Special Coverage: Cloudy with a chance of pain

Early forecasts for ocean shipping are now being revised downward to reflect slower-than-expected volume growth.

   Earlier this year, there were some strongly optimistic forecasts suggesting that after experiencing just minor growth in each of the past several years, culminating in a horrendous 2016, ocean shipping might just be headed toward a substantial rebound. As recently as this past spring, economists were bullish on the potential for strong growth in the American and global ports sectors.
   For example, the Paris-based Organization for Economic Cooperation and Development (OECD) in June forecast real GDP growth for the world as a whole at 3.5 percent for 2017, a couple of tenths of a percent higher than a World Bank forecast.
   In April, the World Trade Organization (WTO) forecast that global trade could rise by as much as 3.6 percent this year and up to 4 percent in 2018, both of which would be a welcome change from the very weak 1.3 percent growth rate seen in 2016.
   The WTO was bullish on market growth, predicting at the time that despite the unpredictable direction of the global economy, trade could strengthen global growth if international movement of goods and supply of services remains largely unconstrained.
   The main risk factor, according to the WTO, was international trade policy, including the possibility of trade-restrictive policies being put in place in Europe and elsewhere.
   Like the WTO, the International Monetary Fund (IMF) projected that 2017 would be a relatively good year for growth. The IMF in April predicted world trade volume would grow 3.8 percent this year and 4.1 percent in 2018, outpacing the estimated 1.9 percent growth of 2016 and 2.7 percent the year before.
   In May, maritime industry analyst Alphaliner projected full-year global port throughput growth would reach 4.6 percent in 2017, a positive revision from earlier projections of 2 percent to 3 percent in view of healthy volume growth recorded across key container ports in the first quarter.
   According to an Alphaliner survey of over 150 ports, global container port throughput grew an estimated 5.8 percent during the first three months of the year compared with the same 2016 period.
   However, things have changed in the past couple of months. The sky hasn’t exactly fallen, but newer predictions suggest that the sun may only be peeking out from behind the clouds for the ocean carrier industry and a legitimate market rebound may not actually be in the cards after all.

Changing Forecast. The big news came in early June, when due to a previously undiscovered algorithmic error, Container Trade Statistics had to release a significant revision of its intra-Asia data. As a result, a previously reported strong start to the year, with 10 percent global demand growth in Q1 2017, was revised downward to a global growth rate of a mere 2.4 percent.
   This revision materially changed the global view to the start of 2017 from a growth rate not seen since before the Great Recession to an outlook that was much more in line with recent years.

   “There’s a lot of fear and uncertainty around the trade outlook,” Paul Bingham, vice president of the Economic Development Research Group, said in a recent interview with American Shipper, adding that although uncertainty and other risk factors have affected projections in past years, it hasn’t been on the same level as in 2017.
   “Headed into this year, it was the most extreme in terms of potential variance of risk around the forecast that I think I’ve seen in my career,” he said. “I think some of that risk has been diminished a little bit; [but] there’s still an awful lot.”
   Part of the reason for the uncertainty has been instability in the Asian shipping market. In addition to Hanjin Shipping filing for bankruptcy at the end of last August, numerous Asian carriers have either merged operations or been acquired over the past year-and-a-half. State-run Chinese lines COSCO and China Shipping (CSCL) merged in 2016 and in early July agreed to purchase Hong Kong’s Orient Overseas International Ltd., parent of OOCL. Singapore-based APL was purchased last year by CMA CGM of France. And Japan’s “Big 3” carriers—MOL, NYK and “K” Line—will merge their container operations and operate under the name Ocean Network Express (ONE) starting in April 2018. In addition, a reshuffling of the major east-west vessel sharing agreements saw carrier alliances on those trades reduced from four to three.
   But the jury is still out as to whether all this consolidation will ultimately help or hurt the industry in the long term.
   “Toward late 2017 and early 2018, the benefits of the mergers and newly established alliances in 2016 should become visible, hopefully by way of better profits and fleet utilization, rather than just lower costs and cheaper offers to the shippers,” Peter Sand, chief shipping analyst at the Baltic and International Maritime Council (BIMCO), said in a January container shipping market analysis. “It takes time to merge two companies into one, and make it work in a way that takes advantage of the economies of scale and broader offering into specific trade lanes.
   “Despite radical changes to the scenery of liner companies and shipping alliances in the past year, there is no entity large enough to dominate or even impact the global market,” he said. “You must look at the individual trades to find any apparent impact from consolidation.”
   “The recovery is slow, but if patience is applied and the supply side handled with care for the years to come, it will happen.”

