US importers rode out the choppy waters of trade turmoil to increase collective container volume more than 7 percent in 2018, while the impact of China's rejection of waste goods and retaliatory tariffs drove a flat year for US containerized exports.
The latest escalation of trade tensions between China and the United States and moderating economic growth clouds how well the top US importers and exporters will fare this year.
While US containerized volume didn’t plunge on the tariffs pressure, the taxes of trade have had an outsized impact on some of the largest US shippers among JOC.com’s 2018 ranking of the Top 100 Importers and Exporters. For example, recovered paper shipper America Chung Nam’s volume for the year fell more than 35 percent as it dropped from its longtime perch as the top exporter this year, a sure sign that China's Green Fence policy to restrict imports of all kinds of waste has had an indelible effect on trade flows.
On the importer side, Walmart stays atop the list and is nearing the 1 million-TEU mark, moving more than 7.3 times the volume of online retail giant Amazon, which came in at No. 12 on the list. That’s a lot of volume for a company that has often been characterized as more of a plucky underdog than an industry leader in recent years.
The big four retail importers — Walmart, Target, The Home Depot, and Lowe’s — collectively imported nearly 2.3 million TEU in 2018, accounting for nearly one out of every 10 US import TEU, according to the rankings compiled using data from PIERS, a sister company of JOC.com within IHS Markit.
That overall US import volume rose 7.1 percent in 2018 to 24.7 million TEU belies the threat posed by tariffs, with uncertainty around pricing of goods and sourcing locations dogging supply chains throughout the last year. The running thread between 2017 and 2018 is the continued pressure on US importers and exporters from tariffs, both implemented and threatened. Exports in 2018 were flat at 12.7 million TEU.
On May 10, the US increased tariffs on $200 billion worth of Chinese goods from 10 percent to 25 percent, sending certain categories of shippers of electronics and computer and vehicle parts scrambling for air cargo capacity. That volume accounts for 4 million TEU or 37 percent of US imports from China.
President Donald Trump also threatened to apply tariffs to the remaining $325 million in imports from China, which would mostly affect the apparel sector, one of the few sectors yet to be hit by the wide-ranging tariffs.
The threat of an increase in tariffs from 10 to 25 percent had an indelible impact on trade volumes in 2018, as the increase was originally set to take effect Jan. 1. It’s clear 2018 import volumes — particularly in the fourth quarter — were bolstered by shippers front-loading volume to beat that presumed deadline. To what extent first-quarter 2019 volumes were impacted by this front-loading, and by the indefinite extension to the tariff increase implementation, is less clear.
Despite coming to grips with the administration's tactics on trade and the resulting increases in tariffs on Chinese goods — as well as duties on global imports of steel, aluminum, solar energy cells, and washing machines — shippers say they can't completely shift sourcing locations.
“It takes years to establish a global footprint where you can move production around,” said Jeff Kirt, founder and managing partner of Fifth Lake Management, which invests in private equity groups that own industrial manufacturers. “Even if the tariffs last for a year or two, that’s a small time frame given the lifespan of a production facility.”
Moderating economic growth
Amid the turmoil, Nariman Behravesh, chief economist at IHS Markit, said global economic growth is likely to stabilize at 2.8 percent during the next three years, although US growth is projected to slow from 2.3 percent in 2019 to 2.1 percent in 2020 and 1.9 percent in 2021.
“Manufacturing growth remained sluggish, and export orders continued to fall,” Behravesh wrote in an April 15 economic outlook. “More accommodative policies in key economies have likely helped to stabilize growth. Nevertheless, a rebound in growth seems unlikely.”
Behravesh also said “a troubling manifestation of this high level of [tariff] uncertainty is the virtual halt in global capital expenditures.”
But perhaps the bigger issue is how beneficial cargo owners (BCOs) grapple with some larger, more lasting dynamics in the container shipping industry. Those include a mandate for ocean carriers to switch to low-sulfur fuel at the beginning of 2020, a burden that affected the tenor of trans-Pacific rate negotiations this spring.
Simply put, both shippers and carriers have enunciated in early 2019 that BCOs will not just be able to wish away the added costs of the cleaner fuel, even if the exact cost and the formula to pass those costs — estimated at $10 billion to $15 billion annually — to shippers is still opaque. Encouragingly, trans-Pacific carriers report success in securing service contracts with shippers that include fuel formulas to account for the higher operating costs.
“We don’t know what we don’t know,” a Top 100 importer told JOC.com. “Carriers have rushed to consolidate accessorials for fuel into one line, but we still have not heard from the oil and gas industry whether the production is there to support supply. But there’s no doubt carriers are getting ready to pass that through to the customers.”
The age of decarbonization
The next big ticket environmental item to consider is broader decarbonization of the shipping industry. The greenhouse gas (GHG) strategy adopted by the International Maritime Organization (IMO) in April 2018, in addition to committing the industry to a 50 percent reduction of carbon dioxide levels by 2050 compared with 2008, calls for “early” measures needed to achieve reduction of GHG emissions from international shipping before 2023, when shipping climate change goals will next be revisited.
