Global shipping industry stays on an even keel despite waves of uncertainty from US-China trade war

  • 03-Sep-2018
  • Global shipping industry stays on an even keel despite waves of uncertainty from US-China trade war

The Baltic Dry Index that measures shipping rates for vessels that carry bulk commodities, such as grain and coal, has been riding high – up nearly 80 per cent since April, when trade tensions were building, ending in the first US tariffs going into effect on July 6. In fact, the index hit a 52-week high this month, as a second round of tariffs hit.

In addition, executives of several shipping giants reporting earnings in the past two weeks have declared that, while they are cautious about the growing trade war, they so far have not needed to batten down the hatches.

However, concern that shipping operators could be thrown off keel could grow as US President Donald Trump plans to move forward with tariffs on another US$200 billion of Chinese goods as early as next week, as reported by Bloomberg on Thursday. And Trump recently said he has “no time frame” for ending the dispute.

Meanwhile, Trump’s campaign against what he sees as unfair global trade policies has spilled over to other countries, prompting retaliatory tariffs by the European Union on American whiskey and Harley-Davidson motorcycles as the US has placed new levies on foreign-made steel and aluminium and threatened tariffs on automobiles made by overseas car makers.

The global shipping industry transported US$2.19 trillion worth of products to the United States in 2016, with nearly half of all goods imported to America coming by boat, according to the US Bureau of Transportation Statistics. China is by far America’s largest trading partner, sending some US$505 billion in goods to the US last year, according to the US Census Bureau.

Those who could feel the pinch in the second half of the year include the state-owned China’s Cosco Shipping Holdings, the Danish shipping line A.P. Moller-Maersk and Nippon Yusen Kabushiki Kaisha of Japan.

But industry players and analysts say there is reason to hope that the global shipping industry – built around shipping lines, port operators and manufacturers of vessels and cargo containers – can largely sail past the trade wars.

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Goods will still be shipped between China and the US, with consumers carrying the cost of higher prices, not the shippers. And if higher prices reduce demand, sending buyers scrambling for other sources for their goods, such as Southeast Asia, shippers will still be needed to haul the cargo.

Some even think that the trade wars could increase shipping business by forcing buyers of products to use inefficient routes to try to get around the tariffs or get new sources.

“The impact of these tariffs on global trade is uncertain and depends on how much of the resulting price increase is absorbed by consumers, how much the US and its trading partners can diversify their imports, and the broader effects on business confidence, investment, and supply chains,” Maersk said as part of its second-quarter results announcement.

Maersk said its US container imports from China could be reduced by up to 4 per cent if the trade war escalates, while Chinese container imports of US goods might be reduced by up to 6 per cent.

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The Danish shipping line operator said that container demand on East-West trade routes softened in the second quarter as imports to North America moderated “after unsustainably high growth in 2017.” Average freight rates also were down in its ocean segment, driven by a 5.1 per cent decline in rates on East-West trade routes, the company said.

Maersk has warned that global trade could be reduced by 0.1 per cent to 0.3 per cent as a result of the escalating trade tensions.

Nippon Yusen said that the demand for container shipping remained firm in its first quarter, which ended in June, but the completion of some large new ships had led to a standstill in the recovery of spot freight rates. The Japanese company said that shipping volumes for coal, grain and other dry bulk goods had increased.

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Cosco Shipping said last Thursday that growing trade protectionism, including the trade dispute between the US and China, could “inhibit the growth of the global economy to a certain extent,” but it expects the global economic growth to continue, helping the volume of shipping using containers.

Bank of America Merrill Lynch said that China’s export growth to the US remained resilient in July, but that the growth of imports from the US to China this year has underperformed China’s overall import growth.

“China probably started to shift away its import demand from the US after US President Trump announced his plan to investigate China's exports” last summer, Zhi Xiaojia, the bank’s Greater China economist, said in a research note.

“In particular, China's imports of US vegetable products (primarily soybeans) contracted by 14 per cent year-over-year in [the first half of 2018], even though China's total imports of vegetable products increased by 8.4 per cent in the same period,” she said. “In addition, the US is also losing its market share in other commodities (such as meat, chemicals, wood) and transportation products in China, though its share in China's oil imports increased.”

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The outlook is further muddied by concerns about rising interest rates and currency fluctuations, analysts said.

Anti-globalisation, including trade protectionism by the US “will bring more uncertainties to global trade recovery and threats to global economic growth,” China International Marine Containers Group, the world’s largest maker of shipping containers, warned recently.

Trade growth has slowed slightly, but remains at a relatively high level, according to the company, which is based in Shenzhen. Rising oil prices also could cut into the results of its shipping company customers, it said.

“This will, to some extent, affect customers’ willingness to purchase containers,” said the company, which generated 37 per cent of its revenue from container manufacturing in the first half of this year. “However, it is expected that demand for containers will remain relatively high throughout the year.”

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At Singamas Container Holdings, the world’s second-largest maker of shipping containers, the escalating tensions have not dramatically cut into trade, but customers “are watching it very carefully,” said Teo Siong Seng, the chairman and chief executive of Singamas Container Holdings.

“Customers, whether they are shipping lines or leasing companies or others, are very cautious of these trade tensions,” Teo said, adding that some clients of the Hong Kong-based company have delayed orders.

The ongoing dispute could ultimately be a boon for other parts of Asia as businesses evaluate whether to move some operations to existing facilities or build new manufacturing plants, trade experts said.

Zhang Wei, vice-chairman and managing director of Hong Kong-based Cosco Shipping Ports, said the trade conflict, coupled with China’s long-term national strategy to upgrade its industrial sector, could cause trade to gravitate from China to Southeast Asia and South Asia.

“We are closely watching how the shipping volumes may change or shift, and may seek potential investment opportunities in those regions,” he said.


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