The Quarterly Forecast Q4 2018

synopsis

One word that comes to mind when thinking back on the third quarter is “disruption.” And with disruption, comes uncertainty. Such unpredictability is not uncommon within the shipping industry; rather, you might say this sector is defined by periods of varying degrees of ambiguity: how trade policies on one side of the world will ripple through to affect rates on the other, how regional conflicts can seismically dictate supply and demand, how global economic homeostasis or destitution can, quite literally, sink ships. Each possesses the power to alter the overall balance of this delicate ballet.

Despite these inherent characteristics, however, shipping, similar to other sectors, finds itself at an exceptionally distinct moment due to the recently implemented $200 billion in tariffs targeting China and tough rhetoric from the U.S. government throughout the past several months threatening even more. Talk (and tweets) regarding this ongoing “trade war,” consequentially substantial shifts in tariffs, specifically those aimed at China, and other equally seismic alterations associated with protectionism have dominated the industry. This removes us from a “normal” scenario and sets us afloat toward lesser-charted, possibly turbulent waters into the fourth quarter—typically our peak and choppier period. What will the next round of tariffs from the White House be? And what will be its ramifications?

These are questions that we inside the industry have been asking ourselves, too. The fact of the matter is, we simply do not know. Regardless, we must, as the saying goes, hope for the best but be prepared for the worst. How do you do that? With experience. With insight. With a dedicated team committed to ensuring the very best for clients. With the confidence that you’ve recruited the very best supply chain management in the industry, one that’s anticipating every variable affecting the sector. That’s CAF Worldwide.

We will continue to monitor the situation, and continue to provide unprecedented freight forwarding and logistics services to our clients, no matter the seas ahead.

Joe's View

The Breakdown

“It’s a very disjointed market at the moment. I think nobody has a firm grasp on where it’s going for a variety of reasons, one of which is the tariffs coming from China.”
The fear-mongering rhetoric surrounding the trade war will cause importers to make alterations to their supply chains that are more emotionally driven than reality-based; or that was the feeling as of late August, at least. Since then, paranoia has been given hard and fast context well within the realms of an unusually stark reality, as the third round of duties have, in fact, been implemented, and stand to impact supply chains dealing with more than 5,000 different products.
Feelings about the perceived impact of Trump duties have shifted significantly over the last 4-6 weeks. What once seemed like possible saber-rattling now feels like a legitimate threat to U.S. supply chains. Clients are hoping for the best, preparing and fearing for the worst.
In a normal situation, Chapters 61 and 62 of the global harmonized tariff schedule would remain largely untouched, because of its profound ramifications domestically within the United States. (Think: Walmart, Kohls, Target, etc.) However, we are not in a normal situation, so importers are scrambling to prepare for the possibility of additional tariff increases affecting apparel to be implemented and cause significant disruptions.
To date, wearing apparel and footwear have been spared by the tariff increases. If the entire list of tariffs of all commodities from China is increased, wearing apparel and footwear will be affected having a significant impact on the U.S. consumer.
Carriers likely won’t get the rate increases they’re hoping for in Q4. As of Sept. 15, carriers are holding rates at Sept. 1 levels.
While automated platforms (Flexport, NYSHEX) are emerging with gusto, forwarders with good human services are still desirable to mitigate inevitable freight shipping issues and for strategic consultation, especially during times of heightened volatility and uncertainty exemplified by the present.
Blockchain technology in logistics was a highly buzzed about topic earlier this year but has since quieted down, it seems. This is likely due to the reality of antiquated processes that are still employed by suppliers in developing countries.

Source: The World Container Index assessed by Drewry, a composite of container freight rates on 8 major routes to/from the US, Europe and Asia

The Breakdown

There is shared uncertainty regarding the ramification of the latest round of U.S.-China tariffs, which went into effect Sept. 24.
The first week in October is “Golden Week,” a major holiday time in China where all factories shut down for the week. China suppliers race to get goods on sailings prior to the holiday, so capacity is extra-tight. It’s hectic and there are a lot of space issues.
Carriers and overseas offices have provided insights suggesting more space will open up post-Golden Week, after October 15, which should mean rates from China to the U.S. will decrease.
Early in January, rates from China to L.A. have more than doubled due to the ongoing capacity crunch.
U.S. tariff increases could cause space to burst wide open between America-bound Chinese exporters, because suppliers will move their factories elsewhere, causing a rate decrease.

The Breakdown

“I think looking forward, right now, probably the biggest threat—and it is one we do not understand that much about yet—are the potential, well the existing or potential evolving trade wars. That is the big factor that really, nobody can fully evaluate at this point. I think the ideas range from just the threats; threats from the United States to change global trade—Are they threats? Are they reality? Are things going to be negotiated? And it can range from threats of shutting down global trade—to the effect of trade actually being more open, with fewer tariffs. I think that’s a very direct potential effect on global shipping.”
“We have seen it already with some of the initial U.S. tariffs. There were a lot of stories in the media about a particular ship going to China and being turned around right as the tariffs were being implemented and then going back when the threat was eliminated. It doesn’t get any more direct than that (Although, it functions, theoretically, on a completely different level, on a global trade level). So that’s the threat—the global tariffs and some kind of a breakdown in global trade. At the same time, on the other hand, we have not really seen any effect of the threat to global trade on the economy.”
“Most likely, what will affect shipping will be a lot of uncertainty about where exactly we are and how these tariffs or trade negotiations will evolve. I think, what I expect, that some of the companies may be delaying orders, slowing down orders, waiting for more certainty as all of these issues evolve. So there is certainly a potential for a slowdown in orders in shipping until we understand better what is going on.”
“I expect to be an effect of the U.S. “trade wars” will probably be close collaboration with the rest of the world. I actually think the United States threatening all the other countries will probably bring the rest of the world together. So I see more cooperation between other countries as a sort of balance against the threat of the limitations of trade with the United States.”

Source: Integration Point, Sept. 20, 2018 Global Tariff Update; WTO Actions Challenging Retaliatory Duties Wherein the United States has Initiated WTO Dispute Complaints