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Falling imports from China test trans-Pacific carrier discipline    12/06/2019
The newfound capacity discipline of trans-Pacific container carriers will increasingly be tested by declining eastbound volume growth, with US imports from China down 4.6 percent in the first five months of the year and total Asia imports up only 1.8 percent.

Early signs, however, suggest trans-Pacific carriers will continue to hold firm, blanking more sailings in order to keep supply in line with demand, thereby maintaining spot rates. Tight capacity will likely be exacerbated by another wave of front-loading to avoid the next round of US tariffs on Chinese-made goods and increased fuel costs related to the IMO 2020 low-sulfur fuel mandate. The spot rate to ship an FEU from China to the US West Coast — a barometer of how supply is stacking up with demand — has stayed above $1,300 since March, and is up more than 5 percent from a year ago, according to the June 7 reading of the Shanghai Container Freight Index.

There are plenty of reasons to expect another wave of front-loading, which in the second half of 2018 kept spot rates to the West Coast above $2,000 per FEU for 16 straight weeks and rates to the East Coast above $3,000 for 17 weeks. Several shippers across commodity groups told JOC.com they are already rushing shipments to avoid any potential tariffs on the remaining $300 billion in US imports of Chinese goods that President Donald Trump threatened after trade talks with China broke down in May.

US importers may also front load some shipments to avoid the higher bunker fuel charges tied to the low-sulfur emissions mandate that could be levied as soon as the fourth quarter — even though the rule doesn’t take effect until Jan. 1, 2020. Over the last year, carriers have become more agile in managing capacity via skipped sailings and have warned shippers to prepare for more in the fourth quarter as ships are taken out of service for scrubber installation.

“You will see spot market rates increase [and] start seeing space issues develop rather quickly,” David Bennett, president, Americas, for Globe Express Services, a non-vessel operating common carrier and forwarder, said June 5 at the Canada Trade Conference in Toronto.

 

From late May through late July, eastbound capacity to the West Coast will be 0.3 percent lower than the same period a year ago, while capacity to the East Coast will expand just 1.7 percent in the same period, according to maritime consultant Sea-Intelligence.

“Seemingly, for much of this year, carriers have been doing their part, showing strong capacity discipline,” Alan Murphy, co-founder and CEO at Sea-Intelligence, told JOC.com

There’s little sense among container lines that the sky is falling; in fact, they say the tide is cresting. Although US imports from China contracted in two of the first five months of 2019, three container line executives tell JOC.com they don’t expect the impact of higher tariffs — an increase of 25 percent to 10 percent on $200 billion of Chinese imports — to fully hit US consumer demand until 2020.

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

Even so, volume growth is slowing, though, how much of that is due to front-loading in 2018 to avoid higher tariffs and how much is importers pulling less from China because of higher tariffs is unclear. Interestingly, the US retail trade inventory to sales ratio in March fell for the first time in three months before US Asia imports surged 6.1 percent and 5.2 percent in April and May, respectively.

The tariffs pressures cast a shadow on the trans-Pacific trade, which has been a rare bright spot for container lines plagued by higher fuel costs and overcapacity on other trades, namely Asia-Europe. Whether truly because of tariff concerns as carriers maintain or not as some shippers grumble, the slashing of trans-Pacific capacity last year drove spot rates up and paved the way for the securing of higher rates in spring annual service contracting. Equally important, carriers were able to get cargo owners to agree to mechanisms within service contracts allowing them to recoup higher operating costs tied to meeting the International Maritime Organization’s low-sulfur mandate.

As global container growth slows, the trans-Pacific will be a litmus test for container carriers’ resolve to focus on profit rather than chasing market share via rate cutting. In a first quarter earnings call on May 24, industry leader and bellwether Maersk Line said container volumes expanded at a 1.7 percent clip in the first three months of 2019, compared to 3.6 percent growth in first quarter 2018. To paraphrase political theorist and revolutionary Thomas Paine, these are the times that try carriers’ resolve.




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