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US-China tariff delay does little to stabilise freight demand

2019-10-22 Source: Jctrans

Decision to postpone 18 October scheduled import duty hike on $250bn worth of goods has failed to lift the uncertainty


US President Donald Trump’s decision to postpone a scheduled 18 October tariff hike on $250 billion worth of goods imports from China has failed to lift the uncertainty around a “mercurial trade environment” in which importers have to assume the worst to avoid rising costs, freight sources believe, although it has been welcomed by US import representatives.

As negotiations on a tentative US-China trade deal continued, Washington delayed a planned rise on selected Chinese goods that would have seen tariffs go up from 25% to 30% from last Friday.

The Washington-based National Retail Federation (NRF) lobby group welcomed the move as “good news to US retailers and consumers” heading into the busy holiday shopping season. It later reported that US retail sales in September were down 0.1%, seasonally adjusted from August, but up 4.5% unadjusted year-over-year, according to the NRF.

“The pullback in September compared with August is possibly a reaction to increased fears over US-China tensions,” said NRF chief economist Jack Kleinhenz. “While uncertainty around trade policy and other issues has dampened consumer sentiment recently, consumers still have a lot going for them as evidenced by longer-term trends and factors like the tight labour market.

“September is a tricky month to measure because of seasonal factors like the end of summer and back-to-school spending, and this year’s early Labor Day may have moved up some spending into the last days of August.”

But digital freight rates specialist Freightos predicted that that the latest US-China tariff delay will do little to help stabilise a volatile freight demand environment. In its latest  Freightos Baltic Index container price update, the online freight marketplace reported: “The crux is that the tariff deferral probably won’t spike demand. However, despite flat rate growth, China-US shipping prices may continue to grow in November – in both 2017 and 2018, peak season prices only truly peaked in the second week of November.”

And while the latest tariffs were deferred, Freightos warned that the impact so far on small US businesses, both in profitability and sourcing behaviour has been “significant”.

The index showed that China-US West Coast prices  increased slightly to $1,321/FEU with a handful of carriers increasing prices mid-month: “There may be another small spike next week as forwarders catch up after Golden Week and belatedly implement mid-month price rises. For now, prices remain flat, 7% behind 2017 prices, and well (43%) behind last year’s high prices.”

China-US East Coast prices  dropped 5%  since last week to $2,587/FEU: “That makes for a mixed bag when compared to recent years – down 25%  on 2018 (when prices were high), up 31%  on 2017 (when prices on this lane were crashing) and even up 7% on 2016 (when the Hanjin crisis cranked prices up).”

A Freightos spokesperson added: “It’s hard to see how Friday’s indefinite deferral of the 25%  tariff increase will have much impact on China-US shipping prices. As President Trump proved in May, deferrals can be axed at very short notice, making for a mercurial trade environment whereby importers have to assume the worst in order to avoid massive losses. Nevertheless, a smattering of optimistic carriers tested the waters with mid-month price increases. 

“Deferrals or not, importers are stocking up for holiday shopping with the NRF expecting a holiday sales windfall this year, and November’s imports are forecasted to be 9%  up on last year, creating an environment more conducive for significant ocean freight price increases early next month.”

Despite the unpredictable policy decision-making in the US, container lines appear to have enjoyed a better first half of 2019 versus the same period last year, although there is less-comforting statistics from the box port sector. UK-based research house Drewry said that despite the “unpredictability amid the escalating trade war” between the US and China, container carriers performed better in 2019 than in 2018.

A Drewry spokesperson added: “Nonetheless, clouds of uncertainty have been hovering around the industry as spot rates continue to decline on major East-West trades notwithstanding better capacity management by carriers. On a positive note, some front-loading surge on China-US trade to beat the latest 15% levy on Chinese imports and stock up earlier than usual for Thanksgiving and Christmas sales could boost Transpacific trade and freight rates.”

It is a different story for those handling containers on the quayside. Added Drewry: “Slow pace of throughput recovery amid the US-China trade war and a slowing global trade spells a worrying trend for port operators.

“Our Drewry Port Index fell steeply as markets count the cost of the impact of the global slowdown which is gripping major economies.

“As such, the sector profitability nosedived (ex the IFRS16 impact) and margins have all but stayed flat. We believe the valuations are under correction against the backdrop of the outlook of dampening volume growth.”

For air cargo, there is continued market turbulence and a downward trend in key metrics, according to the latest update from analyst WorldACD: “In our trends message two weeks ago, we reported negative Year-on-Year (YoY) growth for chargeable weight in August 2019. The last month with positive growth (October 2018) is now almost a year ago.”

WorldACD, which uses air waybill data inputs from 80 airlines worldwide, added: “Monthly inputs on flight level from a large majority of our reporting airlines, provide an early indication for the trend in September 2019. Measured in Freight Tonne Kilometres (FTKs), we observe a YoY decrease of 4.4% in September 2019. The cargo load factor dropped by four percentage-points, YoY, but increased by two percentage-points month on month. The year-to-date change (Jan-Sep 2019 vs 2018) in FTK was a YoY decrease of 4.5%.”

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