Could rising plastic exports create competition for empty containers?
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Unease about the possibility of increased friction in United States foreign trade relations has risen steadily since the inauguration of President Donald Trump, but the truth is that the outlook for some U.S. exports remains strong.
Even so, shippers of certain commodities will have to grapple with a variety of challenges in the near and long term.
A recent report from financial services firm HSBC on U.S. trade projects “robust export growth over the medium term in high value-added goods, including industrial machinery, transportation equipment and medical and scientific apparatus.”
At the same time, the report notes, “The strong dollar and weak trade outlook is testing the resilience of U.S. exporters. Although the near-term outlook remains difficult, U.S. exporters are in a good position to take advantage of an improvement in demand over the medium term.”
Daniel Hackett, a principal at Hackett Associates, said he expects to see much weaker growth for exports in the coming year—about 0.5 percent to 1 percent compared with the preliminary 3.2 percent growth rate seen last year.
During 2016, growth in exports from the West Coast, up 7.4 percent year-over-year, was much stronger than either the East Coast (up 0.6 percent) or Gulf Coast (down 0.4 percent), according to Hackett Associates’ initial figures for the year.
Jock O’Connell, international trade advisor with Beacon Economics, said he is concerned about the high level of uncertainty surrounding the new president’s trade policies, which makes any projections for future growth more difficult.
“You can do economic forecasting, but then you can say ‘so what?’ because there is every likelihood that Trump is going to blow up the China trade or tear up trade with Mexico and thumb his nose at the Europeans, or do something that just invalidates any reasonable economic forecast,” he said.
Speaking in early February, O’Connell noted the U.S. dollar had weakened since December, and said “there is an expectation that if that trend continues it, will make U.S. goods more attractive to foreign buyers.”
“Europe seems to be coming out of its doldrums, there is an increase in economic activity there,” he added. “China’s always going to be a big customer. If we don’t blow up the China trade, the prospects are pretty favorable for increases in overall export activity.”
O’Connell said he thinks exports could increase as much as 3 percent to 3.5 percent in the coming year.
According to Walter Kemmsies, an economist for JLL, agriculture and petrochemical commodities are likely to be the fastest growing exports from the U.S., barring any new taxes and tariffs imposed on imports.
“That is what we are effective, efficient at producing,” he said. “With the economy of Europe growing, Asian economies should benefit because they will not be entirely dependent on the U.S. for growth, and that will eventually benefit Latin America as well.”
And Mario Moreno, senior economist with IHS Maritime and Trade, estimated in a recent article in the Journal of Commerce U.S. containerized exports ticked up 1 percent in 2016, the first year-over-year growth for the segment in three years, and predicted similar 1 percent growth in 2017 to a total of about 11.8 million TEUs.
Plastics Boom. Chemicals and plastics are projected to be one of the fastest growing exports from the U.S. over the next decade and a half.
In 2015, the American Chemistry Council (ACC) pointed to a study by Nexant Consulting that forecast net plastic exports will more than triple from $6.5 billion in 2014 to $21.5 billion by 2030.
“The surge in natural gas production from shale has reversed the fortunes of the U.S. plastics industry,” says the ACC. “Because the competitiveness of plastic resins depends on energy costs—in particular, the difference between oil and natural gas prices—shale gas development has changed the competitive landscape for U.S. plastics.”
In a December note, ACC said it has been tracking chemical manufacturing related to shale gas and that a “running tab of 281 announced projects represents a cumulative investment of $170.2 billion.”
ACC said it is updating projections, but in May 2015 found $25 billion in projects related to plastics, $2.5 billion for compounding, additives and colorants, and $19.6 billion in projects built to consume resin that is not exported, though some of the products built in those factories could be shipped overseas.
Most of that increased production lies in the future. In the first 11 months of 2016, the ACC said U.S. plastics production reached 72.7 billion metric tons, just a 1.8 percent increase compared with the same 2015 period.
However, Roger Guenther, the executive director of Port Houston, told the Houston Chronicle the port was forecasting “about 8 percent growth in its container business in 2017, as plants making plastic resins come online and the port continues to increase its trade with Asia.”
A white paper produced by Petrochemical Update in conjunction with a conference it held last fall noted, “Ethylene, polyethylene, propylene and methanol capacity is expected to grow by a combined 24.5 million tons per annum by the end of this decade, presenting a challenge to producers, shipping companies and ports alike.”
Martha Moore, senior director-policy analysis and economics at ACC, said her organization is also updating its projections, adding that older projections need to be taken with a grain of salt because the sudden collapse in oil prices has significantly narrowed the gap between oil and gas prices.
Still, ACC expects about half of the incremental polyethylene production to get exported, and that polyethylene (as opposed to other plastics such as polypropylene) will account for the “lion’s share” of added plastics capacity.
Container Crunch. Beverly Altimore, executive director of the U.S. Shippers Association, which counts many chemical manufacturing companies among its members, says in addition to plastic resin makers, manufacturers of other chemicals see opportunity because of the increase in natural gas production, and “barring any restrictions, this could be a real boon for the chemical shippers.”
