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TRANSPORTCEO - 08/01/2019
Improving, but still shaky.

A less than convincing performance in the Asia to Mediterranean headhaul market and a sharp fall in Turkish imports have dulled westbound growth prospects.

After a flat second quarter, westbound Asia to Mediterranean volumes in the period July-September rose by 3.4%, and returns for October yielded a growth rate of 5.6%, according to data from CTS.
The year-to-date rise in headhaul demand was by the end of October reading 3.5% - a more convincing performance than the anaemic 1.2% recorded for the North Europe trade.

Exactly what was driving the uplift in growth in the latter half of 2018 is not altogether evident. It is not as if one is making comparisons with a weak second half in 2017 since year-on-year growth in that period was showing a very respectable gain of 7.6%.
At the mid-point of 2018, Asian exports to the mature economies of the West Mediterranean sector were registering an increase of just 2.2%. Spanish imports had dropped by a similar percentage and the sector was propped up by a 9.3% jump in French imports and a more modest 3.3% advance in shipments destined to Italy. In the following four months from July to October, Spanish imports rose by 4.8% with those to Italy and France pushing ahead by 5.9% and 8.8% respectively.
Italy still remains the largest market in the Asia-Mediterranean trade but the deep-seated problems within its economy remain. The Five Star-League coalition in Rome still seems to be at loggerheads with Brussels over its budget proposals. The country’s debt remains huge, and over the years the economy has grown weakly, partly because there are too few younger workers supporting many older citizens. There seems to be little good news at the moment to encourage consumers to go out and spend more.
Growth of Asian exports entering France over the North Continental ports has scarcely been spirited in 2018, whereas during the first ten months via the southern gateway flows have been achieving gains of 9.3%. Quite why this difference exists is not easy to fathom as the policies of President Macron’s government and the recent activities of the gilets jaunes “yellow vest” protesters have been weighing down on consumer confidence.
The sudden turnaround in Spanish volumes is equally paradoxical. The country’s political landscape continues to remain heavily fragmented and its economy is now slowing, with 2.5% growth expected in 2018, compared with the 3% it achieved in 2017. One international forwarder observed that after an indifferent first half to the year there had been a bout of restocking within some of Europe’s more mature economies during the autumn. The upturn may therefore be short term.

The recovery in North African volumes continues apace, propelled chiefly by Egypt’s reviving economy. Asian boxes discharged in the five countries bordering the Mediterranean increased by almost 11% in the ten-month period from January to October. Traffic into Egypt rose by 17.5% and continues to gather momentum; between July and October the year-on-year increase was touching 29%.
The IMF loan of $12 billion negotiated back in 2016, the accompanying package of economic reforms including the floating of the currency, and the rebound in the country’s tourism industry have all contributed to getting Egypt back on its feet. But it would be wrong to assume that this recovery in imports is entirely down to a resurgence of household spending. Inflation has been falling since the devaluation of the pound but it is still around 16% and that still hurts the consumer’s pocket. Instead, no small portion of the additional volume this year consists of construction materials and equipment consigned to Egypt’s largest building project, its new as yet unnamed administrative capital to the east of Cairo that will be home to some 6.5 million people.
The East Mediterranean sector is this year’s laggard in the trade, with volumes dropping in the ten-month period by 4.7%. Israeli imports retreated 2.4% and Lebanese traffic gave up almost 11%. Greece, on the other hand, has marked its exit from an eight-year financial rescue programme by allowing its imports from Asia to rise by 11%. Over eight years, Greece received a staggering €289 billion of loans to repair its economy.
The major casualty in the East Med has been the Turkish market where imports fell by 10%, equating to some 75,000 teu. But the damage only started in the second half of the year when a currency crisis fuelled record inflation rates and stunted consumer demand. In the first six months of 2018, Asian exports entering Turkey were marginally up by just over 1%, but in the subsequent four months they collapsed by 27%.
Although the lira has made a partial recovery from the depths it touched in August, it has still lost 40% of its value this year. Households have to contend with inflation rates which reached 25% in October, and higher interest rates have put the cost of borrowing well beyond the reach of the average consumer. The government may not be in any rush to reignite domestic spending as the drop in imports is at least helping to redress the country’s current account balance, which stands heavily in the red. It is likely then that Turkish imports will not show any gains until after the first half of next year and, having now ceded the second largest import country ranking in the Mediterranean to Spain; Turkey is unlikely to challenge that placing in the immediate future.
With an expected absence of demand growth in the Turkish inbound market in the first half of 2019 and only weak expansion in the West Mediterranean sector, Drewry believes headhaul volumes may struggle to match this year’s growth rate.

Our view

If there is further cascading of ships from the North Europe trade into the Mediterranean, then freight rates could well come under pressure in 2019.




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