The Quarterly Forecast Q2 2019

The shipping industry is breathing a much-needed, collective sigh of relief after an extremely hectic q1. All is now quiet on the western front... for now.

There are a few lasting unknowns pertaining to trade negotiations, tariffs, and carrier consolidation, but these industry issues are mere anthills compared to the mountainous build-up of containers at U.S. ports during the several months between President Donald Trump’s $250 billion tariff announcement on Chinese goods last September and the start of the Chinese New Year this February, when shippers scrambled to get ahead of the new measures, while traditionally rushing to get orders out in preparation for the prolonged shutdown of many Asian factories and businesses.

Those entangled in the ensuing port congestion were subject to an astounding amount of associated charges, due to increased wait times and carrier rate inflation. Eventually, one of two things will happen: either costs incurred by shippers will be passed to consumers, or we’ll see companies lower earnings, because they’re holding inventory. Any further economic effects will likely become clearer in Q3, though there are several reasons to be optimistic about the overall health of global trade.

Thus far, the U.S. trade war with China has slowed down the latter’s economy, affecting global economic growth. We are not experiencing any heightened threat from an inflation standpoint, however, which suggests the downward momentum is symptomatic of the Trump administration’s trade practices rather than the end of an economic cycle. So, while the slowdown is indeed very real, low unemployment and a low-interest rate environment should help to dispel recession-related anxiety.

Much will depend on the timing and parameters of an anticipated resolution or compromise in U.S.-China economic relations going forward. It is likely the demands of the electoral cycle will lead the two to an agreement rather than further escalation.

As always, we will continue to monitor the situation and provide extraordinary freight forwarding and logistics services to our clients, no matter the seas ahead.

Deja Vu at the Port of L.A.

From 2014 to 2015, a longshoreman strike halted trade at nearly 30 U.S. ports along the Western Seaboard. Lasting about three months, the work stoppage resulted in hundreds of vessels stalled just off the coast for its duration. Once ended, it took dockworkers six months to get back on track.

This congestion was a walk in the park compared to what happened after President Trump’s tariff announcement at the tailend of 2018: In anticipation of its implementation, and with trepidation over threats of an even further escalation, cargo volumes from China skyrocketed. Consequently, there simply weren’t enough boats or resources—human or technological—at East and West Coast ports.

For context, even in a congested port, it normally doesn’t take truckers more than four days to retrieve a container. This time around, between the ports being ill-equipped to handle such capacity, the curtailment of trucking fleets, and a severe shortage of chassis, truckers couldn’t get containers out of the port for 10 to 15 days post-delivery orders. Such havoc created an average charge of $3,000 per container in demurrage—costs incurred by shippers when a container is left unloaded at a port for longer than the allotted grace period—for every forwarder.

THE BREAKDOWN

Automation at the Ports

Technology at U.S. ports lags the rest of the world. There are developing nations with more efficient port systems, strictly because of longshoremen’s stranglehold on the industry. At the Port of Amsterdam, for example, a boat is offloaded in about six hours. In L.A., it could take up to five days, because dockworkers still prefer pencil and paper recording methods. This is not sustainable.

APM Terminals—a terminal operating company responsible for a network of 76 ports and more than 100 inland services locations globally—recently announced its intention to introduce automation to its Pier 400 terminal in Los Angeles. The International Longshore and Warehouse Union (ILWU) is blocking the construction permit, however, despite clear contractual language accepted by unions in 2008 guaranteeing employers’ freedom to do so.
The proposed automation would serve a section of the port devoted to working reefer containers—refrigerated containers used for transporting perishables.
There are a lot of risk factors involved when dealing with reefer containers, which makes these ideal candidates for automated processes. If there’s any kind of manual error made with reefers, for example, you’re looking at a large liability.
Currently, there are two automated terminals at the Los Angeles-Long Beach port complex. These terminals experienced loss of general longshore and marine clerk jobs when automation was first introduced, but data from the Pacific Maritime Association (PMA)—a nonprofit dedicated to negotiating and administering maritime labor agreements with the ILWU—shows that employment in the harbor has actually increased by more than 1,100 jobs since 2015.

Carrier Consolidation

The future may be very limited, in terms of carrier selection. There will be several major carriers likely dominating the entire industry, potentially resulting in a very negative impact on freight forwarders.

Carriers are now trying to become forwarders, because there is upside potential in premiums they can add to their product when sold directly to the shipper or importer. They’ll add on the brokerage, they’ll add on delivery. It’s all about service, though, and lack thereof. Generally speaking, carriers have a hard time matching the level of service of freight forwarders.
Smaller importers and shippers essentially provide a different product. Small forwarders can’t service the really big shippers, because their processes and automation all have to communicate with each other, and they have their own logistics teams, anyway. The real risk is to the multi-billion dollar freight forwarders competing with the carriers.

Source: The World Container Index assessed by Drewry, a composite of container freight rates on eight major routes to/from the United States, Europe, and Asia

The Breakdown

Unless President Trump makes another serious announcement, people probably won’t flood to ship inventory ahead of schedule again. It was a false market. It doesn’t look like he’ll be announcing anything soon, so the normal trend of the market will take over and what will happen is, by late March/April, it will begin to uptick a little bit.

Following Chinese New Year on February 5, cargo volumes at the Port of Los Angeles started to dwindle, spurring an onslaught of cancellations. We predicted as much, knowing that the 30- to 60-day production cycle would begin anew for all shippers who frontloaded inventories ahead of schedule.

