Good times at U.S. ports not expected to last as world’s largest shipping line warns trade war will rear up at start of next year.
The high numbers of containerized imports coming into the U.S. this year face a sharp drop in January due to the increase in U.S. tariffs on Chinese-made goods, according to Maersk (Nasdaq OMX: MAER.B).
Chief commercial officer Vincent Clerc delivered the view during the company’s third quarter earnings conference call. Maersk is already feeling the effects of the trade war between the world’s two largest economies as backhaul volumes out of the U.S. fell below expectations last quarter.
In Maersk’s outlook for 2019, it says the U.S. tariffs imposed on $200 billion worth of goods from China and the reciprocal tariffs placed on $60 billion worth of goods from the U.S. could reduce the global container trade by 0.5% to 2% over the next two years.
Already at 10% as of September, the U.S. tariffs on Chinese goods increase to 25% at the start of 2019. At that point, “we expect to see a significant slowdown in demand for imports into the U.S.,” Clerc said.
The fourth quarter, though, still looks to be a strong period for inbound freight.
The Port of Long Beach, the second largest U.S. port in throughput, said its October container volume of 705,408 twenty-foot equivalent unit (teu) was up 5% from a year earlier, a new October record and the third highest monthly volume ever seen at the port.
Year-to-date, the port is approaching an 8% overall increase in container volume at just over 6.7 million.
On the east coast, the Port of Savannah saw its October container volumes of 413,778 teu mark a new monthly record. Year-to-date, Savannah total volumes are up 7% to 3.6 million teu.
While the volumes reflect strong U.S. consumer demand, they also reflect the ongoing “pull forward” effect from shippers looking to beat the deadline for higher tariffs, Clerc says.
“A lot of customers have actually accelerated their purchase orders to get them into the U.S. before the tariffs,” he said.
The trade war with China is increasingly asymmetric as U.S. outbound freight falls lower. Long Beach’s outbound container volumes which fell 5% from a year earlier while Savannah’s outbound volumes were down 7% from a year earlier.
Maersk echoed the view as it reported higher unit costs per container transported due to lower levels of backhaul freight from the U.S. during the third quarter.
Panjiva, the trade research arm of S&P Global (NYSE: SPGI), says there has been a “marked downturn” in U.S. product exports that have been targeted by China for reciprocal tariffs, with year-on-year volumes from the U.S. falling just under 2% in October.
“China’s retaliation is proving more effective than U.S. import duties,” said Panjiva research analyst Chris Rogers.
In response to the expected slowdown, Maersk says it plans to reduce container ship capacity slightly going into the fourth quarter, with a target level of just around 4 million teu expected for 2019, down about 5% from the start of 2018. The company says it’s running about 730 ships globally, down from the 780 ships running when it combined with another large player Hamburg Sud.
Maersk and other container lines efforts to reduce capacity have pushed ocean container freight rates to their best levels of the year.
Despite better rates and higher container volumes, higher fuel prices pinched operating profit in Maersk’s ocean carrier business with operating profit rising year-on-year 16% to $925 million against a revenue increase of 32% to $7.3 billion for ocean shipping. Fuel prices rose 47% over the same period.
Outside of ocean shipping, Maersk touted the ongoing growth in its supply chain management and freight forwarding businesses under the Damco brand. Revenue in supply chain and logistics rose 7.5% from a year ago thanks to volume growth in supply chain management and intermodal revenue. Operating profit rose 71% to $48 million, but Maersk says the results were impacted by start-up costs of new contracts as well as foregoing less profitable volumes.
Nonetheless, Maersk hopes logistics and value-add services will deliver increasing profit as ocean freight grows at a slower pace.
“The growth in supply chain management is something we take a lot of encouragement from,” said executive vice president Soren Toft.