As their volume slipped due to environmental and tariff restrictions, exporters of agricultural and scrap products are finding new markets in Southeast Asia and the Indian Subcontinent, but they say ocean capacity constraints are keeping them from keeping up with demand. Ocean carriers counter that the capacity is there; the booked cargo isn’t.
“Carriers are going where they want to go. They want a backhaul to China,” said Bruce Abbe, president and CEO of the Midwest Shippers Association. As exports to China drop while volumes to Southeast and South Asia pick up, agricultural exporters are struggling to get slots on vessels serving the growing trade routes, he said.
'Rationalized’ services or the 'fall down' issue?
The problem has intensified since carriers recently “rationalized” their trans-Pacific services — reducing capacity 6.7 percent to the West Coast and 1.3 percent to the East Coast — to cut costs, said Hayden Swofford, independent administrator of the Pacific Northwest Shippers Association, whose members ship forest products and related commodities. Rationalize is another word for combining service strings to reduce capacity in a trade lane. “You might have five or six carriers on a ship to India. The ships fill up,” he said.
Carriers disagree with those assertions. They say the perpetual habit of numerous exporters to overbook shipments is filling up the ships on paper, but the vessels are often departing with available space because the cargo “fall down” rate is 30 percent or more. “There are no real issues with space,” said George Goldman, president of Zim Integrated Shipping Services USA. “It’s not just Zim. It’s all carriers,” he said. Export shipments never delivered to the carriers can be 30, 40, 50 percent of all bookings, he said.
“It is a fall down issue,” said Lawrence Burns, senior vice president of trade and sales at Hyundai Shipping Agency. Carriers can book their outbound vessels to 120 to 130 percent of capacity and still consistently sail with available space, he said. Hyundai Merchant Marine last month became the sixth carrier to join the New York Shipping Exchange, a technology-supported platform that offers enforceable ocean freight contracts for both shippers and carriers. “We want to use these tools to get reliability from our customers,” Burns said. HMM on Monday will begin posting offers on the exchange.
The loss or diminution of the China market for some commodities is disrupting containerized exports from the United States. In the first five months of 2018, scrap paper exports dropped 14.1 percent to 408,234 TEU, iron scrap declined 35 percent to 72,249 TEU, and plastic scrap is down 43 percent to 37,084 TEU, according to PIERS, a sister product of JOC.com.
However, total US containerized exports January through May dropped only 0.2 percent to 5.3 million TEU. The decline in waste products was offset by a 15.2 percent increase in vehicles to 188,414 TEU, a 19.2 percent increase in sawn and chipped wood to 155,968 TEU, a 6.1 percent increase in auto parts to 137,535 TEU, a 6.4 percent increase in cotton to 106,027 TEU, and a 6.3 percent increase in soybeans to 106,027 TEU, according to PIERS.
China, which has by far been the largest US market for scrap paper, metals, and plastics, dried distillers grains, and other low-cost products, began restricting scrap product imports several years ago for environmental reasons. Tariffs are not a cause of recyclables shifting to Southeast and South Asia.
China’s tariffs hit some US exporters, leading to re-routing
However, some US agricultural exports have recently been affected by Chinese retaliation to Trump administration tariffs. The recent tariffs, plus China’s environmental policies affecting recyclables the past few years, have shifted US westbound volumes away from China to Southeast and South Asia, which do not have the extensive weekly direct services that China has. As a result, transshipment hubs in Asia are being stressed. “Without a doubt, the China situation is creating some operational issues,” Goldman said.
The shift of commodities away from China is expected to grow, the Institute of Scrap Recycling Industries (ISRI) stated in its July 26 advisory to members. “As China’s market continues to close to scrap imports, exporters and traders are understandably searching for new customers and markets. ISRI's trade committee has directed ISRI to initiate planning for a trade mission in 2019 to Southeast Asia, a high-potential growth market for scrap trade given their dynamic economies, growing manufacturing bases, growing middle class, and access to major trade lanes,” the advisory stated.
