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Falling imports won't guarantee lower trans-Pacific rates    05/06/2019
Implementation of the Trump administration’s 25 percent tariffs on Chinese-made goods could cause imports to plunge by double-digit percentages this peak season, but retailers should not expect freight rates in the eastbound trans-Pacific to drop because carriers will manage capacity via blank sailings.

Carrier and non-vessel-operating common carrier (NVO) executives said that there is no indication that import volumes will drop sharply in the coming weeks, primarily because the purchase orders for shipments coming in now were placed two to three months ago with factories in Asia.

“I don’t see anything indicating a huge drop-off. It’s business as normal,” said George Goldman, president of Zim USA.

US imports, especially from China, so far this year have been trending lower, due to the inventory that retailers and manufacturers built up in late 2018, when they believed that the planned 25 percent tariffs were going to take effect on Jan. 1.

“There’s still a lot of stuff in the inventory pipeline,” a trade economist told JOC.com Monday.

US imports from China dropped 6 percent in the first four months of 2019 from the same period last year, according to PIERS, a JOC.com sister company within IHS Markit. The latest escalation of tariffs will pull eastbound trans-Pacific peak-season volume down by about 15 percent compared to last year, maritime consultant Drewry said in its May 27 newsletter.

Sea-Intelligence Maritime Consulting argues it is impossible to reliably predict the volume impact of a prolonged US-China trade war because there is no precedent to refer to, but projections of a 10-15 percent drop in peak-season imports compared to the summer-fall of 2018 are being openly discussed by industry analysts in an uncertain environment that can change with a single tweet.

Any merchandise set to enter the US in June and early July is already committed, so a 10-15 percent drop in import volumes in the early stages of the back-to-school and peak-season period could be a stretch.

“This does seem a bit high in our opinion, as the new 25 percent tariffs were only announced three weeks ago, so we would assume that the majority of planned imports will still go ahead,” Sea-Intelligence stated. Orders are placed with factories about 60-90 days before the products are actually manufactured.

The state of spot rates

The tariffs are not expected to have an immediate impact on spot rates. Normally, spot rates in the eastbound Pacific, the largest US trade lane, drop along with cargo volumes. That scenario began to change last summer when carriers suspended three weekly strings from Asia to the West Coast, reducing capacity by 6 percent, and one string to the East Coast, reducing capacity by 1.3 percent. As US import volumes fluctuated wildly in late 2018 and early 2019, carriers responded by blanking sailings when bookings were weak and deploying extra-loaders during surge periods.

Alan Murphy, co-founder and CEO at Sea-Intelligence, expects carriers to manage capacity equally vigilantly in the coming months. “Seemingly, for much of this year, carriers have been doing their part, showing strong capacity discipline,” he said.

 

Sea-Intel’s analysis of capacity deployment in what it referred to as the “first half of the peak season,” from late May through late July, shows that capacity deployed to the West Coast will be 0.3 percent lower than during Weeks 22-30 last year. East Coast capacity will increase 1.7 percent, and total capacity to both coasts will be up only 0.4 percent. That will be the lowest year-over-year increase in capacity since 2014, and down significantly from the 12.6 percent average annual increase in peak-season capacity from 2012 through 2018, Murphy stated.

Spot rates have been following normal slack season trends in May and June before back-to-school merchandise begins to enter the country. The spot rate from Shanghai to Los Angeles on May 31 was $1,471 per FEU, which was 13.7 percent higher than the previous week but only 1.8 percent higher than in May 2018. The East Coast rate was $2,541 per FEU, the same as the previous week and 3.2 percent higher year-over-year, according to the Shanghai Containerized Freight Index published under the JOC Logistics and Pricing Hub.

For at least the next couple of months, retailers will not be able to cancel orders for imports subject to the 25 percent tariffs that took effect on June 1. “We’re not seeing any significant drop off right now,” said Bruce Chilton, vice president of trade management at Ascent Global Logistics. The NVO will update its forecasts in the coming weeks after consulting with clients to see what they anticipate importing later in the peak season, he said.

Toys are a major source of containerized imports in the trans-Pacific, and the toy market in the US totals $27 billion, according to figures from The Toy Association. Rebecca Mond, vice president, federal government affairs of the association, said US importers are going through the “stages of grief: shell-shocked, denial, and acceptance.” Toy importers are analyzing various strategies for dealing with the tariffs, but “of the options they have, none are great,” she said.

An NVO added that preliminary discussions with clients indicates they have entered the “pass-along environment,” meaning they intend to pass along the added costs associated with import tariffs to consumers.

Shippers seek FTZ relief

With the Trump administration threatening yet another round of tariffs that would cover all remaining Chinese products not yet under tariff, importers are moving quickly to reserve space in Foreign Trade Zones. Scott Weiss, vice president of business development at Port Logistics Group, said he has received several inquiries this past week from importers considering storing their merchandise in FTZs in Southern California for two or three months.

FTZ activity in the Houston region has tripled over the past nine months, and the movement is in its earliest stages, Curtis Spencer,  president of logistics consultancy IMS Worldwide, told the JOC Gulf Shipping conference in Houston May 22. “June 1 will not be the end of the trade war,” he said. The beauty of the foreign trade zone is that the importer pays “zero upfront,” and pays the tariff only when the product enters the commerce of the US, he said. If the merchandise is re-exported, no duties are paid.

Import volumes in the second half of the peak season, from August to October, remain a big question mark because consumer demand will be difficult to predict given the uncertainty as to how much of the 25 percent tariffs retailers will absorb, how much they will pass on to consumers through price hikes, and how the consuming public will respond to price increases that could be quite high in some cases.

Carriers, on the other hand, demonstrated last year they can be quite nimble in adjusting vessel capacity to meet demand. “While liner carriers scale their networks to the peak season, the prevailing freight rates will to a large degree be governed by the underlying supply/demand balance,” Murphy said.

So far, only the Ocean Alliance of Cosco Shipping, OOCL, CMA CGM/APL, and Evergreen has announced blank sailings in the eastbound trans-Pacific. The alliance in June is canceling one weekly sailing to the Pacific Southwest, one to the Pacific Northwest and one to the East Coast. Goldman said Zim is not planning any blank sailings right now, “but that could change  overnight” if bookings drop sharply, he said.

The trade is also looking anxiously ahead to the fourth quarter, when every vessel that has not been fitted with a scrubber must be removed from service for about a week while high-sulfur fuel will be flushed from the engine and replaced with the low-sulfur fuel mandated by the International Maritime Organization before the requirement takes effect on Jan. 1.

If bookings late in the year are weak, carriers may simply blank weekly sailings while the transition occurs. However, if bookings are strong because importers choose to front-load 2020 shipments before the higher bunker fuel surcharges take effect after Jan. 1, carriers will most likely replace the vessels with others on hand and maintain their weekly capacity in the trade.




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