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Rocky Road Ahead as Optimism Evaporates

What a change eight months can make. At the beginning of the year, carriers and big consulting houses projected a bumper year all round for the ocean cargo business. Global Port Tracker suggested that growth in import demand in 2018 was going to be half that of 2017. At the same time, we also noted that shipping capacity would continue to increase, which would put downward pressure on freight rates after the first quarter.

The pressure on freight rates has certainly come, and with it less optimism for big profits for ocean carriers. But with a trade war growing between the United States and China, imports have been up ahead of tariffs taking effect – even though volume could fall off afterward.

This year started with huge shots of optimism from the carriers but that has evaporated in the gloom of negative financial returns. The new president of CMA-CGM was quoted in Lloyd’s List Containers saying that the industry overestimated trade growth, which, in turn, persuaded carriers to open more services. That, in turn, destroyed rates on previously profitable routes.

Our models are reinforcing our view that imports during the last quarter of this year will be weak after expected tariffs take effect and that both East and West Coast ports will see virtually no growth in imports in the first half of the 2019 when compared with the first half of 2018. That would compare with a growth rate of 4.1 percent in the second half of 2018 versus 2017.

Despite all this, Cosco, Yang Ming and HMM (each state-owned or dependent upon state funding) have placed orders for more ultra-large container ships. As a result, U.S. ports will see an increasing number of ships in the 10-15,000 TEU range. That will lead to fewer ship calls but potentially a greater exchange of containers per call, putting operational pressure on the ports and terminals.

The current boom in Transpacific shipping can primarily be explained by importers’ response to the US trade war with China as inventories are being kept at levels above those seen in the 2014-2016 period. And consumers appear to be spending money on goods ahead of the tariff price increases that will eventually come. But there could be a rocky road ahead as the impact of tariffs begins to be more fully felt.

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