China-US shipping rates tumble on overcapacity and trade tariffs double whammy

26 March 2018, Global – Container shipping rates from China declined across all major trade lanes (with the exception of China-Japan) in the spot market during the past week, down 4% w/w. In particular, spot freight rates on the China-US West Coast and China-US East Coast trade lanes corrected significantly by 7% and 4% in the past week. The US trade tariffs will put pressure on China-North America freight rates near term. This comes at a particularly bad time as the container shipping companies are heading into their annual contracting season with customers in the coming months.

COSCO SHIPPING and Orient Overseas have substantial revenue exposure to the Transpacific trade of 28% and 38% respectively; US tariffs will have a disproportionately negative impact on both carriers as well as the Chinese port operators China Merchants Port Holdings, COSCO SHIPPING Ports and Shanghai International Port Group.

We trim our forecast global container shipping demand growth to 4.2% in 2018, moderating from 5.2% demand growth in 2017. This will fall short of the container shipping industry’s capacity expansion this year; we forecast global container shipping net capacity to grow 5.1% y/y in 2018 after taking into account vessel scrapping and delivery slippage. 

CHINA-US WEST COAST SPOT FREIGHT RATE FALLS BELOW US$1,000/FEU

China-US West Coast and China-US East Coast container shipping rates (based on the SCFI) fell 7% and 4% w/w respectively to US$945/FEU and US$1,933/FEU respectively during the past week ending 23 March 2018. We have not seen China-US West Coast spot freight rates fall below US$1000/FEU since June 2016 which does not bode well for the upcoming Transpacific contracting season. If spot freight rates continue to slide, the carriers are likely to be compelled to sign lower container freight rates for their annual contracts that typically run from 1st May.

Chart: China-US container shipping spot freight rates (2013 to 2018)

Chart: China-US container shipping spot freight rates (2013 to 2018)

 

HEAD-HAUL SPOT FREIGHT RATES FROM CHINA WEAKENED ACROSS MOST MAJOR TRADE LANES

Container shipping rates from China declined across all major trade lanes (with the exception of China-Japan) in the spot market during the past week, down 4% w/w. Apart from the southbound trade lanes (namely China-Australia, China-Southeast Asia, China-South America, China-South Africa) and China-Japan, head-haul spot freight rates from China have fallen below last year’s levels.

Chart: Spot container shipping rates from China fell in the past week (23 March 2018)Chart: Spot container shipping rates from China fell in the past week (23 March 2018)

 

Chart: Apart from the southbound trade lanes, head-haul spot freight rates from China have fallen below last year’s levels (23 March 2018)Chart: Apart from the southbound trade lanes, head-haul spot freight rates from China have fallen below last year’s levels (23 March 2018)

 

STRONG TRANSPACIFIC TRADE VOLUME GROWTH MOMENTUM COULD FALTER AS US TARIFFS KICK IN

Container shipping volume growth has been robust on the Transpacific trade. Asia-North America volume surged 15% y/y in January 2018 (partly due to the later timing of the Lunar New Year holidays this year) and 8% in full year 2017 (versus 5% growth in full year 2016). Furniture & lighting, raw materials, machinery, fashion accessories and building materials have been the key drivers behind the stronger shipping demand on the Transpacific trade.

However, demand growth momentum could falter as the US trade tariffs kick in. North America-Asia volume has already been soft, down 6% y/y in January 2018 and 1% lower y/y in full year 2017 (versus 8% growth in full year 2016) and could deteriorate further if China retaliates with more tariffs.

This will have a detrimental impact on COSCO SHIPPING (1919:HK) and Orient Overseas (316:HK) which have substantial revenue exposure to the Transpacific trade of 28% and 38% respectively. The listed Chinese port operators China Merchants Port Holdings (144:HK), COSCO SHIPPING Ports (1199:HK) and Shanghai International Port Group (600018:CH) will also be negatively impacted.

Chart: Asia-North America container shipping volume growth/decline (2013 to 2018)

Chart: Asia-North America container shipping volume growth/decline (2013 to 2018)

Chart: North America-Asia container shipping volume growth/decline (2013 to 2018)

Chart: North America-Asia container shipping volume growth/decline (2013 to 2018)

 

GLOBAL CONTAINER SHIPPING DEMAND GROWTH TO FALL SHORT OF INDUSTRY CAPACITY EXPANSION THIS YEAR; OUTLOOK TO IMPROVE FROM 2019

We trim our forecast global container shipping demand growth to 4.2% in 2018, moderating from 5.2% demand growth in 2017. This will fall short of the container shipping industry’s capacity expansion this year; we forecast global container shipping net capacity to grow 5.1% y/y in 2018 after taking into account vessel scrapping and delivery slippage.

We expect the global container shipping sector’s operating outlook to improve from 2019 as capacity growth moderates based on the current vessel orderbook and delivery schedules.

Chart: Global container shipping demand and supply growth and idle fleet ratio versus freight rate growth (2007 to 2020)

Chart: Global container shipping demand and supply growth and idle fleet ratio versus freight rate growth (2007 to 2020)

 

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