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Trade Tariffs Could Push Shipping to the Edge: An industry battling higher fuel prices, weak freight rates faces uncertainty of U.S.-China tariff fight

Trade Tariffs Could Push Shipping to the Edge: An industry battling higher fuel prices, weak freight rates faces uncertainty of U.S.-China tariff fight
Costas Paris July 9, 2018

Trade tariffs between the U.S., China and Europe add to the problems confronting the global shipping industry, which was already struggling this year with weak demand and high fuel prices.

Container ships, which move $4 trillion worth of products each year, are suffering from weak freight rates, owing to a glut of boats in the water. Despite consolidation that has left the market dominated by a handful of players, companies have recently issued profit warnings, suspended some sailings and scrapped a planned IPO.

The first round of tariffs kicked off Friday, affecting $34 billion worth of Chinese products, with Beijing saying it will retaliate, slapping similar levies on U.S. imports. The moves mostly apply to engines, medical equipment, semiconductors and other products that account for about 6% of total China-U.S. container-trade capacity, according to the Journal of Commerce.

“Right now it only gets worse for shipping from the escalating trade war,” said Peter Sand, chief shipping analyst at BIMCO, an industry group. “A lot of uncertainty is added.”

Soybeans, moved by bulk carriers, will be hit. China is the world’s biggest importer of soybeans and America’s biggest market. Last year the U.S. exported $14 billion worth of soybeans to China, according to the U.S. Department of Agriculture. Brokers in Singapore said U.S. cargoes could dry up, and China is already pumping up soybean imports from Brazil.

Denmark’s Maersk Line, the world’s biggest shipping company, said the initial round of tariffs is expected to have a small impact on its business, but “a continued escalation could result in severe consequences for global trade.”

The National Retail Federation, the biggest retail trade association in the U.S., said in a statement that container volumes at big U.S. ports in May were up 11.6% from April, at 1.82 million boxes, and 4.3% on the year. The NRF expects box numbers to grow every month until November.

“As tariffs begin to hit imported consumer goods…these hidden taxes will mean higher prices for Americans rather than significant changes to international trade.” NRF Vice President Jonathan Gold said.

But the tariffs could spell an end to any hopes of recovery in the shipping industry.

Volumes at ports around the world are up this time of year as retailers stock up for the year-end holidays, but ship fuel prices are as much as 50% higher than this time last year and freight rates are down at least 5% over the same period.

The Port of Los Angeles, the nation’s biggest gateway, expects the tariffs could affect 15% of all cargo it handles.

Maersk and Mediterranean Shipping Co., which combined control up to 35% of the container market, last month canceled a trans-Pacific route and pulled out six ships.

Germany’s Hapag-Lloyd AG , another large boxship operator, issued a profit warning in late June that sent its shares tumbling. GoodBulk, a general cargo operator, recently pulled a $140 million Nasdaq IPO, which would have been the first return of a shipping company to the market in three years.

“GoodBulk ship cargoes are not directly affected by the U.S.-China tariffs, but the IPO timing turned out to be bad because everyone realized the Trump tariffs are no joke,” said a person involved in the listing. “Nobody wants to be around shipping stocks at this time.”

Shipping executives said they are concerned that escalating tariffs could later include crude oil. China is the biggest customer of U.S. crude, buying one-quarter of U.S. exports. In the first 10 months of 2017, total U.S. seaborne crude-oil exports to Asian and European markets were up 150% compared with the same period the year before, according to BIMCO.

“We’ve got a significant number of megatankers committed to the China-U.S. crude trade on relatively long contracts,” a Greek owner who operates about two dozen tankers said. “You can’t cancel contracts and find employment for the tankers from a different oil origin overnight.”

About 36 very large crude carriers, or VLCCs, have been used this year to move U.S. crude cargoes to China, according to marine-data provider Vessels Value. With nearly all U.S. crude exports to China leaving from the U.S. Gulf, the sailing distance is almost double that of other oil origins such as the Middle East, meaning the cargo is tied up on the ship for longer periods, benefiting tanker owners.