The economies of China, India and Vietnam are projected to grow faster in 2013 than they did in 2012, raising hopes in the maritime industry that the major east-west trade lanes serving Asia again will be engines of growth.
China’s economy is projected to grow 8.5 percent this year, India’s GDP will increase 5.4 percent, and Vietnam’s economy is forecast to increase 6 percent.
By most every measurement, 2012 was a disappointment for cargo interests, carriers and ports in the east-west trade lanes. Europe slipped into recession, dragging the Asia-Europe trade down with it. Manufacturing in Asia declined, so U.S. exports of raw materials and scrap products to China dropped.
Europe’s containerized imports declined 2 percent, and, for the first time in five years, Europe’s imports failed to match or exceed its exports, according to the North Europe Global Port Tracker published by Ben Hackett Associates. Europe’s exports increased 3.3 percent in 2012, but from the Mediterranean and Black Sea countries, exports increased only 1.4 percent.
The Asia-U.S. trade fared somewhat better, but not much. U.S. containerized imports increased 4.6 percent in 2012, according to Journal of Commerce economist Mario Moreno. Exports increased a paltry 2 percent.
The disappointing trade numbers in 2012, which followed a lackluster performance in 2011, put ocean carriers in a bind. Global container capacity increased 7.2 percent last year, noticeably higher than growth in demand, according to research analyst and consulting firm Alphaliner. Carriers this year will take on a record amount of new capacity. Global container capacity is scheduled to increase 9.8 percent in 2013.
The new ships mostly will be large vessels capable of carrying 10,000 20-foot-equivalent units or more. Although most of the vessels will enter the Asia-Europe trade, their introduction will cause a cascading effect, with vessels of about 8,000-TEU capacity moving from the Asia-Europe to the Asia-North America trades.
About 40 new vessels with a capacity of 10,000 TEUs or more entered service last year, almost all of which went into the Asia-Europe trade. Another 45 mega-ships will be launched this year, including delivery of the world’s first 18,000-TEU container ship to Maersk Line, according to London-based research analyst Drewry.
Vessels larger than 10,000 TEUs greatly lower the per-unit cost of transporting containers compared to Panamax vessels of 5,000 TEUs. These modern ships are also much more fuel efficient than the preceding generation of vessels, reducing fuel costs by as much as $30,000 a day, according to Alphaliner.
When confronted with a significant increase in capacity amid slow growth in demand, however, carriers often panic, slashing freight rates to attract cargo. That’s what happened last year. The average global freight rate peaked last summer at $2,590 per 40-foot container, but plummeted 66 percent by December to $1,706 per FEU, according to Drewry.
Carriers showed somewhat more discipline in the eastbound Pacific, where spot freight rates dropped from a peak of $2,880 per FEU in early August to $2,168 per FEU in December.
Trade conditions will improve this year, with the U.S. and China leading the way. IMA Asia expects U.S. GDP to increase 3.2 percent in 2013, up from 2.6 percent last year. China’s GDP will increase at least 8 percent, with some estimates as high as 8.5 percent, compared with 7.7 percent in 2012.
Vietnam, one of the United States’ fastest-growing trading partners, will experience GDP growth of 6 percent, compared with an increase of 4.8 percent last year. As wages increase in China, manufacturers are looking to Southeast Asia for lower-cost labor. Footwear importers, for example, see imports from China slowly declining in the coming years as some production moves to Vietnam.
India, with a population approaching the size of China’s, will grow 5.4 percent, compared with growth of 4.4 percent last year. Although that’s good, economists such as Walter Kemmsies of port engineering firm Moffatt & Nichol say India is still some years away from becoming an import and export powerhouse, given its poor infrastructure and structural impediments to trade.
Growth also will be stronger in 2013 for other important trading nations in Asia. GDP will increase 3.5 percent in South Korea, 2.3 percent in Taiwan and 6.6 percent in Indonesia, according to IMA Asia. Japan, however, will struggle with growth of only 0.8 percent, compared with GDP growth of 1.6 percent last year.
Most economists predict this year’s first quarter will be sluggish, but growth will pick up in the second quarter and accelerate in the final two quarters of the year. China’s exports to the U.S. and Europe will increase as the year progresses.
Carriers in the Asia-Europe and trans-Pacific trades already are reaping the benefits of the pre-Chinese New Year busy period when factories in Asia push production forward before closing for the two-week celebration. “Vessels are currently full and have been so since the middle of December last year,” Lars Mikael Jensen, head of Asia-Europe trade at Maersk Line, told The Journal of Commerce.
