Thursday, July 5, 2018

Concerns Over Import Duty Tariffs as Trade Wars Impact Shipping Industry

Quarterly Analysis Reveals Potential for Escalation of Problems
Shipping News Feature
US – CHINA – WORLDWIDE – According to shipping consultancy, Drewry, the risk to container freight from US led trade wars after import duty tariff rises, has the potential to be very damaging. Though the current risk is considered as low, the consultancy's quarterly container market analysis report, Container Forecaster looked into three potential scenarios for eastbound Transpacific container trade and found that if the situation were to escalate any further, the effects of the trade wars could derail the progress the improvements the sector has seen in the first half of the year. Simon Heaney, Senior Manager, Container Research at Drewry and Editor of the Container Forecaster, commented:

“In the March report we said that we were hopeful of a peaceful resolution, but at this point in time we must accept that tariffs are going to become a reality. The only question now is: how severe will they be?”

Additional tariffs of 25% on the first list of 818 Chinese products, worth approximately $34 billion, are scheduled to be collected by US Customs from Friday 6 July. A second list of 284 newly recommended products covering $16 billion is currently being reviewed, while there are threats of further tariffs on as much as $400 billion of goods to follow, in response to Chinese retaliation.

Container Forecaster’s three analyses based on the intensity of a trade war, ranges from tariffs of $50 billion to $450 billion being applied to Chinese imports. In the worst-case scenario, Drewry calculates that as much as 1.8 million TEU, or nearly 1% of world loaded traffic could be lost to the market over a period of time. As things stand, the impact from the initial two lists of Chinese products alone would be relatively insignificant at around 200,000 TEU.

Drewry research shows that revised lists announced on June 15 were heavily weighted towards industrial goods, also being readily available from other trading partners. China only exported about 13% of the first list of products to the US last year and around 8% of products on the second list. Heaney continued:

“With other sourcing options available, tariff increases on Chinese goods on these initial products lists will most likely create a small amount of trade diversions and raise the prospects of other exporting partners of the US. The current risk threat to container demand is relatively low, even when factoring in tit-for-tat measures and disputes with other trading partners, but there is clearly the potential for matters to get much darker if additional tariffs are forthcoming. Perhaps, the biggest risk is the unpredictability of it all and the potential confidence knock it will give to the world economy, just when it seems to be finding its feet.”

The trade disputes take the gloss off the strong demand growth seen in the early months of 2018, driven by an acceleration of the world economy. Using a redesigned demand forecasting technique, Drewry has upgraded its demand forecast for the next two years to 6.5% and 5.8% respectively. There was also an upgrade to the fleet growth outlook for this year after surprisingly few scrappages. However, anticipated supply growth of 5.4% is below the revised demand increase, which will support ongoing supply-demand rebalancing. Heaney concluded:

“There will be some gain for carriers this year in the form of increased demand and slowly improving supply-demand, but a lot more pain. Escalating fuel prices have caused us to slash the industry’s profitability forecast to break-even and while freight rates are expected to rise modestly in the second half of 2018, it won’t be sufficient to turn things around. In some ways, buoyant demand is a problem for carriers right now as every extra box shipped at a loss only amplifies the deficit.”

Photo: Fewer vessels are being broken impacting available global capacity.