We have spoken several times over the last few months about the shipping industry. It may not be a traded metal product but it has a direct bearing on metals prices. And, more important is often a bellwether for the state of regional economies. So after a bumper 2007, it is interesting to see how demand is dropping in 2008 just as an additional 60% of global capacity is about to be added.
This would not be a problem if demand continued at the rate we have seen for the last few years. But that is not the case. Supply and demand patterns are in a state of rapid flux at the moment as evidenced by the capacity utilization rates dropping on the Asia to US west coast routes for five straight months and on the Europe to US east coast route, both a function of the weaker dollar and falling demand. Conversely, (and this will be good for US importers and consumers) capacity utilization is up from the US to Asia and Europe as exports increase. This will encourage shipping lines to drop the import rates to position containers for the more lucrative export routes. Rates from Asia to Europe are also up due to the strong Euro transferring material and component supply to Asia. A further sign of strain in the market are the steps being taken toward consolidation of services. We take this as a sure sign that shipping lines are trying to protect rates in the face of falling demand. Even the industry leader Maersk Line is in talks about vessel sharing on their transpacific routes.
The question is to what extent will this continue and can we expect this massive increase in capacity to benefit US consumers by lowering freight costs further? The answer depends at least in part how much a US downturn will spill over to the rest of the world. To what extent, over the last few years, are the different economies interdependent and to what extent have they decoupled (the current in vogue phrase)? Evidence presented in the Economist suggests that the emerging economies may indeed have decoupled from the mature western economies to a greater extent than we had realised. Half of China’s exports now go to other emerging economies. Sales to the other BRIC countries are up 60% year on year to January. Domestic demand is also surging (a matter of concern to the Chinese government worried about inflation) with consumer spending rising three times as fast as in developed countries and fuelled by massive capital spending, up 17% in emerging economies last year. Much of this investment is in infrastructure and property which will continue to fuel internal consumption keeping the economies growing even as the US does not.
Much of this additional shipping capacity was ordered on the assumption that the global economy would continue to expand. With the US going into a period of stagnation, there is bound to be excess capacity available if not to the extent that a global recession would release. So the good news for hard pressed US manufacturers is that rates are likely to ease over the coming year, though not collapse, reducing import costs (the exchange rate notwithstanding) and making exports yet more competitive. Wouldn’t it be something if the US economy which was facing a massive imbalance of payments position just 18 months ago was to export itself out of a recession in 2008?