The most recent Global Port Tracker projects month-to-month increases in U.S. imports at least through the end of its forecasting period in May. The December 2012 JOC-PIERS Container Shipping Outlook expects containerized U.S. imports to increase a tepid 1 percent in the first two quarters of this year, before ramping up in the second half of the year.
China’s economy bottomed out in the third quarter of 2012, with the export juggernaut turning around in the fourth quarter. Exports increased 7 percent in October and November compared to the same months in 2011, according to IMA Asia.
China last year initiated an infrastructure development program, which contributed to its growth in the final quarter of the year. The Chinese government also is nudging the country away from almost total dependence on export-led growth to more of a consumption-based economy.
Over the long term, China’s growing middle class will become a strong market for U.S. agricultural exports as food products from the U.S. are respected in China as being of high quality. As China’s middle class consumes more meat products, U.S. exports of feed grains to China will increase.
Europe is expected to remain in recession during the first half of 2013, with slight growth returning in the third and fourth quarters. Despite the depressing economic news, pent-up demand among European consumers should result in greater consumer spending in the second half of the year.
The U.S. can contribute to growth in Europe and Asia if Washington addresses its budget deficit issues. IMA Asia is bullish on prospects for U.S. growth, especially with the boom in oil and gas production that has been under way for the past few years, and believes the U.S. will help lead the global economy to a broad recovery beginning in the second half of the year.
After slowing last spring, manufacturing activity in the U.S. has picked up, according to a Jan. 10 report by the Manufacturers Alliance for Productivity and Innovation. The group cited increased investment in factories and rising production heading into the new year.
Industry analysts see another year of volatility in freight rates in the major east-west trades. In early January, average freight rates were 26 percent higher than they were in early 2012, according to Alphaliner.
Lars Jensen, CEO of SeaIntel, sees 2013 being a repeat of 2012, with freight rates falling after the Lunar New Year celebration, picking up in the summer, peaking in the fall and then dropping again in the final two months of the year. The east-west trades have entered a phase where they are experiencing two complete up-and-down cycles a year, Jensen said.
In the current environment where capacity is increasing at more than twice the growth rate of container traffic, carriers must manage the deployment of their vessels to better align supply with demand. Carriers last year were unable to achieve this balance in the Asia-Europe trades. Freight rates last summer declined much more rapidly in Asia-Europe than in the trans-Pacific, where carriers exerted more self-discipline.
Trans-Pacific carriers last year ran a two-track strategy in which they offered low — some would say non-compensatory — freight rates to beneficial cargo owners in service contracts, and then raised the rates they charged to cargo consolidators four or five times during the course of the year.
Steve Aldridge, president of Hong Kong-based third-party logistics provider Encompass Global Logistics, said this strategy resulted in an untenable spread in freight rates in which retailers and other large importers were paying $1,800 to $1,900 per FEU on shipments from Asia to the West Coast, while non-vessel-operating common carriers were paying $2,700.
Carriers generally don’t express much sympathy for NVOs who deal primarily in the spot marketplace, although they admit freight rates that were in BCO contracts last year aren’t sustainable. The Transpacific Stabilization Agreement, a discussion group representing 15 of the largest carriers in the eastbound Pacific, announced plans to increase freight rates $600 per FEU to the West Coast and $800 per FEU to all other destinations when contracts come up for renewal this year.
Some carriers are floating the concept of quoting freight rates on a quarterly basis, adjusting rates on a mutually agreed formula based on seasonal fluctuations in cargo volumes, Aldridge said. Carriers, he said, have discovered yield management, but they’re still struggling for a process of dealing with the normal peaks and valleys of vessel load factors throughout the year.
Likewise, they must find a better way of handling round-trip pricing, he said. For more than a decade, carriers have based their pricing on the head-haul, with the eastbound Pacific subsidizing the weaker westbound leg. That results in a wide variation in rates, such as $2,000 for an eastbound container of electronics goods, with a westbound shipment of scrap paper or hay moving at $400 per FEU or less.
The TSA last year moved to rectify this situation by filing a request with the Federal Maritime Commission to combine with its westbound counterpart, the Westbound Transpacific Stabilization Agreement, to have just one discussion group covering both directions in the Pacific trades. The combined group could be formed this year.