dispute continues over the long term, container operators may curtail purchases of the ultralarge boxships that have taken over major trade lanes.
The potential for reduced trade comes at a volatile period for shipping operators. Global economic growth has been slowing even as the U.S. economy has expanded at a strong pace, and fuel prices that have been spiking upward are expected to grow even faster as new low-emissions rules take hold at the start of 2020.
Chinese shipping executives say they have withdrawn some container capacity since the first round of tariffs were introduced last summer. “The business is still there, though clients would shift sourcing of goods from China to elsewhere in the region due to the tariffs,” one executive said. “Liners will continue to adjust their capacity on the U.S.-China trade accordingly.”
That earlier round of tariff increases prompted a surge in U.S. imports late last year as companies rushed to get goods into North America ahead of potential new levies. Pulling forward the purchases left many companies with bulging inventories, and shipping volumes more recently have receded.
U.S. container import volumes into the West Coast fell 0.5% in the first quarter from a year ago, according to BIMCO Informatique A/S, a shipping industry group, while exports from those ports most exposed to trans-Pacific trade fell 18% in the same period.
“The only upside may come from additional goods being imported ahead of the June 1 deadline, but U.S. importers are pretty well stocked up as they tried to minimize the impact from the previous round of tariffs, leaving little room for upside,” said Peter Sand, BIMCO’s chief shipping analyst.
Container operators said the existing tariffs had a small impact on their trans-Pacific business so far.
“It is too early to foretell how this will evolve, but we hope that there will be an agreement soon, as nobody benefits from trade restrictions,” said Tim Seifert, a spokesman for German container major Hapag-Lloyd AG .
Operators of tankers and of the bulk carriers that haul industrial raw materials, grains and other commodities may see trade flows shift direction but won’t see business diminish as long as Chinese demand holds up.
Crude oil isn’t on the tariffs list, but China imports of U.S. crude have dwindled to close to zero, according to BIMCO, as Beijing has bought oil from other sources.
The burgeoning U.S. liquefied natural gas export trade may be more affected. China said on Monday it would raise tariffs on LNG imports from the U.S. to 25% from 10%. China had been the third biggest importer of U.S. LNG since early 2016, but so far this year it has dropped to No. 17, according to LNG brokers.
“We’ve seen only three U.S. shipments of LNG so far this year, compared to 15 in the first four months of last year,” a Singapore broker said.
U.S. gas exporters such as Cheniere Energy Inc. are looking to other markets to fill the void.
U.S. agricultural exports and forest products, which mostly move on dry bulk ships, are a big component of the list of Chinese tariffed items.
Peter Friedmann, executive director of the Washington-based Agriculture Transportation Coalition, which represents exporting farmers, said the Chinese tariffs are “a significant hit,” but the damage is still being quantified.
He said China has replaced the U.S. with Brazil for soybean imports but other products such as hay, almonds and nuts are difficult to source elsewhere, so he expects Chinese importers to continue buying from the U.S. despite the levies.