Three issues certain to impact 2019 trade

Three issues certain to impact 2019 trade

Three issues will have a major impact on the container shipping world for all stakeholders in 2019: trade squabbles, capacity management by carriers, and service contracts with (or without) some form of fuel cost recovery.

The trade issue between the United States and China is one key to how the trans-Pacific will play out. Where the US-China relationship goes now that US President Donald Trump and Chinese President Xi Jinping have declared a truce that will delay the latest round of tariffs on $200 billion in Chinese goods until at least the spring will trigger carrier decisions on deployment of trans-Pacific capacity. That, in turn, will impact how to approach the market for 2019-2020 service contracts with cargo interests. With Asia-Europe contracts being signed first, however, we could see early indications of market direction.  

I think this will be a year of turmoil because of unknowns, primarily because of timing. The US-China trade issue is a big key. The impact on US imports so far has been positive in terms of volumes, with beneficial cargo owners (BCOs) trying to beat anticipated tariff increases — the front-loading phenomenon. Carriers, managing capacity in the trans-Pacific, raised spot rates to near-record levels.

But what happens now that the latest round of tariffs, initially scheduled to take effect on Jan. 1, has been shelved, with the United States saying China has pledged to make “very substantial” purchases of US goods?

Tariff impositions earlier in 2018 had a negative impact on US exports, especially agricultural products. Will that change? What about China deciding it doesn’t need any more wastepaper, the single largest containerized US export?

Most experts agree that US imports will fall significantly if the trade dispute isn’t resolved, a damaging scenario for BCOs, carriers, and third-party logistics providers (3PLs) alike.

The next unknown is the content of service contracts, starting with the Asia-Europe market. This is where timing comes into play. Those contracts are being negotiated now. How will carriers approach the large shippers with the new contracts considering known fuel cost increases are already in place and considering the International Maritime Organization’s mandate to cut emissions a year from now?

As background, carriers started 2018 by virtually ignoring the fuel cost increases that occurred in 2017 and anticipated increases for 2018. Carriers’ 2018 financial reports reflect that blunder. They tried to capture some of the increased costs in mid-year, but it applied to less than half of the carriers’ third-quarter and fourth-quarter lift because of contract terms. 

In the trans-Pacific, carriers smartly managed capacity and watched spot market rates more than double the service contract levels. The result was vessels sailing virtually full through most of the fourth quarter. In the Asia-Europe trade, however, carriers didn’t manage capacity until the last few weeks of the shipping season, so rates dropped. How will this play into their negotiating strategy in new contracts?

2019 rates prediction

Allow me to speculate: carriers will seek a modest rate increase to base rates and some form of fuel surcharge through 2019, and then an increase to that surcharge on Jan. 1, 2020. I’ve learned in four-plus decades in this industry that price is a function of the market, supply and demand being the key component, and costs are rarely considered.

If carriers choose to manage capacity as they did in the trans-Pacific in the second half of 2018, they will be able to obtain and retain reasonable increases. If they choose to repeat what they did in the Asia-Europe market, rates will fall, and they will be in a serious loss position again. The decision is in the carriers’ hands.

These issues will dominate the realities for 2019. Failure to resolve the US-China trade dispute will cause significant drops in volume, triggering one of two reactions from carriers: a panic-driven rate drop to protect existing volumes and cash flow or true capacity management as they did in late 2009 and 2010.

The former would be a disaster for carriers and wouldn’t produce a single load of additional freight in the market. Instead, it would simply reduce top- and bottom-line results. Managing capacity could produce results as it did in 2010, taking collective losses of $21 billion in 2009 to a profit of $8 billion in 2010. Those decisions are directly in the hands of carriers’ senior management.

There is a potential third scenario: the trade dispute will be resolved, yielding global trade growth of 3 to 6 percent for 2019. Again, it’s strictly the carriers’ decision on what to do with the new contracts, how much of the fuel increase they decide to recover, and then how they manage capacity.

What’s the outcome? That’s the multibillion-dollar question. As an industry, losses amounted to nearly $30 billion over the past decade. Even after a reasonable profit in 2017, carriers returned to losses in 2018 because of their decisions on fuel.

Sooner or later, logic says they must recognize the unsustainability of prolonged losses, but logic rarely seems to prevail. It’s why there are so few large carriers left in the world. I can’t stress enough that the outcome rests with the decisions being made now and early in 2019 by carrier management.

Finally, I have to comment on the recent attempt by shipper interests to remove the block exemption the European Union grants carriers that in essence allows vessel-sharing alliances. I’ve noted several times in several venues recently that this would create a bad outcome for shippers. I’ve been joined by Drewry in that sentiment. I don’t know the thinking behind the decision to take on this issue, but I do know the results will be fewer carriers in the Asia-Europe markets, fewer vessels, and fewer options. I doubt those are the results shippers are seeking.  

Gary Ferrulli is CEO of Global Logistics & Transport Consulting. Contact him at gferrulli@globallogisticsandtransport.com.