The Transatlantic: In Need of Stimulus
The transatlantic continues its descent down the pecking order of world container trades, according to Drewry Maritime Consultants. Might the new US administration give it the boost it needs?
Annual westbound transatlantic volume growth seems set to end 2016 a little over two percent even after a recovery of sorts in the second half of the year. For the first 11 months westbound shipments were up 2.5 percent to 2.9 million TEU. This is a far cry from growth of 8.4 percent and 6.4 percent recorded in 2014 and 2015 and is symptom of plateauing consumer demand in the US. Given the rapidly strengthening dollar against the euro and British pound, carriers might well have expected more from this trade.
The eastbound remains a weak market with year-to-date North American outbound volumes as of the end of November 2016 a fraction below what was carried in the same 11-month period of 2015. A strong dollar and subdued demand in Europe is not providing any momentum to the trade, which last saw any real annual growth in volumes in 2013.
Shipments of US agricultural machinery fell in 2016 to both France and the UK as lower corn prices cut the spending power of farmers. Construction machinery also declined, and eastbound shipments of medical equipment have dropped because governments in Europe have tightened their healthcare budgets. This has hit carriers’ revenues hard as they constitute higher-paying traffic.
The shipping lines have already seen average eastbound earnings shrink in the last 18 months as a result of lower reefer volumes. Eight years ago, Russia was the single largest market for US chicken products, accounting for about 18 percent of US poultry exports. Russia was also among the leading export markets for US pork and beef products. Sanctions have simply wiped out this refrigerated cargo stream.
While exports out of the US and Canada to Europe were slumping in the 11-month window, volumes out of Mexico flourished with almost nine percent growth. Mexico’s new car manufacturing belt in the country’s central Bajio region is spawning a whole entourage of suppliers, which in turn are now producing components that are shipped to Europe. With a small but growing share of 14 percent of the trade, Mexico alone will not be able to reverse the fortunes of the North America export market to Europe.
The total loaded volume carried on the combined legs will exceed five million TEU in 2016, but in the next twelve months the transatlantic route is likely to be overtaken by the Asia-South Asia market as the fourth largest deep-sea trade lane after the transpacific, Asia-North Europe and Asia-Mediterranean. Drewry expects westbound volumes to continue to decelerate in 2017 with growth of 1.8 percent, while the eastbound market is due for a small pickup after three years of decline or flat results to 1.4 percent.
Even with our relatively cautious transatlantic forecasts the new Trump administration does add considerable uncertainty. The IMF recently upgraded its GDP outlook for the country by 0.1 point and 0.4 points for 2017 and 2018, but cautioned that the forecast was merely the most likely in a wide range of scenarios. As things stand the IMF thinks that fiscal stimulus will see economic output rise to 2.3 percent in 2017 and 2.5 percent in 2018.
One possible growth story lies in the Russian market, which a warmer relationship with the Trump administration could result in some of the sanctions being relaxed and kick-start the movement of car parts to American assembly plants in the country. On the flip side, if Donald Trump’s election campaign rhetoric is to be believed the tentative free-trade agreement discussions between the US and the EU—the Transatlantic Trade and Investment Partnership (TTIP)—is dead in the Atlantic waters.
Capacity growth on the transatlantic route in the fourth quarter of 2016 was subdued after the suspension of MSC’s USA West Coast Express. Earlier in the third quarter, Hamburg Süd, CMA CGM, and UASC suspended their joint Vespucci service and deployed their ships on the new Liberty Bridge Express loop, but MSC did not compensate for the loss of service by direct calls to North European ports. Instead the carrier introduced 9,000-TEU ships on its Mediterranean-USWC service California Express in October. The objective is to compensate for the loss of direct connectivity between the US West Coast and North Europe via transshipment through Mediterranean ports.
Westbound vessel utilizations during the second half of 2016 were generally considered to be good, according to Drewry, with load factors averaging out in the high 80s. Some ships were sailing 95 percent full, and yet, in the September renewal of annual service contracts, rates softened by as much as $100 per 40-foot container as carriers again fought for market share. Eastbound load factors are currently no better than 55 percent-60 percent and spot rates in this direction are still as low as $500 for low-value products.
“More growth could have been expected for the westbound trade given the strength of the US dollar,” the Drewry report concluded. “It is unlikely that the new US administration will be able to spark this sleeping trade into life in the short to medium term.”