BIMCO Shipping Market Outlook: Container shipping sector and Macroeconomics September 2019
Low growth persists amid trade tensions and a slowdown in global manufacturing
Global economic growth continues to slow with recession warnings sounding in many corners of the world, none of which points to high global trade volume growth for the time being.
The Global Manufacturing PMI (Purchasing Manager’s Index) reported by IHS Markit, has been under the threshold level of 50 in every month since May, reaching 49.5 in August, indicating four months of contraction. At 49.3 the index reached its lowest level since October 2012 in July.
Global trade volumes of manufactured goods also continued to contract in July with lower production and fewer new orders signalling that this trend is likely to continue at least over the next few months. The new exports sub-index fell to 47.5 in August from 48.3 in July, as international trade volumes fell at their fastest rate since late 2012. (Source: J.P. Morgan).
The new US tariffs will have a limited impact on shipping as these are mostly high value containerized goods, and although the Chinese will add tariffs on bulk goods such as crude oil, these bulk trades have already been severely disrupted, which the shipping industry has already adapted to.
In particular, the continued slowdown in manufacturing is highlighted as a reason for slowing growth as well as low business spending and consumers shying away from buying capital goods.
Germany’s economy is the biggest cause for concern in Europe, where falling GDP in the second quarter has led to concerns of the country heading for a recession.
Germany’s manufacturing PMI rose slightly to 43.5 in August, up from 43.2 in July, which was its steepest decline in seven years. Leading the decline in July was the largest fall in new export orders since 2009, as well as output falling at a faster pace. The German economy has been hit hard by weakening demand domestically as well as internationally, including the effects of US-inspired trade tensions, which Germany, and its export heavy economy has been hard hit by.
Auto sales in particular have slowed, with figures from the German Association of the automotive industry (VDA) showing that production is down 12% in the first seven months of the year compared to the same period last year, and exports are down 14%, with a slowdown in auto sales in China in particular hurting German exports.
The IMF has revised its growth expectations for the US upwards by 0.3 to reach 2.6% in 2019, on the back of a strong first quarter, although it expects growth to slow in the remainder of the year. GDP growth was at 3.2% in the first quarter, yet fell to 2.1% in the second. Statistics from the Bureau of Economic Analysis (BEA) showed that lower inventory investments, exports and investment in capital goods slowed growth in the second quarter, despite increased spending by both the federal government as well as consumers. Growth is expected to slow in 2020 to 1.9%, with the effects of the stimuli, such as the tax cuts winding down.
The US’ manufacturing PMI remains just above the threshold of 50, posting 50.3 in August. Although this figure still signals growth, it is the weakest expansion since September 2009, with June and July also posting disappointing results of 50.6 and 50.4 respectively.
Growth continues to slow in China although it remains very high; GDP growth was reported at 6.2% in Q2 2019, and 6.3% in the first half of the year, according to the National Bureau of Statistics China (NBS). The IMF forecasts that full year growth will be 6.2% in 2019 and 6% in 2020. Weakening exports from slowing global growth as well as trade tensions have hurt the economy, with manufacturing and infrastructure slowing. Although consumption remains on the right path, car sales have slowed 11.4% in the first seven months of the year according to the China Association of Automobile Manufacturers, with production down 13.5%. BIMCO has previously explained why it does not believe that Chinese GDP is a reliable indicator of the Chinese economy on its own and that it therefore pays to follow data on imports/exports as well industrial production.
The Chinese government has launched several stimulus programmes over the past few months. Latest measures include reforms to interest rates aimed at lowering borrowing costs to boost spending.
Industrial output was in particular concerning by Chinese standards in July when it grew by just 4.8%, which is the weakest it has been in China since February 2002, adding to the worry that the stimulus measures have so far done little to stop the long term trend, despite some short term good news at the start of the year.
Elsewhere in Asia rising tensions between Japan and South Korea are being played out. Originally down to a dispute over compensation for wartime forced labour, the countries have each removed the other from their lists of preferred trading partners, causing delays to those trading, as well as placing trade restrictions, as Japan has done on three high tech materials that South Korea’s economy relies on.
As with trade wars elsewhere, this will not only hurt the two countries’ economies, in a time when in particular South Korea’s is already struggling, but also others’. Although the volumes of impacted goods has so far remained very low, shipping is held hostage in the situation and should the conflict escalate further, shipping volumes between the two countries, as well as to the rest of the world, could be impacted.
The latest IMF forecasts do not take into account the latest escalation of the trade war, in which the US President announced 10% tariffs on USD 300 billion worth of US imports from China,
consisting mostly of consumer goods and China responded with 5 to 10% tariffs on USD 75 billion worth of Chinese imports from the US. A delay in the implementation of tariffs on the most sensitive goods, such as phones and laptops appears to be an admission by the US government that increasing tariffs hurt US consumers. The first half part of the tariffs will be implemented on 1 September, and the rest will follow on 15 December, with the Chinese retaliation following the same timeline.