April is historically contracts season for Vessel Owning Common Carriers (VOCCs) and Non-Vessel Owning Common Carriers (NVOCCs). Between excess capacity and the desire to create demand ahead of contract negotiations, blank sailings should be expected. It’s not structural, however; merely a moment in time.
Carriers announced 35 blank sailings through February and early March.
Such cessations should taper off once we get through the bulk of advanced goods brought in and we return to the normal replenishment cycle. The market itself is fairly healthy.

The Breakdown

Trade War Tensions

There was a drastic increase in cargo traffic through December and into January, primarily driven by an attempt to avoid tariffs. The subsequent slowdown was affected by shipments being finalized before the feared additional tariffs dates, and also by the slowing of the Chinese economy.

Unlike other countries, China is likely to aggressively respond to the economic slowdown with a variety of tools until they see a recovery in economic growth.
Ultimately, the demands of the electoral cycle will likely lead the United States to an agreement with China. At this point in time, it is unclear whether this will result in deep structural changes in China, or just an impressive increase in Chinese imports from the United States prior to the 2020 elections.
Trade figures may not fully normalize until we have more clarity into the U.S.-China agreement.

Economic Slowdown

The global economy was in very good shape until the Trump administration decided to start trade wars with the rest of the world. The U.S. trade war with China slowed down China’s economy, affecting global economic growth.

Typically, a slowing global economic growth could simply be a sign of the end of an economic cycle, when central banks strangle the economies to contain inflation which usually picks up during an expansionary period. This time, we have not seen any significant threats of inflation, and the global slowing is mainly a result of bad economic and trade policies from the U.S. administration.

European growth also slowed, primarily because of the slowing of exports by Germany—the largest and most export-oriented economy in Europe. China is Germany’s third-largest export market, so any slowdown in Chinese demand results in a slowdown in Germany, and hence, the European economy.
The slowdown probably isn’t as concerning as it may seem: Due to the nature of GDP [Global Domestic Product] calculations, a decline in exports has a disproportionate effect on the GDP if such an effect is not felt in the economy otherwise.

Commodities

The potential for flat or even lower interest rates in the United States and several other developing nations is likely to help many commodities-dependent emerging markets and developed countries with large commodity exposure, like Australia.

Since China is the primary driver of the increase in commodities demand, the specifics of the agreement have the potential to lock other countries out of China’s economic reacceleration. Additionally, any long delays in reaching the agreement might result in further damage to the global economy that will delay any potential global reacceleration.

New NAFTA

The new NAFTA [North American Free Trade Agreement], or the USMCA [United States Mexico Canada Agreement] has not yet been ratified by politicians operating in a gridlocked Washington.

The updated NAFTA has many supporters among business people in the United States, Mexico and Canada.
Because NAFTA became part of a political game, it may very well face delays or potential revisions. Recent comments from House Speaker Nancy Pelosi suggest Democrats are likely to delay the ratification until after the 2020 election.

Recession

Economists are infamous for predicting 20 of the last five recessions, and those who claim to have success in predicting a recession are usually predicting one all the time.

There is very little evidence that a recession is likely in an economy with historically low unemployment, plentiful and cheap energy sources, and a very low-interest rate environment.
The misguided trade and economic policies have been slowing the U.S. and global economy, and they have the potential to drive the U.S. economy into a recession, if continued. However, I believe that the ever-closer election cycle is likely to moderate and reverse those policies before they succeed in more lasting economic damage.

Growing Deficit

Worrying about the trade deficit is a basic misunderstanding of the economy and global trade. The higher trade deficit for a consumption-oriented country like the United States (and the vast majority of developed nations) is a reflection of increased demand usually due to stronger economic growth. A higher trade deficit is typically something positive for the U.S. economy.

The easiest way to lower or even eliminate the trade deficit is to slow economic growth. Recessions are typically the best “tools” for trade deficit elimination. In our case, normal trade relations have been interrupted by misguided and inconsistent trade policies (including a variety of politically driven tariffs) and by further threats of increasing tariffs and a trade war. Because of the bizarre nature of the United States’ approach to the trade war, importers accelerated shipping of goods they believed were most likely at risk for further tariffs increases.
These effects are likely to be temporary. We have already seen a large drop in the trade deficit due to the goods already arriving in the United States before the proposed deadlines. Of course, such a shift in shipment timing will have a negative effect on GDP for some period of time—at least until threats of further tariffs diminish.

The Devalued Dollar

The expectation of a large decline in the U.S. dollar is somewhat overblown. We are not in a “normal” economic environment. The economic slowing, while real, is a side effect of bad policies. It is likely that some of those policies will be changed as we get closer to the elections, when politicians become more desperate for strong economic growth.

If U.S. economic growth reaccelerates, the U.S. dollar would strengthen, so stronger commodity prices may be weakened by a stronger dollar and/or may not be sustainable within the context of a continuing slower global economic growth.

Brexit

We have to consider potential effects of Brexit. The impressive lack of leadership and competency of U.K. politicians is probably making the rest of Europe grow quite fond of the idea that the U.K. may soon be leaving the European community, but nothing seems to be clear on that front, either.

At this point in time, there is a general feeling that nobody wants a hard no-deal Brexit, but the stubbornness and confusion of U.K. politicians presents us with a real risk of an accidental no-deal Brexit.