Uncertain times for transpacific traders and carriers

Date: Tuesday, May 28, 2019
Source: Lloyd's List

Ocean freight demand growth prospects have significantly weakened in the last few weeks due to the new uncertainty created by the revival of the US-China trade war, Drewry highlighted

Ocean freight’s demand growth prospects on the transpacific have significantly weakened in the last few weeks due to the new uncertainty created by the revival of the US-China trade war, container shipping analyst Drewry highlighted today.

It said “the naïve hope” that the US-China trade war was over had quickly vanished, leaving “an unpredictable situation for carriers” in the Asia-North America trade – and for the cargo owners and logistics companies whose cargo fills their ships, who Drewry believes may engage in a further round of front-loading or “trade substitution” in order to avoid paying new higher tariffs.

Drewry noted that “it had seemed that the flames of the trade war between the US and China were being dowsed following talks between the two sides that promised to deliver an accord, only for that cosy assumption to be shattered on 5 May when President Donald Trump took to social media”.

Frustrated by a perceived lack of progress, Trump announced that all existing tariffs would almost immediately be set at 25%  – effectively raising the second tranche of around $200 billion of Chinese goods that were originally pegged at 10%, whereas the first tranche of $50 billion was already set at 25%  –  while also preparing the ground for all so-far untouched goods to get the same treatment, Drewry noted.

“If the ratcheting up of tariffs is simply a negotiating tactic by President Trump designed to speed up a deal, it is an extremely bold move and one that seems unlikely to succeed judging by the feisty soundings coming out of Beijing,” Drewry observed. “As other commentators have noted, the quarrelling between the two largest economies is less about trade and more a full-blown power struggle for world hegemony. Given the high stakes, it is hard to see either side backing down, making it far more likely that the situation will worsen.”

It added: “Carriers and cargo owners are caught in the cross-hairs, the unpredictability making it almost impossible to second-guess the best approach to minimise the damage. Shipping lines operating in the transpacific fared well out of the chaos last year as, despite some operational challenges, they benefited from rapidly escalating freight rates as shipments were front-loaded to beat tariff deadlines.

“It is unlikely they will be beneficiaries this time around. Containerised goods were less exposed to the extra duties last year, mostly residing in the second tranche at 10% and virtually offset by a devaluation of the Chinese currency, meaning that demand for Chinese goods moved in containers continued to rise. That would not be the case if the tariff blanket rises to 25% for all goods; some reduction in demand has to follow.”

Drewry observed that in April, Maersk Line CEO Soren Skou had said that his company foresees the new tariffs dragging global container growth down by as much as one percentage point. Based on previous impact analysis, Drewry calculates that a 10% increase in US import prices of goods from China results in a 6% decline in teu volume from China to the US over time, holding all other factors constant. “With tariffs of 25% the potential teu contraction would be around 15% for that leg alone,” Drewry noted. 

Other logistics observers have highlighted that tariffs are based on the wholesale import value of goods, not on their ultimate retail value, with some US retail experts indicating that a 25% tariff may only result in an increase in effective retail prices or perhaps 2-3%.  

Drewry noted that that “if exporting directly from China becomes uncomfortably expensive for the US importer, they may consider re-routing products through Taiwan, Vietnam or some other place where final assembly could take place. These goods could then be shipped to the US, avoiding the tariffs. 

“Therefore, some trade substitution will keep a portion of the trade within the Transpacific market, but these far smaller markets cannot replicate what China does quickly or cheaply.” Drewry said it will provide a more in-depth impact assessment in the upcoming Container Forecaster report, to be published at the end of June.

Focusing on the Asia to East Coast North America trade, Drewry noted that the effects of last year’s pre-tariff pre-loading had fallen away rapidly in the first quarter (Q1) of this year, commenting: “The heady, tariff-induced days of late 2018 in the Asia to East Coast North America trade quickly evaporated in 1Q19 as volume growth shrank to 3.6% year-on-year, down from the stellar 4Q18 performance of 18.1%. 

“However, more recent US-only data from PIERS shows that demand rebounded very positively in April, with shipments to the US East Coast alone rising by nearly 20% year-on-year. It would appear that more shippers are returning to the all-water option with volume growth to the US West Coast falling by around 2%, y/y, in April.

“Demand weakness in February and March sent the rolling 12-month average on a tailspin, but the early indications suggest that it will right itself when April’s data is fed in.”

Drewry said it appears that lines had responded appropriately to these patterns in recent weeks, noting: “Having kept capacity broadly flat in the early months of 2019, it seems that carriers had a good idea that the trade would rebound as the available eastbound slots was pumped up by 8% in May, although in most cases this was simply the result of missed voyages returning to service.” 

Drewry continued: “It remains to be seen how carriers will react to the tariff situation, but they will be wary of how average ship utilisation fell during 1Q19 and the impact it had on spot rates that dropped to their lowest point since June 2018 in March. Having been in a position where ships were full at the turn of the year, by March load factors were hovering around 85%.

“The mini-recovery in rates in April that has mostly held during May indicates that ships are fuller now, but we expect that carriers will be considering some capacity retrenchment to counter potential lost traffic as a result of the trade war.”

Drewry concluded: “Demand growth prospects in the transpacific are significantly weaker than they were a few weeks ago. Carriers will be debating whether to draw back on capacity needs as we speak.”

The observations from Drewry are broadly in line with those from Maritime Strategies International (MSI) reported last week in Lloyd’s Loading List . MSI noted that transpacific container shipping volumes could see a sustained period of weak growth, volatility and uncertainty as the US-China trade war escalates.

 “The sudden and severe escalation in the US-China trade conflict has placed the containership industry under a cloud,” said the analyst’s latest monthly report. “Goods that constitute around half of US containerised imports from China now face 25% tariffs, with the near-remainder of US imports also facing the prospect of 25% tariffs.”

MSI said that while frontloading to avoid potential new tariffs and some success in relocating production would offset some of the negative impacts of the US-China trade war, it predicted “the transpacific is heading for a period of pronounced negative growth” which would put spot freight markets under pressure.

“Other trade-lanes will be relatively unaffected unless the escalation creates wider economic contagion,” MSI added. “The time-charter market will be affected if liners adopt a more cautious approach to taking on new tonnage, and perhaps through redeployed tonnage if Transpacific loops are withdrawn. But in the near-term the impact should be manageable.”

 

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