She and some other exporters, including shippers of traditional commodities like cotton, have expressed concern about whether there will be an adequate supply of empty containers to handle the increase in plastic and chemical exports at ports along the Gulf of Mexico.
“I listen to carriers assure the shippers, that ‘oh, no problem—we’ve got plenty of equipment,’” she says. “The truth of the matter is that capacity is only available for exports as a backhaul if there are imports.”
Stan Swigart, director of marketing and external communications at the Port of Houston, which in 2016 handled 48 percent of the 8.5 million metric tons of plastic resin exported from the U.S. in the first 11 months of the year, said he does not believe equipment supply will be a problem and that there is “a lot of misinformation about this container availability” when it comes to plastic resin exports.
“We can handle pretty much all of it,” said Swigart. “We have the capacity to do it. The stuff is produced right here. It doesn’t make sense for them to produce it here, put it on a train, rail it out to some other port” because of the additional cost. “We feel we’re going to get the majority of [those volumes], and that is supported by the fact that there’s new bagging facilities being built right now in this area.”
Plantgistix, for example, is planning to add another 330,000 square feet of space to a 600,000-square-foot resin packaging plant in Baytown, Texas in April.
Swigart noted that unlike at some U.S. ports that are dominated by import volumes, container imports and exports at the Port of Houston are relatively balanced, with inbound shipments accounting for roughly 46 percent of the port’s container throughput in 2015, compared with 54 percent for exports. In theory, this will lessen the need to reposition empty containers into Texas as they should already be there. In addition, the growing population in Texas will likely mean more imports from Asia and more empty containers available to reload with exports.
“The Gulf generally isn’t as heavy as far as imports from Asia, so we need to get more equipment in there to pick up what could be a major increase in this commodity,” Howard Finkel, executive vice president of China COSCO Shipping’s Americas subsidiary, told Petrochemical Update. “Now, the problem, to be perfectly honest, is the rates are way too low right now, so unless we have imports coming in, it doesn’t pay for us to reposition equipment into the area.
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We can’t reposition equipment and take a loss, so we’re hoping the rates come up to a certain level so when needed, we can cover repositioning costs to make sure there’s no shortage of equipment down there.”
If additional containers are needed in Houston, Swigart said carriers are likely to reposition them, noting that the Union Pacific railroad has a shuttle service delivering empty containers from Dallas to the port on a weekly basis.
When Maersk and MSC announced last April they were starting a new trans-Panama Canal service to Gulf of Mexico ports, they pointed to the “projected increase in resin exports out of the Port of Houston,” as well as wood pulp exports out of Mobile, as the primary motivator. Maersk highlighted efforts to “ensure there’s an adequate supply of container equipment in place, in Houston in particular, to make this service a dependable supply chain choice.”
Earlier this year, CMA CGM upgraded it PEX 3 service between South Korea, China, Hong Kong and Shanghai and U.S. Gulf and South Atlantic ports by adding a direct call in New Orleans, the second leading port for plastic resin exports. And still other ports are eager to capture part of the fast-growing trade.
“It’s an interesting story that is developing and a good one for overall U.S. exports,” said Clint Eisenhauer, external affairs manager at South Carolina Ports Authority. “We think that we offer a very strong alternative to whatever excess freight that would develop.”
Shippers “have seen the demand for equipment and ship space developing and so they’ve been looking for alternatives,” he said. “For a least a year and probably over that, we’ve been talking to the major manufacturers and getting ready for what we hope will turn out to be good business. We’ve got the transloading equipment” to transfer plastic pellets from hopper cars into containers.
Both BNSF and Union Pacific have highlighted plans by companies to transload resin in the Dallas-Ft. Worth area into ocean containers that can then be moved by rail to ports on the East or West Coast, as well as domestic locations.
Last April, the resin packaging company Packwell, along with BNSF and real estate developer Hillwood, announced plans to build a new facility for plastic exports to be located in the AllianceTexas Industrial Park near Fort Worth.
Union Pacific in May said the Belgian company Natoen Natie will build a plastic packaging plant in the Prime Pointe Industrial Park adjacent to its Dallas Intermodal Terminal. Due to open in third quarter of this year, “The new plastic packaging facility is strategically located in Dallas to align with empty container availability and our premier intermodal service to the West Coast for export,” said Beth Whited, Union Pacific’s vice president of chemicals. “Our expedited intermodal service offers four-day transit to the West Coast ports.” Union Pacific also offers international intermodal service between Dallas and Houston.
Cotton Conundrum. Michael A. Symonanis, director of the North America logistics and global container logistics group at Louis Dreyfus Co., said that while not necessarily an immediate concern, the projected growth in resin exports could create complications for cotton exporters.
Texas is the largest cotton producing state in the U.S., accounting for 7.4 million bales of the total 16.5 million produced in 2016, according to the Department of Agriculture.