The July IMF update to its 2019 growth forecasts from April shows that advanced economies are performing somewhat better than expected while the opposite is the case for emerging economies, with growth revised upwards by 0.1 and downwards by 0.3 respectively.
Ship sizes keep increasing despite stagnant volume growth
Demand drivers and freight rates
Global growth in container volumes has picked up slightly in the second quarter of the year, with growth in the first seven months reaching 1.2%, compared to the just 0.8% in the first quarter. Despite this rise, the growth figure remains substantially below what the industry has been used to, with growth in the first seven months of 2018 equal to 4.4%.
This low growth figure masks large differences in developments on trades around the world. In particular a 5% rise in exports from the Far East into Europe singles itself out. That high growth should come on this trade is good news for the shipping industry as the large distances lead to a more than proportional increase in tonne-mile demand.
Despite this growth, spot freight rates on the trade between the Far East and Europe have continued to fall. On 30 August spot rates are down 24% from the start of the year and 18.8% from the same week in 2018.
Also experiencing high volume growth is the US East Coast (USEC) which year after year continues posting high volume growth. According to BIMCO’s own data, growth in the first half of the year stands at 7.2%, compared with the 7.4% and 10.6% in the first six months of 2018 and 2017 respectively. Despite this, spot rates continue to fall and are down 22.7% year-on-year, so that it costs USD 2,691 per FEU on 30 August to ship a container from Shanghai to the USEC. Taking into account more ports and other contract types, the CCFI ha fallen less dramatically, down 4.8% from the same time last August.
High growth rates on both the Far East to Europe, as well as imports into the USEC raises the question whether containers are being sent from the Far East to the USEC through Europe.
In contrast, other major container trades have experienced more sluggish growth. The trade war is certainly making itself felt on the Far East to North America route, where volumes have fallen by 0.4% in the first seven months of the year (Source: CTS). Similarly, laden container imports into the US West Coast (USWC) in the first seven months of 2019 are down 1.5%, according to BIMCO’s own data.
Since the start of the year the container fleet has grown by 2.6% so far this year, a number which BIMCO forecasts will grow to 3.5% by the end of the year. Deliveries include four ships larger than the previous record holding vessel, the first with a capacity of 22,000 TEU which was soon followed by the delivery of two 23,756 TEU vessels and one 23,656 TEU ship.
The size of the ultra large container ship (ULCS) fleet (14,500+ TEU) will only go one way in coming years, as these vessels are piling up in the orderbook with the already active vessels so young that demolition is still a long way off. Of the 165 ULCSs in the active fleet (currently at 22.6 million TEU), only 8 are over 10 years old, whereas 78 have been sailing for two years or less. These vessels are here to stay for the next two decades, and will soon be joined by many more.
There are currently 71 ULCSs on order, amounting to additional capacity of 1.3m TEU with all but four contracted to be delivered between now and the end of 2021. The remaining four are set for 2022. A furthur eleven have recently been ordered by Evergreen, all of which have a capacity of 23,000 TEU.
These ULCSs will be deployed on the Asia-Europe route at a time when freight rates indicate that there is no need for additional capacity, and existing sailings are being blanked despite the 5.2% volume growth rate, indicating that there is no urgent need for these extra ULCSs.
As these newer ships are introduced, cascading of smaller, yet still significant ships will lead to added capacity on smaller routes. As larger ships have arrived on the Far East to Europe routes, Neo-Panamax ships (10,000 – 14,499 TEU) have found themselves being deployed elsewhere, a trend which will continue with larger and larger ships entering smaller trades. Cascading clogs up the balance of these trades where there is currently little demand growth.
Growth rates on intra-Asian container trades are viewed as an indicator of what is to come on long-haul routes, as volumes here indicate the health of supply chains in the region and therefore what finished goods are likely to be exported from Asia in the near future. With a volume growth rate of 0.8% in the first seven months of 2019, low growth levels can be expected in global demand for container shipping for the remainder of the year.
The continued slowdown in global manufacturing and the broader global economy will impact container shipping. BIMCO expects the GDP multiplier to stay around one for the foreseeable future.
The slowing demand growth means that despite the comparatively low fleet growth expectations which BIMCO has of 3.5%, the fundamental balance of the container shipping market will worsen this year. Furthermore, with the fleet currently projected to grow by 3.2% in 2020 this is unlikely to change much next year, with the industry heading deeper into a hole. Cutting costs will remain in focus to be able to weather the storm.
Adding to the worsening of the fundamental balance, the added fuel costs due to the 2020 sulphur cap, paints a disturbing picture for the rest of the 2019 and 2020 for container shipping. As we have also noted in the dry bulk analysis, the oversupply of capacity is likely to make it difficult for shipowners to recover the additional fuel costs.
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