That rapidly approaching deadline, three-and-a-half years away, has given way to the belief that only operational steps can take a meaningful bite out of emissions because no one currently knows which zero- or low-carbon propulsion sources will be technologically and economically viable.
Amazon’s expanding reach
Another dynamic is consistent growth in e-commerce and shrinking goods delivery windows. Shippers, particularly in the retail arena, must navigate how to keep as much of their volume as possible on the ocean and out of the air, but that means they need to sharpen their demand sensing and forecasting capabilities.
Ten of the top 20 US importers are retailers and another six wholly or predominantly make retail goods. In other words, the fortunes of the US economy are integrally tied to retail activity, and that’s reflected in the makeup of the top importers.
Behind these growing end-consumer demands, for both business-to-consumer and business-to-business goods, is the ever-present impact of Amazon, which is not only a top 12 US importer, but also a massive facilitator of imported goods through its Fulfillment by Amazon (FBA) program.
Through a network of freight forwarders, FBA allows international sellers to execute fulfillment of online orders. Amazon’s growing presence as a non-vessel operating common carrier (NVO) and domestic freight broker portends a future where shippers need to weigh the merits of potentially working with a logistics services provider that may also be a competitor.
The presumption among watchers of the logistics industry is that Amazon will seek to undercut ocean and trucking rates to aggressively grow market share. An alternative theory is that Amazon will charge competitive freight rates and use the revenue from those customers to subsidize its own freight costs.
Trans-Pac rates higher
Either way, shippers have told JOC.com categorically that trans-Pacific freight rates rose in spring service contract negotiations. “All rates have gone up 20 percent, and that’s consistent with what the NVO market is advertising,” a food importer said. “We saw this coming, between [ocean carrier] consolidation, the Hanjin bankruptcy, and trade tariffs. It’s all had an impact on capacity availability. Alliances have a lot to do with that; they’ve worked to minimize space on vessels.”
The shipper said these dynamics have focused his organization on ensuring capacity, as opposed to chasing the lowest possible price. “We want a great rate, but if it’s a rate that doesn’t get me on a vessel, that doesn’t do me any good.”
The effect of the tariffs on vessel capacity should not be underestimated, the shipper said. “What hasn’t been openly discussed is how the ocean carriers are leveraging the tariff fear factor to improve their business. In the previous eight months, we’ve noted carriers opting to skip ports of call in the Asian trade lanes. This creates pent-up demand for capacity.
“With the shipper community pushing to get ahead of any additional tariff action by the USTR [US Trade Representative], [carrier alliances] have created a strategy that adds unanticipated capacity strains. These are difficult waters to navigate if you’re managing just-in-time inventory with a close eye on margin pressures.”
It’s not just tight capacity, either. Trans-Pacific carriers were assessing BCOs peak-season surcharges of as much as $1,000 per container on time-sensitive shipments last fall because of the front-loading.
NVOs anticipate booking more business from BCOs whose containers were shut out of some vessel departures leaving Asia during the 2018 peak season, even when customers had booked slots, because carriers overbooked the vessels. That played havoc with the budgets they had presented to their companies earlier in the year. “We went 8 to 15 percent over budget,” an importer told JOC.com.
Top 100 shifts
In terms of the exports, US tariffs on Chinese imports have had the indirect effect of compelling China to retaliate in kind, resulting in headwinds for US agricultural exporters. US exporters are also coping with Chinese regulations prohibiting imports of waste goods, so it’s notable that International Forest (No. 5 on the top exporters list) held steady headwinds of agriculture exporters due to China while Chung Nam fell off.
One notable entrant in the exporter list this year is the Palo Alto-based carmaker Tesla (at No. 94). On the top importers lists, 99 Cents Store joined the list at No. 92, showing sustained growth in the discount retail sector (with Family Dollar and Dollar General fixtures in the Top 100 list). BASF North America also returned to the importer list at No. 65 (the company is also No. 50 on the exporter list).
Meanwhile, on the intermodal side, terminal operators working on behalf of the Class I railroads struggled this winter to keep up with the flow of volume, and when chassis providers ran out of equipment, inflexible and stringent demurrage policies ended up costing BCOs thousands of dollars in penalties. While these demurrage penalties are meant to keep fluidity up, it's a double whammy when gridlock occurs for reasons beyond their control.
Pricing and service remain the key issues in domestic intermodal, with questions lingering over the industry.
Will precision scheduled railroading deliver on the promise of reliable, consistent service that has eluded the railroads for years? If service can reach a high-water mark, will Class I railroads’ obsession with operating ratios and shareholder value cause them to charge more for intermodal service than a truck? Will shippers accept such a revolutionary approach to pricing, particularly this year when truck capacity is more available and rates are significantly lower than a year ago?
Published On : 31-05-2019
Source : JOC