Silver Lining? Despite all the tumult in the Asia Pacific region, Bingham said that’s still where the real drivers for growth in the world economy are. China growth in 2017 is estimated at 6.5 percent, he said.
   “Among the fastest growth is coming from India, which has a faster growing population, seeing more foreign direct investment, but still has enormous infrastructure issues, but has been growing at a faster rate and is better able to sustain that growth than China,” he said.
   According to the Economic Development Research Group, Japan is forecast to see just 1.5 percent growth, which is considered strong in relation to some past years, but overall is still pretty meager.
   Over in another region of the world, Western Europe is likewise expected to see about 1.5 percent growth, with stronger growth in Germany, but weaker prospects in places like Greece and Italy, Bingham said.
   “If we look across all these areas, 2017 is better than 2016, and going forward, the greatest potential for growth remains in the emerging market areas. The faster growth is going to be in these emerging market countries, not the old, traditional trading partners in Europe and Japan,” he explained.
   “The overall world outlook right now is moderately faster growth. We’re at a point in the world economy of a recovery from the recession almost of 10 years ago now, 2008-2009, where we’re still recovering slowly,” Bingham said. “It’s not strong growth. It’s not at the potential by any means of the economy for world growth, but we’re far from recession. And we’ve seen weakness in Europe, in Japan, of traditional developed country trade partners. That tends to pull that [growth] down a little bit.”
   One good sign for the global market is that through the first five months of 2017, imports and exports through the ports of Long Beach and Los Angeles, the biggest and busiest ports in North America, were up significantly compared to the corresponding period the previous year. Long Beach handled just over 4 percent more containerized cargo through May, while Los Angeles’ 3.75 million TEUs represented an 8.5 percent year-over-year increase.
   Since the beginning of the Port of Los Angeles’ fiscal year, which runs from July 1 to June 30, throughput at its terminals stood at 8.5 million units, a comparative jump of 9.8 percent from the previous 11-month period. For the Port of Long Beach, however, which has a fiscal year that begins Oct. 1, fiscal year-to-date volumes had slipped 1.3 percent to 4.45 million TEUs compared with the first eight months of the prior fiscal year.
   Meanwhile, the East Coast’s busiest seaport, the Port of New York and New Jersey, handled 2.64 million TEUs during the first five months of 2017, a 5.4 percent increase compared to the corresponding 2016 period.
   And recent data indicates imports at many major U.S. ports are relatively strong, and some are growing to pre-recession levels. Import volumes at major U.S. container ports in first half 2017 are expected to rise 7.4 percent to 9.7 million TEUs compared with the first half of 2016, according to the latest Global Port Tracker report, produced by Hackett Associates for the National Retail Federation (NRF). The Global Port Tracker report covers the U.S. ports of Los Angeles/Long Beach, Oakland, Seattle and Tacoma on the West Coast; New York/New Jersey, Hampton Roads, Charleston, Savannah, Port Everglades and Miami on the East Coast; and Houston on the Gulf Coast.
   Total container import volume through these ports totaled 18.8 million TEUs in 2016, up 3.1 percent from 2015, which itself was up 5.4 percent from 2014, the Global Port Tracker report states.
   “The world view is that the U.S. is now at a point where it is achieving faster growth. It’s really the locomotive for growth in the world economy,” Bingham said. “Overall, we’re talking about a relatively healthy economy that’s stronger this year than it was last year. So for the big picture, that’s good news, we have a healthier customer base potentially.
   “And the forecast for the U.S. shows an even sharper improvement of 2.3 percent this year, as opposed to 1.6 percent last year. The pace is improving, so next year, we’ll have an even stronger economy,” he added. “In 2018, we’ll see a strengthening of the world economy continuing, but it’s not tremendous acceleration. It’s just a little bit better than last year, a little bit more solid foundation for growth, a better employment situation in the U.S. and around the world, fewer countries in trouble, fewer countries in recession and emerging markets that are past their low point—they bottomed out about a year ago.
   “We’re well above being in recession, but this is weak growth,” said Bingham. “We’re missing out on opportunities as a world economy.”

