- Recent weakness in shipping rates sends an ominous signal just as some major economies are starting to stumble and trade tensions are rising.
- Shipping executives fear the trade fight between China and the United States will spread to Europe, weaken manufacturing activity and faltering economic growth in major economies.
- A separate index showed shipping rates late last month from China to the U.S. West Coast at a 48-week low and major containers are cutting their capacity.
- The carriers have also grouped into three shipping alliances that share vessels and port calls to save operating costs.
According to an article published in The Wall Street Journal, Global ship operators that normally begin the summer preparing for peak shipping season instead are bracing for a surge in tariffs.
Surge in tariffs – a cause for concern
Several of the big container lines that carry the household products, furniture, electronics and other consumer goods that fill retail stores have slimmed their capacity in recent weeks. Executives say they are concerned that recent weakness in shipping rates sends an ominous signal just as some major economies are starting to stumble and trade tensions are rising.
“It’s a whole big mess. Volumes are falling and we have to redeploy ships to ports outside China where cargo is not taxed,” the chief operating officer of a large Asian shipping line said of the escalating tariffs.
Increase export fees
China slapped levies on $60 billion worth of U.S. exports at the start of June in retaliation for Washington’s move to boost tariffs on $200 billion of Chinese products. The Trump administration has threatened to tax another $300 billion of China exports and separately to impose tariffs on all imports from Mexico.
Shipping executives fear the trade fight will spread to Europe and add to a troubling global view that includes weakening manufacturing activity and faltering economic growth in major economies.
Escalating tensions can cause a downward spiral
That could trigger a downward spiral in demand for shipping operators still seeking stability as they recover from a downturn that reshaped industry ranks.
The escalating trade tensions couldn’t have come at a worse time. June is the start of a three-month peak season in which shipping companies make most of their annual profits as retailers stock up Asian exports for the year-end holidays and freight rates often jump.
But rates on container shipping’s spot market are falling. The cost to move a container from Shanghai to Los Angeles was $1,262 at the end of May, according to Drewry Shipping Consultants Ltd., 4% lower than a year ago.
Increased shipping rates
Logistics data provider Freightos said its separate index showed shipping rates late last month from China to the U.S. West Coast at a 48-week low.
“This year started off with trans-Pacific rates 60% higher than this time last year,” said Eytan Buchman, chief marketing officer at Freightos. “That gap has been in a free-fall ever since [because] of carrier oversupply, combined with a flurry of tariffs.”
Industry executives say they fear trade relations between the U.S and China will get worse before they get better, and they are starting to adjust their operations to a bleaker outlook.
Containers reduce capacity
Danish company A.P. Moller-Maersk A/S, which moves nearly 20% of all containers, reduced its overall capacity by more than 4% in the first quarter and cut the number of sailings across the Pacific.
China’s Cosco Shipping Holdings Co., the world’s No. 3 liner company, had already cut its container capacity across the Pacific by 10% last August, with the trade route now making up 45% of its total capacity from 58% in 2016.
“We are closely monitoring the tariff scene,” a senior Cosco executive said. “The affected products are still moving, but less from China. I worry because the tit-for-tat is escalating. It could affect everything from natural gas cargoes to food and oil movements. It’s bad news for shipping.”
Trans-Pacific dispute to cut container demand
Maersk Chief Executive Soren Skou said in an interview last month that he expects the tariff-filled trans-Pacific dispute to cut container demand by up to a third this year and expects the trade tension will spread to Europe.
To be sure, the shipping industry is more prepared to face trade headwinds than carriers were a few years ago. The number of large liners has fallen to seven from 20 over the past four years after a wave of consolidation, and they control combined three-quarters of all box capacity.
Alliances to share vessel and shipping costs
The carriers have also grouped into three shipping alliances that share vessels and port calls to save operating costs.
Overall, the three alliances have cut their capacity from Asia to the U.S. West Coast by 6.7% and by 1.3% from Asia to Europe since last summer, according to Cosco officials.
“The optimism we had just a few weeks ago when we thought a trade deal between the U.S. and China would be reached, has evaporated,” said Jonathan Roach, a container shipping analyst at London-based Braemar ACM.
Any reduction in Chinese manufacturing is likely to dampen demand for the intra-Asia trades too, Mr. Roach said. Braemar ACM recently cut its forecast for container growth demand to a maximum 2% this year, down from 4.5% growth in 2018.
Decrease in imports to the U.S
U.S. trade isn’t helping. Container imports into U.S. West Coast ports fell 0.5% in the first quarter from a year ago, according to Bimco, a shipping industry group, and exports from those ports most exposed to trans-Pacific trade fell 18% in the same period.
“The silver lining is that it will at least stop more orders of mega-container ships,” Mr. Roach said. “But there will still be substantial overcapacity this year and next.”
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