Adina Renee Adler, ISRI’s senior director of international relations, said China’s crackdown on imports of scrap from a number of countries because of adulterated shipments is the primary cause of reduced scrap exports, with the recent round of tariffs and counter tariffs by the Trump administration and the Chinese government playing a minor role. The only scrap export to be hit with Chinese tariffs is aluminum, she said.
However, the problem of scrap shipments and recyclables being adulterated with toxic substances or waste that is not related to the commodity listed on the bill of lading is beginning to migrate to Southeast Asia. Some Chinese scrap processors have set up operations in those countries, those recyclers continue to import adulterated shipments, and now the Southeast Asian countries are responding by suspending shipments and stepping up inspections, even for shipments from reputable exporters, Adler said.
Waste shifts to Southeast Asia
While China has been cracking down on irresponsible recycling operations, “unfortunately many of these unprincipled operators moved to Southeast Asia to take advantage of perceived relaxed environmental standards and enforcement,” ISRI stated. Malaysia, Vietnam, Thailand, and Indonesia have recently taken actions to stem the importation of adulterated scrap products, the ISRI advisory stated.
Whether it is due to growing volumes to Southeast and South Asia, or persistent overbooking by exporters, or both reasons, space is tightening on outbound vessels and exporters are finding they must book earlier than they had been. “I was hearing that space was actually tight and the the East Coast is close to three weeks out on bookings,” said Ed Zaninelli, president of Griffin Creek Consulting.
Abbe said the capacity constraints are not systemwide, but more so to the newer destinations in Southeast Asia and the Indian subcontinent. “The concerns we’re hearing have to do with service — exporters’ ability to deliver cargo to the destinations we need to go,” he said.
An added handicap in the Southeast and South Asia trade lanes is that those countries are served mostly through transshipment hubs. “The challenge is on the feeder ships,” Burns said. Export shipments make their intended voyage to the hub ports, but delays may occur there because of competition for berth space among the many transshipment services to destinations throughout the region, he said.
In addition to vessel capacity problems on some trade lanes, Abbe said agricultural exporters face sporadic equipment shortages in the US interior. This is a perennial issue because import containers move mostly to large population centers, which are often located hundreds of miles from the rural areas where agricultural exports are sourced.
On the other hand, carrier pricing for the ocean leg of the export journey is not an issue, even though outbound freight rates are edging up, due in part to rate hikes for bunker fuel, the average price of which was up 51.6 percent year over year in July across the ports of Rotterdam, New York-New Jersey, and Shanghai to $454.42 per metric ton (about $400 per ton), according to IHS Markit data. Spot shipping rates from the US East Coast to China for the week of July 40 rose 19.6 percent compared with the prior week to $616 per FEU, according to the Freightos Baltic Index, while the rate from the West Coast rose 6.5 percent to $477.
“The market took a small increase of $20 to $55 per TEU on July 1, mostly to reflect increases in bunker fuel costs for carriers,” Abbe said. “Some carriers are charging a bunker surcharge, while others build it into the rates. Maersk announced an $80 per TEU/$100 per FEU GRI [general rate increase] hike for Sept. 1. Others suggested that westbound GRIs likely won’t occur until the fourth quarter of the year. Rate increases tend to happen more at that period, around the post-harvest shipping period,” Abbe stated in the Midwest Shippers Association newsletter.
Freight rates are adjusted at different times of the year based upon the export products, Goldman said. Consistently moving exports such as chemical products usually move under annual contracts. Seasonal products, especially agricultural exports, are tied to the harvest, and rates for low-margin, relatively consistent exports such as scrap paper can be adjusted monthly, he said. Both shippers and carriers agreed that with ocean rates to base ports in China as low as $300 per FEU for the low-priced commodities, about $400 to $500 per FEU to Southeast Asia, and $800 per FEU to India, freight rates are not a game-changer in the export market.
Contact Bill Mongelluzzo at firstname.lastname@example.org and follow him on Twitter: @billmongelluzzo.