Symonanis said Houston is an important export gateway for Texas cotton exports, particularly for cotton grown along the coast between Houston and Mexico. That amounted to about 1 million bales of cotton last year. Roughly half is sold in Mexico, but much of it moves through Houston.
He explained the coastal cotton crop is important because it is usually the first harvested during the marketing year and can help suppliers meet the needs of overseas customers, depending on the amount of cotton being “carried over” from the prior marketing year.
The size of the harvest can fluctuate greatly, depending on both weather and the interest of farmers in growing cotton relative to other crops, which varies based on pricing and demand.
“That variability is going to play out against…this perceived significant increase in localized container demand out of the greater Houston area,” he said.
Competition for empty containers is less of an issue for cotton grown in the western part of Texas and bound for export markets. That cotton is commonly brought to Dallas, where containers are abundant, and moved by rail through West Coast ports to buyers in Asia.
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Symonanis said that at an industry meeting with container carriers belonging to the Transpacific Stabilization Agreement last fall, the carriers said it might be possible to increase the supply of empty containers in Houston by repositioning equipment in other parts of Latin America and the Caribbean where surpluses exist.
Another executive involved in cotton logistics who asked not to be identified expressed concern that carriers might show preference to exporters of plastic resin that can offer consistent volumes of product each week, as opposed to those whose shipments are more seasonal.
Waste Paper Chase. The leading export from the U.S. is waste paper, and according to O’Connell, it was the primary cause of a surge container exports from the U.S. West Coast in 2016.
That growth, he says, could be a result of paper recyclers stockpiling material before shipping rates began to rise. But he notes most of that paper goes to China, and the upswing in demand is a manifestation of two other trends in the Far East.
One is the desire by consumers to have products more neatly and individually packaged in retail stores.
The other is the rise of e-commerce. He says Alibaba saw sales on China’s “Singles’ Day” climb 60 percent last year and that China’s post office reported Singles’ Day generated 800 million packages.
“I think what we’re seeing is that the demand for packaging material in China has actually outstripped their domestic capacity for generating waste,” he said. “This is likely to be a flourishing trade for the foreseeable future.”
In the Port of Oakland, “wood pulp” cargoes, which include waste paper, are the leading export commodity followed by fruits and nuts.
O’Connell says that this could make California agriculture vulnerable if the U.S. and China get into a trade war “because we don’t export grains people need to live, we export specialty crops that are really discretionary purchases.
“You can cut off the trade in almonds and walnuts and not have people rioting in the streets. Agricultural exports, particularly from California could be easily targeted,” he said.
DDGS Dumping. Even before Trump’s inauguration, China announced that it was subjecting leading agricultural exports from the U.S. – corn, ethanol and distiller’s dried grains with solubles (DDGS) – to anti-dumping and countervailing duties. DDGS is an ethanol byproduct used as animal feed and one of the leading containerized exports from the U.S.
Along with duties that had already been imposed on the product, China’s action could increase the price of U.S. DDGS in China by 90 percent, said Thomas Sleight, the president and chief executive of the U.S. Grains Council.
Sleight says China has a small, but growing ethanol industry, but it doesn’t produce enough DDGS to fill domestic demand, which increases prices.
“The core of the issue is the fact that China has very high internal prices on corn, and when you take that very expensive Chinese corn and make DDGS out of it… it’s going to be more expensive. They felt that they were facing unfair competition because of that.”
The U.S. Grains Council contends China’s own internal policies are the reason for the high cost of domestic DDGS and that “it’s actually counterintuitive to Chinese interests to limit your sources of feed ingredients.”
The U.S. Department of Agriculture says DDGS exports (including bulk, container, and cross-border movements) have grown from 1.2 million metric tons in 2006 to a peak of 12.7 million metric tons in 2015, making it the top containerized grain export. About half of DDGS is shipped in containers and the other half in bulk vessels.
USDA says the main importer of U.S. DDGS is China, representing 50 percent of the market, followed by Mexico (13 percent), Vietnam (5 percent), and South Korea (5 percent).
Growth slowed last year, however, and through the end of October, year-to-date DDGS exports were down 2 percent from 2015 levels.
Sleight said the council has been “ramping up efforts to find alternative markets” in Mexico and South Korea, as well as countries in Southeast Asia and North Africa.
DDGS is a “very popular feed ingredient, so we’ll find alternative markets,” he said. “But it’s kind of hard to completely replace a market the size of China that, again, was importing 6.3 million tons of DDGs in 2015 to the tune of $1.6 billion.
“The industry has to put pressure on the administration to solve this problem,” said Sleight. “The U.S. and China have been having trade friction for quite some time here on a wide variety of products – steel, wire, you name it. It’s a very complicated trade relationship and this is just the latest incidence where duties have been put on. U.S. agriculture and the ethanol industry is going to be paying a pretty heavy price.”
Chris Dupin is Maritime and Intermodal Editor of American Shipper. He can be reached by email at cdupin@shippers.com.