Ocean shipping in crossfire again as trade war reignites
Hope for a cease-fire in America’s multi-front trade war has dimmed after a barrage of hawkish new U.S. statements toward China, France, Brazil and Argentina. For ocean shipping, fallout suffered in 2019 now appears likely to extend well in 2020 — not just in terms of lost demand, but also, lost investor interest.
U.S. President Donald Trump said on Dec. 3, “I think it is better to wait until after the election [to conclude a China trade deal] if you want to know the truth.”
In an interview with CNBC, U.S. Commerce Secretary Wilbur Ross said that waiting until after the November 2020 presidential elections “takes off the table something that they [the Chinese] may think gives them some leverage.”
On Dec. 2, Trump said that the U.S. would raise tariffs on steel and aluminum imports from Brazil and Argentina. The two countries had been on the original tariff list in 2018 (25% steel, 10% aluminum) but those levies were never imposed after both negotiated quotas. Trump claimed his latest decision was in response to currency manipulation by the two South American countries that hurt American farmers.
Also on Dec. 2, the Trump administration threatened to impose a 100% tariff on $2.4 billion of French exports including wine, cheese and handbags in retaliation for a French digital services tax on U.S. technology companies.
Trans-Pacific shipping impacts
The effects of U.S.-China trade tensions are already clearly apparent in the trans-Pacific container trade.
France-based consultancy Alphaliner has estimated that this market will experience a 2% year-on-year drop in volume, the first such decline since 2009 when the financial crisis struck.
Another gauge of market health is the price to ship a container, which is tracked by indices published by Freightos. Trans-Pacific rates in the second half are down sharply versus the same period in 2018, when U.S. shippers were “front-loading” cargoes to beat tariffs.
According to Peter Sand, chief analyst at shipping association BIMCO, “The trade war has sped up the process, which had already begun, of some manufacturing moving away from China in favor of its neighbors with lower labor costs.” In addition, “the trade war has led to products still being produced in China being transshipped through neighboring countries to avoid tariffs.”
The next round of U.S. tariffs on Chinese goods is set to begin on Dec. 15. Given the latest developments, prospects for a delay are evaporating.
Shipping equity pressures
The stock-market reaction to the more aggressive rhetoric on China will have consequences across the entire ocean shipping spectrum. Stock pricing of listed ship-owning companies in all sectors has long been weighed by negative sentiment on trade relations.
Dry bulk stocks are particularly exposed given the importance of China to bulker demand. U.S.-China trade tensions are also a negative for crude oil, liquefied natural gas and liquefied petroleum gas carriers, given potential Chinese demand for U.S. exports of these commodities that are constrained by the lack of a resolution.
On Dec. 3, most shipping stocks fell in the low single digits. The biggest losers were in the dry bulk sector: Golden Ocean (NASDAQ: GOGL) declined 5.4%; Safe Bulkers (NYSE: SB) fell by 4%; the BreakWave Dry Bulk Shipping ETF (NYSE: BDRY) by 3.9%; and Genco Shipping & Trading (NYSE: GNK) by 3.6%.
The broader issue ahead is that ongoing concerns about trade relations, compounded by an investor shift toward equities in the pro-ESG (environmental, social, governance) stocks, could act as a headwind to shipping stock pricing in 2020 at a time when underlying bulk shipping rates are improving – in the case of tanker companies, dramatically so.
A shortfall of investor interest coinciding with stronger fundamentals — outside of the container-shipping segment, where fundamentals remain challenging — is coinciding with a shift among listed owners to higher dividend payout policies. This combination could lead to higher dividend yields (the annual dividend divided by the share price) in 2020.
Negative trade-politics sentiment among equity investors could also put a lid on the recent resurgence of share sales by listed shipping companies. The window to do such transactions could be narrower than expected.
Trans-Atlantic shipping impacts
Container shipping rates in the trans-Atlantic market from Europe to the U.S. East Coast have far outperformed rates in the trans-Pacific market from Asia to the U.S. West Coast. The former is up 51% over the past two years. The latter is down 8% over the same period.
Rising trade tensions between America and Europe could jeopardize that market strength. In October, the U.S. imposed 25% tariffs on $7.5 billion of EU products including wine, whiskey and cheese, related to a dispute between Europe’s Airbus and America’s Boeing.
The addition of another $2.4 billion in tariffs on French products on top of the previous levies is certainly not a positive for container rates. But to put it in context, the combined $9.9 billion in affected goods from both tariff regimes would equate to only 2% of U.S. goods imports from the EU in 2018.
South American shipping impacts
The potential imposition of tariffs on Brazilian and Argentinian aluminum would have a minimal effect on shipping demand, given the small volumes involved. According to the latest data from the U.S. Aluminum Association, Brazil and Argentina combined accounted for only 4.8% of U.S. aluminum imports in January through September.
Shipping consequences from a steel tariff would be much more significant. According to a report from the U.S. Commerce Department, Brazil was America’s largest source of imported steel during the first half of this year, with a volume of 2.8 million tons representing 19% of total U.S. imports during that period.
The South American agribulk sector is experiencing an even more substantial tariff-related impact. Cargoes in this category are generally carried aboard bulkers in the Panamax class, which have capacity of 65,000-90,000 deadweight tons.
On the quarterly conference call of dry bulk owner Diana Shipping (NYSE: DSX) on Dec. 2, chief financial officer Andreas Michalopoulos pointed out that “while China remains the largest importer of U.S. soybeans, the American Farm Bureau said that exports to China plummeted 53% in the 2018-19 crop year.”
While the Chinese tariffs on U.S. soybeans have pushed more business to Brazil and Argentina, the bigger story appears to be corn.
Sand of BIMCO noted that soybean exports to China are down from both the U.S. and Brazil year to date. A key reason is not related to trade, but rather, to the culling of Chinese pigs due to the African swine flu (soybeans are used as pig feed). “This has led to 41% fewer pigs in China than at the same time last year, dramatically cutting the country’s demand for soybeans,” said Sand.
“Brazilian corn exports are up 123.8% in the first 10 months of the year, with volumes from Argentina up 48.7%,” he continued. “This brings total exports from the two countries to 60 million tons, or an additional 317 Panamax loads, compared with exports from the two countries in the same period of 2018. On the other hand, the U.S. has seen falling corn exports, down 44.3% in the first nine months of the year. In volume terms, this means a loss of 234 Panamax loads – not enough to derail the positive effects of higher exports from Brazil and Argentina.”
From an ocean shipping perspective, the longer the voyage distance, the more vessels are soaked up and the better the supply-demand balance in terms of freight rates. Ships from the U.S. Gulf take the Panama Canal to Asia. Those from Brazil and Argentina go around the Cape of Good Hope and sail about 14% longer than the Panamaxes departing the U.S. Gulf.
In other words, the negative effects being felt by U.S. farmers due to trade tensions and weather disruptions are not necessarily translating into the same degree of negative consequences for Panamax shipowners.
Source: Freight Waves by Greg Miller (https://www.freightwaves.com/news/ocean-shipping-in-crossfire-again-as-trade-war-reignites)