Westbound trade from the U.S. to Asia grew faster than eastbound trade in 2011, pushing outbound shipments to ports at a faster pace than the expansion of imports, but that was hardly anything to crow about, even for the export trade. The trans-Pacific container shipping market displayed the weakest growth among the major U.S.-based ocean trade lanes last year.
Overall trade across the Pacific increased just 3.1 percent in 2011, led by 7.3 percent growth in exports, to a total of 19.3 million 20-foot-equivalent container units.
Imports, which make up by far the larger share of U.S. trans-Pacific trade, grew just 1 percent last year, faltering late in 2011 after a 16.5 percent year-over-year post-recession surge in 2010.
Numerous factors contributed to last year’s imbalanced growth on the United States’ largest trade lane. As the first quarter of 2012 winds down, this year’s forecast from The Journal of Commerce and its sister company PIERS projects the modest improvements in some of those underlying demand drivers — from the U.S. housing market to changes in trading relationships that are affecting supply chain decisions — won’t be strong enough to break the recent pattern. We expect growth in U.S. outbound volume to exceed the relatively meek gains in import business, a trend that will broadly affect carrier economics and decisions on capacity on the trade lane.
Our forecast, based on historical volume trends from PIERS as well as broader economic trends, is that eastbound container shipping volume in the Pacific will grow 2.4 percent year-over-year in 2012, bringing 12.6 million TEUs in import trade. Although this year will mark the third straight year of growth in U.S. trans-Pacific imports, the total volume still is just 96 percent of the trade lane’s total imports in 2007.
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Imports from China will edge up 0.9 percent in 2012, accounting for 63.4 percent of the total container imports from Asia, down from a 64.4 percent share in 2011. Westbound exports, meanwhile, are forecast to grow 4.2 percent.
This marks the opposite of larger U.S. shipping trends, where our preliminary projections show U.S. containerized imports growing 4.5 percent while exports expand 3.5 percent.
There are important drivers on both sides of the Pacific that will affect trade this year. In 2012, the eastbound trade will improve based on encouraging economic data, but rising costs in China will make the improvement look anything but modest.
U.S. economic growth will pick up the pace in 2012, but economic expansion remains relatively meager and below potential growth.
Based on positive economic data and the extension of the payroll tax reduction for all of this year, I have upgraded my GDP forecast from 1.7 percent to 2.3 percent. The economic growth has several underlying factors that are significant contributors to shipping demand. Manufacturing activity appears to be gathering steam, driven by the automotive industry, while nonfarm payrolls are recovering at a decent pace. Overall business investment appears to be improving.
Consumers, however, still are paying off debt, and the “deleveraging” of personal debt has some distance to go. Household debt as a percent of disposable income was at 114 percent in last year’s third quarter, down from 130 percent in 2007, but still well above the 30-year average through 2000 of 75 percent. Job gains, which are now averaging more than 150,000 a month, will accelerate the deleveraging process, and more importantly sustain a delicate housing recovery. Unemployment will average 8.2 percent in 2012, down from 9 percent in 2011 and not far from its levels in recent weeks.
Stability in the housing market is crucial for trade with Asia. The sale of a home spurs consumption opportunities that reach as far as the shipping industry, prompting the buyer to seek furniture and other home goods, many of which enter the U.S. by ship from Asia.
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Asia, for example, had a 93 percent share of U.S. furniture imports in 2011. Sales of existing homes picked up in the fourth quarter of 2011, and sales will accelerate 4.5 percent this year, after growing 2.4 percent in 2011, according to the National Association of Realtors.
In my view, a minimum monthly average gain of 150,000 nonfarm jobs is needed to support at least a modest housing recovery. In the 12 months through January, nonfarm payrolls have averaged monthly gains of 162,000. If this economy is able to sustain that pace, it’s highly likely home sales will accelerate in 2012.
But super-low mortgage rates and cheap homes can’t do the trick alone. Solid gains in employment are a must in order to support this much-needed housing recovery.
The prospects for expansion in shipping demand also face headwinds within the industry, from broader increases in supply chain expenses to rising direct transportation costs.
Import prices from China rose on average 3.1 percent in 2011 over the average import prices of 2010, as total U.S. imports from China increased just 0.7 percent over the year before after jumping nearly 16 percent in 2010. A sustained rise in wages within China, the appreciation of China’s yuan against the dollar and higher prices of raw materials all have contributed to this uptrend in import prices, which in combination with higher transportation costs has prompted shippers to look away from China for more affordable sourcing alternatives.
Because average import prices from China are expected to rise another 1 to 2 percent this year, demand from China will be modest at best and near-sourcing, the strategy of producing goods closer to their home markets, will gain popularity.
