A Tale of Two Trades
Growth in the two Asia export trades—to the Middle East and South Asia—is moving in opposite directions as the former struggles to adapt to low oil revenues, while the latter is benefiting from continued high consumer demand.
The latest data from Drewry’s Container Trades Statistics (CTS) shows that volume growth from Asia to the Middle East picked up in October (2.1 percent) and November (1.9 percent) after a dreadful third quarter when traffic was down by seven percent year-on-year. However, even the recent turnaround was not sufficient to raise the year-to-date growth into positive territory. After 11 months the westbound trade was down by 1.5 percent at just shy of three million TEU.
The 2016 decline continues the downwards pattern of recent years. Since 2013 when Asia-to-Middle East volumes grew 5.7 percent the next two years returned slower rates of 4.4 percent and 2.7 percent.
The pain is being most keenly felt in the oil-dependent states. Ports in Saudi Arabia, which account for approximately one-quarter of the imports from Asia into the Middle East, fell by eight percent in the first 11 months of 2016. Signs of the economic slump are evident in Riyadh and other major cities in Saudi Arabia, where discounts of 50 percent or more have been offered by stores selling clothes and consumer electronics. Austerity measures have been introduced including wage cuts for government employees (more than two-thirds of Saudis work for the state), while initiatives have been planned to broaden the kingdom’s economy and reduce its dependence on oil.
Despite this, there are fears that Saudi Arabia could fall into an economic recession in 2017 for the first time since 1999, and that the recent agreement by OPEC and non-OPEC members to curb oil output may have come too late to prevent that from happening.
The United Arab Emirates, which take in one-third of containers from Asia into the region, suffered less thanks to its more diversified economy, but it too was down by the end of November, at -2 percent. The prospects for the UAE look better as the emirate is about to start spending on its infrastructure in preparation for hosting the World Expo in 2020.
The lifting of sanctions on Iran has provided some much needed impetus to the trade and helped boost the country’s container inflow from Asia by 52 percent in the first 11 months with the initial surge consisting of foodstuffs, electrical goods, and clothing. With a large and growing pool of middle class consumers and a highly diversified economy, there is a queue forming at Teheran’s door to offer investment, including the motor vehicle and telephone industries, which could in time generate a much wider range of new products entering the country.
Iran’s resurgence will also benefit other ports in the region, such as Jebel Ali, as they will be in a strong position to attract some Iranian transit cargo from those carriers who have decided not to call direct at Bandar Abbas for the time being. It will be a few years before Bandar Abbas, which accounts for approximately 90 percent of the nation’s container traffic, is operating at its pre-sanctions capacity.
One risk to Iran’s growth could come in the form of new US president Donald Trump who has talked of tearing up the Joint Comprehensive Plan of Action (JCPOA)—the pact that defined the removal of Iranian sanctions in January 2016—but given the potential benefits to American exporters it is debatable whether he would follow through with that threat.
South Asia continues to be the regional star performer with year-to-date growth of 5.2 percent for containers from the Far East. This is below the rates of recent years—2014 saw 14-percent growth and 2015, nine percent—but it outpaces any growth seen elsewhere. There is still plenty of mileage left in the region’s consumer spending boom to ensure that decent growth will continue into 2017.
The major commodities entering the Indian market that are witnessing the highest growth include electronic goods and auto parts. One product that is taking the market by storm is solar panels. The Indian solar energy sector is in the middle of an unprecedented expansion, fed by rapidly declining tariffs, improved technology and a global oversupply of panels, which are mainly made in China. Although a smaller market than the US, China, or Japan, India’s solar panel market is expanding the fastest among the major nations.
The sales of new cars and consumer durables have remained buoyant for much of 2016, and were given an added boost when more than 10 million current and former Indian civil servants were recently awarded a 23 percent rise in salaries, allowances and pensions backdated to January 2016.
It remains to be seen what the impact on demand will be following the Indian government’s decision to extend a service tax on bookings where freight is paid at destination to also include bookings destined for India. The move adds a charge for 4.5 percent of the freight and freight related charges.
Overcapacity remains a problem for both trades. In the Asia-Middle East trade capacity was down by around four percent year-on-year at the end of 2016, helped by the disappearance of the bankrupt Hanjin’s FMX loop, served by 8,000-TEU vessels. However, were it not for a number of blank voyages out of Asia during the autumn slack season overall utilization on the fronthaul leg would have struggled to reach the low 60 percent range it did.
Both of the new global alliances (Ocean and THE) will include Asia to Middle East in their vessel sharing agreements, and that could lead to a more coordinated approach to removing capacity when it is simply not required, rather than the ad hoc blanking of voyages that has existed to date.
Looking at the longer term view for supply on this route, Iranian line IRISL has ordered four 14,000-TEU ships at Hyundai Heavy Industries, which Drewry believes could join either the Asia- or Europe-to-Middle East routes when delivered in the second quarter of 2018. The burning question is who IRISL will align itself with; four big ships are not enough to run a service. It is unlikely that the trade’s overcapacity issues will be resolved by then so the introduction of these big new ships could well destabilize the trade further.
Despite the overcapacity that also exists in the Asia-to-South Asia trade, the attractive demand growth is luring carriers to either add additional services or upgrade existing ones. Monthly slot capacity in December was 16.5 percent up on the same month in 2015.
Maersk’s FI3 loop to JNP, Mundra and Port Qasim is now operated with 8,500-TEU vessels and even boasts a 10,000-TEU unit in its ranks. Cosco, K Line, T.S, Lines, Simatech, and RCL launched the IEX/ACE/IFX service in December with five new ships of 4,200 TEU each. This followed the launch in late October of the 5,200 TEU-operated FIX/AIS service from Cosco, KMTC and T.S. Lines.
The persistent overcapacity in these trades serves to supress freight rates although there has been some uplift in recent months thanks to better demand and the assistance of void sailings. Drewry’s Container Freight Rate Insight shows that spot rates from Shanghai to Jebel Ali have broken past the $1,000 per 40-foot container threshold for the first time since the short-lived pre-Ramadan spike in April and May, but remain a long way off the $2,000 per 40-foot levels of mid-2014.
Spot rates from Shanghai to Nhava Sheva have shown more life, rising by 16 percent since October to a still low $780 per 40-foot container. The surge seen in December indicates another strong month for volumes and higher ship utilization.
Drewry believes neither trade are capable of achieving more than 80 percent utilization without considerable void sailings or the removal of entire independently run loops, which will keep a lid on freight rate increases no matter the strength of any demand growth.
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