The brewing trade war between the US and China is seen having varied effects on different parts of the shipping industry. While much will depend on if and when the tariffs actually kick in, analysts seem to agree that the worst effects will be felt by the container shipping industry, exacerbating an already difficult situation with oversupply of capacity and slowing global trade.
In terms of the tanker market, VesselsValue analyst Court Smith pointed out that since the restriction on US crude exports was lifted in December of 2015, China has emerged as a major importer of US-sourced crude oil as it moved to strategically diversify its oil sources. Much of this trade is carried on VLCCs.
“Most of the exports to China have been on VLCCs, which add substantially to ton mile demand given the length of the voyages,” Smith noted.
“With China dialling back purchases, we expect to see the discount for US oil to widen, penalising US producers and sending more exports to European and other Atlantic Basin refiners, which will be good for Aframaxes, and bad for VLCCs,” he suggested.
The outlook for the dry bulk market is less obvious for now, mainly due to the seasonality of the trade however a trade war is ultimately bad for everyone and will result in fewer goods shipped, Smith said.
“Trade restrictions destroy economic value over the long run, but in shipping their effects are felt almost immediately. The imposition of tariffs by the US and China, and the reciprocal action by China will reduce demand for oil, agricultural products, recycling materials, and other dry bulk products,” he reiterated.
“This trade distortion will create some positional advantages and disadvantages, but the net effect will eventually be fewer goods shipped, and higher prices for end users of commodities,” Smith added.
He noted however that “the impact to shipping remains muted due to the seasonality of the shipments in the dry bulk markets”.
An impending Sino-US trade row will be a double whammy for transpacific carriers in the liner industry, Alphaliner said in its latest weekly report.
“The escalating trade tensions between the US and China, triggered by President Trump’s tariff measures against Chinese imports, will hit container volumes between the two countries,” the liner industry analyst emphasised.
Alphaliner pointed out that China is the largest origin for containerised cargo into the US by a long shot, accounting for 46% of all container imports during the first five months of this year.
Based on data from PIERS, Alphaliner said US imports from China totalled 4.14m TEU during the period from January to May and even more starkly pointed out that China-related volumes are almost ten times larger than those from the next largest country of origin Vietnam, at 430,000 TEU.
However Alphaliner qualified: “It is too early to determine the final impact of the new tariff measures and counter-measures that will take effect on July 6, but, since China accounts for 68% of total transpacific container volumes from the Far East, a 10% reduction in imports from China will affect some 6.8% of transpacific volumes, if the goods are not replaced by imports from other Far East origins.”
Inevitably this would then have an effect on freight rates, which are already under pressure from overcapacity. “The impact of any reduction in volumes would significantly affect carriers’ efforts to raise freight rates,” Alphaliner said.
It pointed out that rates are already sliding despite some initial success at the beginning of June and spot rates are falling again. Alphaliner noted that the latest General Rate Increase (GRI) that the carriers tried to impose on June 15 has been cancelled as vessel utilisation rates dipped, and rate cutting has already brought spot freight rates to as little as $1,000 per feu to the US West Coast.
“Carriers’ reluctance to curb capacity increases has already started to hurt. Contract rates from May 1 are largely lower than last year, despite higher operating costs, mainly due to escalating bunker prices,” Alphaliner said.
Overall capacity on the Far East to North America route is currently 6.3% higher compared to the same time last year, with all the carrier alliances adding to their overall capacity on the trade this year according to capacity data compiled by Alphaliner.
Freight forwarders are also warning of dire consequences for the container shipping industry. Zencargo CEO Alex Hersham said: “This could be another hit to the already tepid demand growth on the major East-West Trade Lanes.”
“This could continue a period of consolidation in the shipping industry that has already seen Hapag-Lloyd merge with UASC and the creation of the ONE (Ocean Network Express) shipping line out of Japan. Shipping lines will come out fighting to address problems of overcapacity and weak demand, but we could see some major changes along the way,” Hersham concluded.