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Foolhardy forecasts and trading places

Even as some 21 states postpone the roll back on plans to ease their lockdown regimes and the International Maritime Fund (IMF) has revised its global economic projections downwards, patchy demand in the United States is being seen as a sign of recovery.

A surge in demand for container space is temporary according to consultant Jon Monroe, and a similar message has come from three leading economic thinktanks who have warned that international collaboration is essential if a strong global economic recovery is to be achieved.

With rates rising in the Pacific trade and shippers complaining at the unfair practices, the thought of a surge in demand would, no doubt, be welcome for beneficial cargo owners, who could exert a measure of control, they hope, over the carriers’ current exploitation of the pandemic induced crisis for their own gain.

It is time to plan for that recovery, but the actual upturn may be elusive for some time yet. In a joint statement the World Trade Organization (WTO), the Organization of Economic Co-operation and Development (OECD) and the United Nations Conference on Trade and Development (UNCTAD) believe that the time is right to plan for a recovery that is broad-based.

“As the health crisis is brought under control, it is urgent to put in place measures to ensure a swift and sustainable recovery from the economic crisis and lay the foundations for a more prosperous, inclusive future,” said the statement.

The three organisations stressed the importance of building resilience into societies to protect against similar future global shocks, and in particular to shield the most vulnerable.

Mitigating the impact of the Covid-19 pandemic through the monitoring of policy and “multilateral dialogue” between the OECD, UNCTAD and WTO can offer a valuable route to a wider economic recovery.

“Such dialogue also contributes to inform the design of policies that allow countries to navigate the uncertainties brought about by the Covid pandemic and establish conditions that usher in a sustainable recovery,” said the joint report.

However, the reversal of globalisation, or “re-shoring” is not seen as the answer to more durable supply chains.

Hapag-Lloyd's CEO Rolf Habben Jansen is living in a different world says one consultant.

The joint report argues that, “Open international markets, with greater diversification of supply, are also themselves a source of resilience, allowing for shocks in one region to be offset by supply from another.”

Adding that WTO regulations already provide for national emergencies, however, “WTO Members might also wish to think about whether new trade rules may be necessary to respond to global emergencies in which many countries are affected at the same time.”

Ultimately the three organisations are aiming for greater trade and investment and a collaborative approach to protecting against global shocks such as a pandemic, but the three stop short of explicitly saying that such an approach can offer a solution to the environmental crisis which also presents a global threat.

Foreign direct investment (FDI) and trade can be critical in achieving an economic recovery and “building more resilient, sustainable economies – provided governments embrace the potential of international investment rather than turning inwards.”

Turning inwards is apparently what the world’s largest economy is doing, with policy perhaps skewed by the imminent US election, the noise of which has been largely quietened by the criticality of the pandemic; at least to the outside world looking in.

In a view from America Monroe appraises the trade situation without political affiliation, but not without critical thought. “As we enter our first week of July, container volumes seem to grow each month over the previous month but still down from the same time last year. This premature surge of cargo is temporary. I believe it will begin tapering down by the end of July,” argues Monroe.

For the US importers it remains unclear whether the traditional ‘back to school’ season, which annually sees a surge in demand, will happen at all. Universities are talking about online teaching and the traditional Haloween and Thanksgiving events remain at risk.

It is a “crazy market” according to Monroe with spot rates at twice the level of contract rates and some non-vessel owning carriers (NVOCC) enjoying a boost in volumes while others are in the doldrums.

“All indications from China origin ports show strong bookings through mid-July. We don’t expect the demand to be sustainable throughout the year. Nothing to drive it,” explains Monroe. However, that does not mean that rates will be coming down any time soon, he says, as increased cancellations will maintain the cost of transporting cargo.

Monroe holds out little hope for a sustained recovery through the second half of the year, citing Hapag-Lloyd CEO, Rolf Habben Jansen, as saying that the container lines see “encouraging signs of recovery”.

“Where does he live? I definitely want to move there,” blasts Monroe. He went on to say, “The entire US is in a blanket of fear, malls for the most part, are still empty, we are experiencing record bankruptcies in companies, the unemployment rate is the highest it has been in decades and companies continue to announce layoffs. Add to this, the fact that a doctor from the CDC announced that ‘this is only the beginning’. There is more?” asks Monroe.

Forecasting in a pandemic is clearly a difficult proposition, but there is a need for planning purposes to understand what might be required, so the fool’s game will continue.