Fundamental Issues. Another persistent issue for the ocean shipping industry is that containership fleets have continued to expand faster than demand, with few signs that this will change any time soon. Despite a decline in commodity prices and freight rates in recent years that was largely spurred by excess capacity, carriers have continued to grown their fleets—albeit at a slower pace—in the hopes that global trade growth would one day return to those double-digit levels seen prior to the recession.
   According to data from the United Nations Conference on Trade and Development, as well as the IMF, growth in capacity of the world’s merchant shipping fleet, measured in deadweight tons (DWT), has outpaced growth in global export volumes nearly every year since 2007, with the one exception being 2009. This oversupply has put significant downward pressure on freight rates, which in 2016 plummeted to near-historic lows.
   Further, that borrowing-fueled capacity expansion has increased debt levels for many carriers, and the rise in debt obligations, coupled with post-recession slow revenue growth caused many firms to fall deep into the red in 2016.
   Even now, COSCO Shipping Lines is set to receive over $1 billion in loans for 11 ultra-large container vessels in the 20,000-TEU range, plus five 14,500-TEU ships being built at several Chinese shipyards. The company is also receiving $500 million to finance seven Very Large Crude Carriers (VLCCs) as well as three LR1 products tankers.
   According to BIMCO, contracts for dry bulk and liquid bulk tanker newbuilds in the first half of 2017 were 20 percent higher than in the same period last year. Since the start of the year, newbuild orders in those segments has amounted to 19.6 million DWT collectively.
   Additionally, delivery of VLCCs for the first half of 2017 was the highest since 2011, while only two VLCCs have exited trading so far during the year, according to BIMCO.
   For these reasons and more, analyst projections have pointed to another two years of industry oversupply of vessel capacity before the beginning of a recovery emerges in 2019.
   But while the downward revisions of ocean shipping forecasts have resulted in a somewhat cloudy picture, the Tokyo office of investment research and analysis firm Moody’s suggested this past spring that the outlook for the industry is steady, and that supply growth will continue to outpace demand growth in 2017, causing freight rates to remain low, but higher than last year’s levels.
   However, Moody’s has also said that it reserves the right to change its forecast depending on what happens with the aforementioned issue of vessel overcapacity.
   “For the shipping industry generally, we would consider changing the outlook back to negative if we see signs that shipping supply growth will exceed demand growth by more than two percent or that aggregate EBITDA (earnings before interest, tax, depreciation and amortization) will decline by more than 5 percent year-over-year,” the firm said.
   “Conversely, we would consider a positive outlook if the oversupply of vessels declines materially and aggregate year-over-year EBITDA growth appears likely to exceed 10 percent.
   “Meanwhile, our view on the tanker segment is negative, reflecting high supply and low freight rates,” Moody’s said in its analysis. “The segment faces very high levels of scheduled deliveries for 2017 and 2018, a credit-negative development because it will keep freight rates low over the coming 12 months.”
   Regarding the possibility of more restrictive trade policies in Europe and elsewhere playing a role in global trade this year, the possibility of the Trump administration formally adopting a protectionist stance looms large. In late June, just days before the G20 Summit in Hamburg, Germany, CNBC and other business news outlets reported that the White House was seriously considering a plan floated by Commerce Secretary Wilbur Ross to impose tariffs in the 20 percent range on steel and other imports coming from China and other large exporting countries.
   But even though no strongly isolationist policies have been adopted by the administration as of yet, Trump’s election has already had an effect on international trade.
   The relative value of the U.S. dollar, which began to rise almost immediately after the November election on campaign promises of corporate tax reform and an easing of government regulation but has since tapered off, is actually making U.S. exports more expensive and, therefore, less competitive abroad.
   “There’s some irony in President Trump being elected, in that it led in many respects to perceptions of world markets for greater growth on the part of the U.S. economy and helped lead to the further strengthening of the dollar, which then has actually made his goal of increased U.S. exports more difficult,” said Bingham.