Soft Global Trade Keeps Shipping Rates Low
The U.S. dollar will remain strong until the middle of this year, hampering U.S. exports but boosting a wave of imports into U.S. ports.
A strong dollar means the United States should see imports rise 5.3 percent this year after increasing 4.0 percent last year. With a strong dollar and subpar economic activity overseas, U.S. exports will decline 1.5 percent this year after a 3.8 percent slump last year.
China will continue to be the main player in the Trans-Pacific shipping route, sending commodities of all kinds to the United States even though it is transitioning from a manufacturing hub to a service-oriented economy with a burgeoning middle class.
“Between 2012 and 2016, I am expecting China’s percent of the U.S.-Asia trade will be 64.5 percent, nearly unchanged in five years,” said Mario Moreno, senior economist at IHS Maritime & Trade.
Moreno was speaking along with a host of experts at the 16th annual Trans-Pacific Maritime conference, held Feb. 28–March 2 at theLong Beach Convention Center in Long Beach, Calif. Hundreds of shippers, truckers, freight logistics specialists, customs brokers, longshore workers, port officials and other transportation-related people gather at the event every year.
The shipping industry remains soft as huge mega-ships come on line but cargo-container activity drops along the Asia-to-Europe route as well as along the routes supplying South America.
Consequently, the spot rate this year for sending 20-foot containers across the water from Asia to California is expected to plummet to about $1,000 a container, including fuel charges, compared to nearly $1,400 in 2012. That low price also will hold true along the Asia–to–North Europe channel and between North Europe to the East Coast of the United States.
This news comes as companies that need to ship their goods across the ocean are negotiating new contracts that begin on May 1.
“2015 was a record year for new ships coming online, adding 100 million TEUs [20-foot containers],” said Philip Damas, division director of Drewry Supply Chain Advisors, an international provider of research and consulting services to the maritime and shipping industry. “This will add to lower average rates in 2016.”
Damas noted that the average size of a container ship these days carries 8,000 containers, which is a shipping-industry record and has doubled since 2009. “About 89 percent of the current order book [for cargo ships] is for vessels that carry more than 18,000 TEUs. There will continue to be a trend to bigger ships.”
Bigger ships are more fuel efficient when sailing across the ocean. That helps when plying the longer distances between Asia and Europe, but it is not quite as economical on the shorter Trans-Pacific route between Asia and the West Coast. Cost savings go downhill when the vessels hit the ports, where they may be tied up for longer periods as crews have the daunting task of unloading an enormous amount of cargo containers.
These mega-ships provided better cost savings when oil prices were high. But with petroleum sinking to rock-bottom prices, savings have shrunk. Only one-third of container shipping lines were profitable last year, and a $5 billion loss is predicted for the industry this year.
“One of the things we’ve learned over the last number of years is that growth in the shipping industry is slower than 10 to 15 years ago,” said Rolf Habben Jansen, chief executive of German shipping line Hapag-Lloyd.
He admitted that mega-ships haven’t been as profitable as the industry had anticipated due to a capacity glut and certain inefficiencies that exist in operating the bigger vessels. “The ones that truly beat the market are the ones that take waste out of the market,” he said, noting the industry needs to invest more in technology and automation to make the big ships more profitable.
To cut costs, big shipping lines have been canceling some sailings. “This has become quite common on the East-West trade routes [which includes the Asia-to-California route],” said Damas of Drewery Supply Chain Advisors.
On average, there are 53 canceled sailings per month on the four major East-West routes, which helps reduce capacity, Damas said.
Today, 5 percent of all container ships are idle, which means owners need to choose between scrapping older vessels or parking larger ones on the water until the market improves. During the recession, idle vessels accounted for 11 percent of the global fleet.
With bigger ships and lower profits, experts are expecting to see more shipping lines merge with each other.
Last year, China Container Shipping Lines merged with Cosco. At the end of last year, French shipping company CMA CGM agreed to buy Singapore’s Neptune Orient Lines Ltd., which also owns APL, for roughly $2.4 billion in cash, bolstering its presence in the Pacific Ocean trade routes. CMA CGM Group is now the third-largest shipping line, afterMSC and APM-Maersk.
“We have started to see some big mergers,” said Brandon Oglenski, director and senior equity analyst for transportation at Barclays Capital.
He likened the shipping-industry consolidations to the days when the ailing U.S. airlines industry saw a number of mergers. Now four or five airlines control 60 percent to 80 percent of the U.S. market, helping to attract investment capital.
“Twenty of the container line carriers have 80 percent of the market share, and I think we are going to see a pretty big wave of consolidation,” Oglenski noted, adding that a lack of cash flow makes it hard for shipping lines to maintain the status quo.
Oglenski explained that low interest rates have helped fuel mega-ship orders that don’t make sense when there is not enough demand for them, driving down shipping rates. “We call it the lost decade of container ships,” he said, explaining that container ship growth has outpaced demand during 10 of the past 11 years.
Demand may catch up with supply in the next few years. Nariman Behravesh, chief economist at IHS, said the global economy will probably stay out of recession but remain stuck in low gear for at least another year.
Trade should be on the upswing in the next couple of years as Russia and Brazil emerge from their recessions and other countries start to do better. “The upside to trade in the near future is free-trade agreements,” he said.
He doesn’t believe the Trans-Pacific Partnership will be passed before the U.S. presidential election, but it could pass during a lame-duck session.
“Another upside,” he said, “is that we know the middle-class population in the emerging worlds is growing, which will create demand for products and goods, which will also be good for trade.”
The U.S. stock market has had some people worried about the domestic economy, but Behravesh said falling oil prices have not been caused by reduced demand, indicating economic weakening, but by oversupply. “Recent studies by the Federal Reserve showed that the stock market predicted 23 of the last eight recessions,” he said jokingly.