In the first instance, the ‘fool’ the IMF has released some dismal projections for this year and next, revising the outlook for 2020 further down, from -3% to -4.9% recession for the global economy.

However, the 2021 outlook from the IMF sees growth of 5.4%, down from its earlier forecast of 5.8% growth from April.

Sea-Intelligence says that “Should these figures hold true, 2021 will see us back at the 2019 levels of GDP growth. This is materially worse than the projection in April, which had 2021 up by 2.6% over 2019.”

In its evaluation of the IMF projections Sea-Intelligence argues, “From a container shipping perspective, a few elements are particularly important. The contraction in world trade that was previously projected at -11.0% is now down to -11.9% for 2020, with the 2021 rebound revised down from 8.4% to 8.0%.”

If that makes miserable reading then the forecasts from the OECD and WTO make you reach for the tranquilisers. “The OECD June 2020 Economic Outlook, projects that a ‘double-hit’ scenario, where a second outbreak occurs in all economies towards the end of this year, would see global GDP decline by 7.6% in 2020 and trade by 11.5%, with growth remaining well short of pre-crisis level even at the end of 2021. Even if such a second outbreak is avoided, world GDP is still projected to decline by 6% this year, and trade by 9.5%, but with growth recovering to near pre-crisis level at the end of 2021.”

The coup de grace is applied by the WTO which forecasts that world trade volumes would decline by 13 to 32% in 2020, “though preliminary data as of mid-June are more consistent with the optimistic side of that range,” said the organisation.

“A major question will be the strength of the subsequent rebound, which will determine whether trade returns to its pre-pandemic trajectory or settles in at a lower level.”

The regional areas for major demand will play a major role in the recovery, with demand a prerequisite for production. In the US Monroe believes that the bigger picture heralds a significant dip towards the end of the year.

In one of the world’s other great consuming regions, the European Union (EU), the GDP outlook is expected to fall from a bad -7.5% to a dire -10.2% according to IMF projections. Which, according to Sea-Intelligence, means that “current low demand levels are likely to persist for a while”. And that means the capacity management programmes, which are considerably higher in the European trade than in the US, will persist.

Source: Sea-Intelligence.

In the third quarter, the cancellations have shot up from just 13 in week 20 to 82 this week, week 26. Sea-Intelligence points out that the blanking of sailings is not uniform with the US trades seeing fewer services cancelled, while the vessels in the European trades tend to be considerably larger than their counterparts on the Pacific.

The decrease in the level of cancellations in services to the US is not due to any “structural” improvement in trade, says Sea-Intelligence, but the consultancy is uncertain whether the reasons behind the move are saying it is a result of either the “carriers pulling out too much capacity from the trade in the first instance, or US importers fulfilling short-term needs by using a faster US West Coast service instead of a US East Coast service with considerably longer transit times.”

Carriers do not share the doom and gloom that is surrounding other sectors of the economy. Daily spot rates seen on the FBX from China to the US West Coast reached US$2,681/FEU on 2 July, a level only surpassed for a day, 4 December 2018, since the beginning of July 2018. Rate on services to the US East Coast have achieved levels not seen for more than 18 months at US$3,422/FEU.

On the European trades out of the Far East rates have seen far less dramatic gains reaching US$1,727/FEU from April 2020 lows of US$1,400/FEU. While rates to the Mediterranean have remained almost static at US$2,100/FEU after reaching January 2020 highs of US$2,502/FEU.

Feightos’ CMO Eytan Buchman, said, “Ocean rates from China to the US hit the brakes on their month-long spike this week, levelling off completely to the US West Coast, and increasing 3% to the East Coast.” Buchman added, “This stability could indicate we’ve reached the peak of the demand bump.”

Nevertheless, carriers announced today that they are looking to push through further rate increases to North America and other destinations this month and in August. It remains to be seen whether these increases will stick amid the concerns of a further slowdown in the global economy.

The pandemic has offered the container lines an opportunity to create a new strategy that will keep their heads above water. By maintaining their utilisation levels, the lines have achieved better than expected returns, so far. The real test for the lines will be when the upturn comes.

If and when that turning point does come, unhappy shippers complaining of worse services and higher costs may well be trading places with the lines, who currently sit in the driving seat. But then forecasting in a pandemic is for fools.

Nick Savvides
Managing Editor

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