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TRANSPORTCEO - 28/05/2019
The war goes on, Trump won't budge.
What will happen to the trans-Pacific market?

Despite the meeting between China and the United States, the trade war continues. The US president announced on Twitter the fixing of 25% tariffs on Chinese products.

The naïve hope that the US-China trade war was over has quickly vanished, leaving an unpredictable situation for carriers in the Asia-East Coast North America trade. Adapting the tagline from the slightly disappointing Jaws film sequel; just when ocean carriers thought it was safe to go back in the water all it took was a couple of tweets to throw the Transpacific market back into chaos, reports Drewry.
"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, President Trump announced that all existing tariffs would almost immediately be set at 25%, while also preparing the ground for all so-far untouched goods to get the same treatment".
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. 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, details the consultancy.
"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".

In a 1Q19 conference call, Maersk Line CEO Soren Skou 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. 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 will provide a more in-depth impact assessment in the upcoming Container Forecaster report, to be published end June, the company insures.

Figure 1: Eastbound Asia to ECNA container traffic ('000 teu)

"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 (see Figure 2), but the early indications suggest that it will right itself when April’s data is fed in".

Figure 2: 12-month rolling average of eastbound Asia to ECNA container traffic

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. The only notable service change of late has been the addition of an extra ship on the 2M’s TP18/Lone Star service so that it now deploys 11 ships of approximately 6,500 teu, analyzes Drewry.

Figure 3: Eastbound Asia to ECNA capacity ('000 teu)

"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".

Figure 4: World Container Index Shanghai to New York ($ per 40ft container)

Figure 5: Eastbound Asia to ECNA utilisation v rates

Table 1: Asia-ECNA - estimated monthly supply/demand position

Their view is that 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.

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