US, Europe growth buoy Asia’s shipping and trade forecasts

Rising foreign trade that drove up throughput at China’s container ports in 2014 is expected to continue this year on the back of strengthening demand from the U.S. and Europe, and despite a slowdown in the mainland economy.

The International Monetary Fund projects growth in advanced economies to strengthen in 2015, but JOC Group Economist Mario Moreno said the pace of recovery would be different across regions.

“The strongest rebound in growth is forecast in the U.S., with a still accommodative monetary policy, lessened fiscal drag and healthier household balance sheets,” he said in the latest edition of the monthly JOC Insights report. “In the eurozone, the forecast is for a soft recovery to gradually take hold, supported by accommodative monetary policy, lessened fiscal drag and improving lending conditions.”

Even with concerns about China’s slowing growth of about 7 percent this year, the recovery in major markets will keep cargo volumes growing. Moreno expects U.S. imports to increase 6.8 percent this year, and Europe container trade to grow 7.6 percent. “The HSBC China Purchasing Managers Index was down in December, but the export orders component rose for the eighth month in a row,” he said. “This is mainly attributed to the solid demand from the U.S.

“China containerized exports to the U.S. are estimated to have grown at 5.9 percent in 2014, which is faster than the 4.1 percent growth seen in 2013,” Moreno said. “China’s new orders declined in December, mostly due to softer domestic demand, but external demand appears to be holding up, particularly from the U.S.”

The good news for beneficial cargo owners is that it has seldom been cheaper to ship a container in the major east-west trades. By the end of December, the Shanghai Containerized Freight Index indicated spot freight rates on the Asia-Europe trade were hovering just above $1,000 per 20-foot-equivalent-container unit, barely breakeven for the lines. Even trans-Pacific rates tumbled as carriers struggled to cope with a glut of capacity that dragged down pricing on the main trades.

The consistent weakness in price prompted Maersk Line, the world’s largest ocean carrier, to say it will walk away from unprofitable long-term contracts when they come up for renewal this year and to do more business on the spot market, which already accounts for approximately 50 percent of its traffic. As the market leader, any sign of success on that front would spur rivals to follow suit.

But even as ship lines carried greater cargo volumes at lower rates, that didn’t translate into a complete victory for shippers. Port congestion became a rapidly emerging menace in the container shipping industry as larger vessels transported more containers to ports ill-equipped to handle the concentrated surge of boxes. Bottlenecks developed at hub ports in Asia, Europe and the U.S., especially on the West Coast where labor issues contributed to the gridlock.

As they plan for this year, shippers who lost millions of dollars bypassing the West Coast while being forced to hold excess inventory are nervously watching the negotiations between the International Longshore and Warehouse Union and the Pacific Maritime Association. Regardless of the outcome, East Coast ports are expected to benefit from the chaotic waterfront situation in the main U.S. gateway of Los Angeles-Long Beach.

In Europe, the hubs of Rotterdam and Hamburg faced bottlenecks over the peak season, but appear to have been able to reduce ship delays.

The gridlock at ports in major export destinations created difficulties in repatriating empty containers to Asia, leaving shippers in the region struggling to find enough boxes to stuff. Paul Melkebeke, vice president of supply for Samsonite Asia, said the problem wouldn’t ease anytime soon. “The challenge for me remains shortage of equipment, causing delays and uncertainty for our shipments going out,” he said.

The trend toward carriers deploying larger vessels will continue to challenge ports this year, and there is no short-term solution to the congestion it will exacerbate. According to research firm Clarksons, container capacity in the orderbook amounts to 3.4 million TEUs, of which 1.9 million will be delivered in 2015. Nearly 85 percent of the new orders are for vessels with capacity greater than 8,000 TEUs. An estimated 1.5 million TEUs was delivered in 2014.

Larger cranes are being installed or already commissioned in many ports, but terminals built years ago weren’t designed to handle the 19,000-TEU giants floating into service today. Singapore’s PSA is building a new port that will be able to accommodate the latest generation of mega-vessels, but few cities are in such a fortunate position.

Another trend expected to accelerate is the shift of manufacturing from China to Southeast Asia as rising labor costs and serious labor shortages in China’s coastal areas force factories to look for cheaper locations. “A lot of the low-end, labor-intensive industries, such as toys, garments and shoes, have already moved to Bangladesh, Vietnam or Cambodia,” said Geoffrey Crothall, a spokesman for Hong Kong-based labor rights organization China Labor Bulletin. “You will not see the wholesale China manufacturing industry vanish overnight, but it is transforming.”

An example of this trend can be seen in shoes. Although China remains the dominant source of U.S. containerized imports of footwear, its market share has eroded in recent years because of not-so-stellar economic conditions in the U.S., according to Moreno. “Demand for low- to medium-priced goods manufactured in China, Vietnam and Indonesia has continued to increase as consumers chose low-value imported footwear instead of more expensive, locally produced brands,” he said.

“Vietnam’s share of U.S. footwear imports rose to 14.3 percent year-to-date (October 2014) from 9.1 percent in 2011, while Indonesia’s share rose to 5.0 percent year-to-date from 3.4 percent in 2011,” he said. “Furthermore, footwear imports from Cambodia are jumping from a very low base, up 119 percent year-to-date, accounting for a sourcing share of a still small 0.5 percent.”

As measured by dollar value, China was still the largest supplier for U.S. footwear imports, accounting for 70.1 percent of the market year-to-date through October, although this was down from 74.1 percent in 2011, according to Moreno.

India, China’s traditional Asia rival, is struggling to realize its potential, with infrastructure shortcomings and inefficient inland transportation frustrating efforts to expand its manufacturing base. Hundreds of millions of dollars are pouring into port projects to improve congestion at the country’s main gateway of Jawaharlal Nehru, also known as Nhava Sheva, as an increase in volumes and construction work have slowed cargo movements and created lengthy delays since June.

“The shipping industry is in very bad shape,” Transport Minister Nitin Gadkari told reporters last year. “We are making every possible effort to revive it.”

Japan, the world’s third-largest economy after the U.S. and China, unexpectedly slipped into recession in the third quarter of 2014, and weak exports saddled companies with high inventories. With little sign of domestic consumption increasing, it will be difficult for the country to boost exports. As a net oil importer, however, the cheaper crude prices will help reduce production costs.

As shippers settle into 2015, falling oil prices will be registering brightly on their radar. The price for a barrel of crude fell by almost 50 percent in the last half of 2014, and apart from making factory production and raw materials cheaper, that’s leading to rapid drops in bunker and jet fuel costs. Fuel surcharges have fallen and shippers are waiting to see if they will continue to enjoy the benefits of cheaper fuel.

Samsonite’s Melkebeke, for one, is watching the situation closely, especially as it relates to pricing, asking, “How will we see the evolution of the freight rates as oil prices are dropping?”

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