Robust Transpacific trade is driving shipping demand growth

13 June 2017, Global – Transpacific trade flows have been robust this year. The Asia Pacific region’s exports to the United States have risen 5% y/y while US exports to the Asia Pacific region surged 16% y/y in January-April 2017. The strong back-haul US-Asia Pacific trade growth is mainly driven by oil & gas, soybean and grains exports. However, the global tanker shipping rate recovery has generally lagged the dry bulk and container shipping sector this year due to the excess supply.

Moreover, dry bulk and container shipping rates were disastrously low last year, resulting in more pronounced year-on-year improvements in spot rates, with the Baltic Dry Index up 101% y/y and the Shanghai Containerized Freight Index up 61% while the Baltic Clean and Dirty Tanker indices rose only 16% and 5% y/y in 1H17.

Chart: Global spot freight rate indices of major shipping sectors (2012 to 2017)

Chart: Global spot freight rate indices of major shipping sectors (2012 to 2017)

The Transpacific trade is also less significant to the global dry bulk and tanker shipping sector compared to container shipping where it accounts for 17% of the total container shipping volume in the world.

Historically, there has been a positive correlation between the Asian container shipping stocks and the Transpacific trade volume and freight rates. In the global container shipping sector, the 3 Japanese carriers K-Line (9107:JP), MOL (9104:JP) and NYK (9101:JP) have the largest capacity exposure to the Transpacific trade. Among the global shipping alliances, the OCEAN Alliance, which comprises of CMA CGM, COSCO Shipping (1919:HK), Evergreen Marine (2603:TT) and Orient Overseas International (316:HK), has the largest market share of 42% on this trade lane.

STRONG TRANSPACIFIC CONTAINER SHIPPING VOLUME BOTH WAYS

Both the Asia-North America and North America-Asia container shipping volume grew at a robust pace of 9% y/y in Jan-April 2017. Perhaps there could have been some front-loading of shipments ahead of the liners’ planned freight rate hikes during the annual contract renewal season; and in anticipation of potentially more protectionist policies following the United States’ withdrawal from the Transpacific Partnership.

However, shipping demand appears to be losing steam on the backhaul North America-Asia trade in April, rising only 3% y/y for that month, in contrast with the Asia-North America volume growth of 11% y/y in April.

Chart: Container shipping volume growth y/y on Transpacific trade lane (2016 to 2017)

Chart: Container shipping volume growth y/y on Transpacific trade lane (2016 to 2017)

This has helped to mitigate the average freight rate decline to 5% y/y (from 7% y/y decline in 4Q16) on these routes, particularly on the head-haul trade.

Chart: Container shipping rate growth/decline y/y on Transpacific trade lane (2016 to 2017)

Chart: Container shipping rate growth/decline y/y on Transpacific trade lane (2016 to 2017)

US IMPORTS FROM HONG KONG, PHILIPPINES, INDONESIA, CHINA AND TAIWAN SAW THE STRONGEST Y/Y GROWTH AMONG THE ASIA PACIFIC MARKETS

The United States sources 39% of its total imports from the Asia Pacific region. Among the Asia Pacific markets, US imports (in US$ value terms) from Hong Kong, Philippines, Indonesia, China and Taiwan grew the most rapidly in January-April 2017. 

Chart: Growth/Decline y/y in US Imports from Major Countries (Jan-April 2017)

Chart: Growth/Decline y/y in US Imports from Major Countries (Jan-April 2017)

China is still the largest source of imports for the United States (accounting for 20% of total US imports in US$ value terms), followed by its closest neighbours Mexico (14%) and Canada (13%).

Chart: Key sources of US imports (Jan-April 2017)

Chart: Key sources of US imports (Jan-April 2017)

Capital goods (excluding automotives) and Consumer goods dominate more than half of US imports at 26% each. This is followed by the Industrial supplies & materials (22%), Automotives (16%) and Foods, feeds & beverages (6%).

Chart: Major types of US imports (Jan-April 2017)

Chart: Major types of US imports (Jan-April 2017)

However, Industrial supplies & materials imports experienced the strongest growth this year, up 26% y/y in Jan-April 2017, mainly driven by higher crude oil, natural gas and coal imports as well as iron, steel products and steelmaking materials. This was followed by Capital goods (excluding automotives) imports, +5% y/y, which were mainly driven by higher telco equipment, electric apparatus, industrial machines and computer accessories imports. Foods, feeds & beverages imports also grew 5% y/y, mainly driven by higher food oils & oilseeds, fish & shellfish and green coffee imports.