Bolstered by higher import prices in China, increasing near-sourcing activity in the apparel and automotive parts trade emerged last year. Apparel shipments from Central America rose 9.4 percent last year while declining from China and the rest of the world. Moreover, automobile parts imports from Mexico are rising, and pressure is building in the U.S. to address what some believe are unfair subsidies China provides its auto parts exporters.
Because import prices from China are expected to remain on the uptrend and tensions in the Middle East are more likely to boost oil prices, source shifting to Mexico and Central America will endure.
But even with the recent rebound, there is room to grow for the U.S. automotive manufacturing sector. The average life of a used car is more than 10 years old, and foreign demand (except from northern Europe) is expected to remain strong. Solid demand for automobiles prompts manufacturers to increase their orders of automotive parts, a major reason there’s a strong correlation between industrial production of motor vehicles and containerized automobile parts imports over the last four years.
A continuous recovery in the automotive manufacturing sector is highly relevant on the eastbound trade because Asia sources 75 percent of total U.S. auto parts imports. Because retail sales of autos are projected to remain on the uptrend, growth in auto parts imports from Asia will continue, albeit at a slower pace than last year partly due to a lengthening in source shifting to North America.
The inbound market faces important risks, of course, with the surging price of oil being the biggest factor in the immediate future. If a sustained surge in oil prices continues, real disposable income will decline, and consumer spending will diminish. This is a major risk for the eastbound trade because many of the goods imported from Asia are consumer goods.
Growth in the westbound trade accelerated last year, but was shy of my expectations. Following an increase of 4.3 percent in 2010, the westbound trade surged 7.3 percent last year to 6.7 million TEUs. Growth could have been higher if it weren’t for antidumping duties imposed by the Chinese government on American distilled dried grains, causing a sharp decline in shipments of the second-largest U.S. export category by volume: pet and animal feeds.
A sudden contraction in Asian manufacturing activity also contributed to a marked growth deceleration in the westbound lane, from 11.4 percent in the third quarter to just 0.8 percent in the fourth quarter of 2011.
In 2012, growth in the westbound trade will slow, but it will still expand faster than the eastbound lane, mostly because of a thriving demand for major refrigerated goods and a competitive dollar.
It is evident there is a clear deceleration in global economic growth, and the International Monetary Fund rushed to downgrade its forecasts. China’s economy is now expected to expand 8.2 percent this year, slower than the 9 percent growth expected earlier.
A struggling Chinese manufacturing sector likely will result in declines in outbound shipments of paper and paperboard and scrap metals to China, the top market for those foundation industrial commodities. Offsetting part of these likely losses, we find a thriving meat trade induced by rising Chinese wages and consumers diversifying diets. Rising construction activity also is boosting demand for logs and lumber.
We expect exports to China will rise 5.2 percent this year, following a year-over-year jump of nearly 10 percent in 2011.
Southeast Asian economies, meanwhile, are expected to grow 5.2 percent this year, following 4.8 percent expansion in 2011. I estimate exports to Southeast Asia will grow 5 percent in 2012, driven by growth in shipments of soybeans, logs and lumber, and some refrigerated goods.
India’s output is projected to rise 7 percent in 2012, following a 7.4 percent growth last year. Recent improvement in manufacturing activity bodes well for future demand of U.S. paper and paperboard, industrial resins and some types of scrap metals. I estimate container exports to India will rise 5.1 percent in 2012, after growing 9 percent last year.
A critical driver in exports is currency valuation, and the U.S. dollar will remain on a downward trend and experience great volatility.
The U.S. dollar devalued significantly during the first four months of 2011 mostly because of quantitative easing and a surge of appetite for risk. Since then, investors have returned to U.S. assets as fiscal problems in the European Union worsened and global economic recovery was faltering.
My expectation for 2012 is that the foreign exchange value of the U.S. dollar against a broad basket of major currencies will remain on a downtrend based on historical values but will increase slightly on average by 1.4 percent over the depressed average of 2011, despite poor fundamentals. Europe is expected to experience a mild recession this year, deterring investors from shifting away from U.S. assets. I also expect China’s yuan will continue appreciating against the dollar in 2012, further bolstering growth in the westbound trade.
Given these assumptions, I expect westbound trade growth will slow to 4.2 percent in 2012, after growing 7.3 percent in 2011, to a total of nearly 7 million TEUs — a new peak.
The downside risk to the forecast is that sovereign debt concerns in Europe worsen, spurring a further deceleration in manufacturing production in China and other Asian economies. Negative sentiment in the global economy is bullish for the U.S. dollar, which in turn will exert a downward pressure on overall exports.
Mario Moreno is the economist for The Journal of Commerce and PIERS. Contact him at email@example.com.