Shipping relies on international trade in order to function. At the same time, there are no bigger trade nations than the two largest economies in the world, China and the US. One of the trends that shippers need to be aware of in 2017 is the fact that the relationships between the US and China will be very significant in the way that the business is conceived and conducted. The specific impacts may include changes in pricing, the availability of containers, counter tariffs and import/export restrictions. That is why the shipping industry is advised to pay attention to what is happening to the relationship between the US and China. A good starting point for any analysis is to consider the macroeconomic dynamics that influence the dynamic of that relationship.
The Macroeconomics of Both Countries
It is now generally accepted that the US and China will be the leading economic powers for the next 30 years or so. Therefore; the macroeconomic trends in both countries are very relevant to all businesses, including shipping. One of the key emerging trends is the fact that the dollar is getting stronger against other currencies including the Yuan. At the same time, China has been constantly vilified in the popular and serious international press for manipulating currencies. A closer look at the facts shows that the reality is very different from the perceptions. However, the impression is left that China is not playing fair. This is but one of the many factors that are credited with heralding the eventual decline of the US.
There is a zero-sum game in international trade. For example; as the outlook looks rosy for the US, other economies should brace for a downturn. Since the credit downgrade of 2011, the US has gained about 30% in value and is set to continue rising in 2017. The US economy is slowly picking up post-depression steam and therefore placing the Federal Reserve in a much stronger position than it was in five years ago. Hence, it is expected that in 2017 there will be a series of rate increases which attract interests in those assets that are denominated in the US dollar. In layman’s language; all that this means is that the US is going to be richer and stronger in economic terms. As Christopher Stanton of Sunrise Capital LP stated: “Right now, there is an incredible amount of pressure to sell just about every type of currency and buy the dollar”.
Less Rosy Pictures for China
Although China remains a powerhouse in production and export, its currency is nowhere as powerful as the dollar. That can have an impact on international trade; and by implication the shipping industry. However, there is an advantage for China. High dollar rates mean imports from China are cheaper for US residents. On the other hand, US exports are going to be placed at a distinct disadvantage. Therefore, it is more likely that the traffic from China to the US will be much higher than the return journey in 2017. Meanwhile, the Chinese currency continues to fall against the dollar; losing as much as 4.3% in the period between October and December 2016.
The new U.S. Presidential Administration has been predicted to bring on new trade wars between China and the US. In the immediate future, it seems much more likely that the new presidential administration will engage in some sort of fiscal stimulus. All that this does is compound the relative strength of the dollar against the Chinese Yuan. The sting in the tail may be the proposed tax cuts which could have the same impact as the Bush 2000 tax cut bonanza; which led to uncertainty in equity markets as well as a markedly dovish federal reserve.
Is China’s Economy Getting Weaker?
Although the predictions are very early, 2017 could be the year in which the Chinese miracle is finally exposed in all its vulnerability. If that prediction were to pass, then it would have a profound impact on the shipping industry which relies on China as a major exporter. To date, China is the largest US trading partner outside the controversial NAFTA (North America Free Trade Agreement). The inherent instabilities in the Chinese economy inevitably impact on the flow of goods to and from the US. The much-discussed downtrend of imported goods is best exemplified by the fact that computer prices from China dropped by 1.2% in May 2016.
There are specific events that might affect the overall narrative in subtle ways. For example, the congestion on the West Coast in the first quarter of 2016 meant that shippers were constantly looking for alternatives in the short run. Others look at those upswings within specific segments as a demonstration of an industry that is finally weathering the storm. There are particular upswings that affect the industry in specific areas. For example, raw material exports from US to China increased by 31% in the second quarter of 2016. The increase was as high as 47% in June that year. However, such niche-specific variations may not always be mirrored in the shipping industry as a whole.
What should shippers do?
A risk mitigation plan has never been more urgent than it is for 2017. One of the first remedies is to negotiate higher service contract rates. This should be the case even where overcapacity is crowding the negotiations. A case in point is the strategy that has been employed by Alphaliner, which has had to absorb five straight quarter losses. It is anticipated that higher rates can overcome some of the revenue shortfalls that have characterized the industry so far. The situation may be slightly different for Eastbound Trans-Pacific traffic which is dominated by US liners. In this case, the risk management strategy overcomes any supply and demand fundamentals. Following the collapse of Hanjin, it has become imperative for the industry to pay serious attention to costs in light of the demand for specific trade routes.
Shipping is one of those industries that are intimately linked to international trade. Any trade deficits, surpluses, wars and currency fluctuations between the two main actors (US and China); will necessarily have an impact on the industry. Therefore, it remains for the major companies to ensure that they have a risk management strategy for 2017 in order to avoid disasters such as the Hanjin bankruptcy.
Photo source: parsithalat.com