Chart: Growth rates of US imports (Jan-April 2017) 

Chart: Growth rates of US imports (Jan-April 2017) 

ASIAN CONTAINER SHIPPING STOCKS HAVE POSITIVE CORRELATION WITH TRANSPACIFIC HEAD-HAUL VOLUME AND FREIGHT RATES

Historically, the Asian container shipping companies’ share price performance have a positive correlation with the Transpacific head-haul container shipping volume growth (decline) and Transpacific head-haul container shipping freight rate growth (decline).

Buying (shorting) the Asian shipping stocks when container shipping volume and freight rates rose (fell) y/y yielded substantial returns for equity investors.

Chart: Transpacific head-haul container shipping volume growth (decline) versus Asian container shipping stocks index

Chart: Transpacific head-haul container shipping volume growth (decline) versus Asian container shipping stocks index

Chart: Transpacific head-haul container shipping rate growth versus Asian container shipping stocks index

Chart: Transpacific head-haul container shipping rate growth versus Asian container shipping stocks index

THE 3 JAPANESE CARRIERS HAVE THE LARGEST CAPACITY EXPOSURE TO THE TRANSPACIFIC TRADE

K-Line (9107:JP), Nippon Yusen Kaisha (9101:JP) and Mitsui OSK (9104:JP) have the largest capacity exposure to the Transpacific trade among the global container shipping companies. They also have tanker and dry bulk shipping exposure to this trade.

Chart: Carrier market share on the Transpacific container shipping trade (2017)

Chart: Carrier market share on the Transpacific container shipping trade (2017)

OCEAN ALLIANCE HAS THE STRONGEST MARKET SHARE ON THE TRANSPACIFIC TRADE

On the Transpacific trade, OCEAN, THE and 2M + H Strategic Cooperation have 42%, 29% and 23% share of the total market, raising their total market share to 94%. We expect other carriers that are not part of the above 3 alliances to either join one of them or be crowded out of the market over time.

Chart: Global container shipping alliances market share on the Transpacific trade (2017)

Chart: Global container shipping alliances market share on the Transpacific trade (2017)

HONG KONG, SOUTH KOREA, SINGAPORE, INDIA AND CHINA INCREASED THEIR IMPORTS FROM THE UNITED STATES THE MOST RAPIDLY AMONG THE ASIA PACIFIC MARKETS

Asia Pacific buys around 28% of the total exports by the United States. Among the Asia Pacific markets, US exports to Hong Kong, South Korea, Singapore, India and China increased the most significantly y/y in January-April 2017.

Chart: Growth/Decline y/y in US Exports to Major Countries (Jan-April 2017)

Chart: Growth/Decline y/y in US Exports to Major Countries (Jan-April 2017)

Canada and Mexico are the largest buyers of US exports, accounting for 18% and 16% of total US exports (in US$ value terms). Among the Asia Pacific markets, China, Japan and South Korea are the top 3 biggest markets for US exports accounting for 8%, 4% and 3% of total US exports.

Chart: Key markets for US exports (Jan-April 2017)

Chart: Key markets for US exports (Jan-April 2017)

Capital goods (excluding automotives) form the largest share of US exports at 34%, followed by Industrial supplies & materials (30%) and Consumer goods (13%).     

Chart: Major types of US exports (Jan-April 2017)

Chart: Major types of US exports (Jan-April 2017)

STRONG US-ASIA TRADE GROWTH BENEFITS TANKER AND DRY BULK SHIPPING MORE THAN CONTAINER SHIPPING

However, Industrial supplies & materials exports experienced the strongest growth this year, rising 20% y/y, mainly driven by higher oil & gas, coal and cotton exports which is mainly positive for tanker and dry bulk shipping.

This was followed by Foods, feeds & beverages exports (+15% y/y), mainly driven by higher soybeans, corn and wheat exports which is positive for dry bulk and container shipping.

Automotive vehicles, parts & engines exports rose 5% y/y.

Notably, civilian aircraft exports (which fall under the category of Capital goods excluding automotives) fell 7% y/y.   

Chart: Growth rates of key US exports (Jan-April 2017)

Chart: Growth rates of key US exports (Jan-April 2017)

The Japanese carriers K-Line (9107:JP), NYK (9101:JP) and MOL (9104:JP), COSCO Shipping Energy Transportation (1138:HK) and Pacific Basin Shipping (2343:HK) will benefit among the listed tanker and dry bulk shipping companies in Asia.

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