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Drewry: Latest Tariffs Weaken Transpacific Demand Growth Prospects

Demand growth prospects in the Transpacific are significantly weaker than they were a few weeks ago after US President Donald Trump revealed a new wave of tariffs.

The naive hope that the US-China trade war was over has quickly vanished, leaving an unpredictable situation for carriers in the Asia-East Coast North America trade, according to shipping consultancy Drewry.

It had seemed that the flames of the trade war between the US and China were being dowsed following talks between the two sides that promised to deliver an accord. However, frustrated by a perceived lack of progress, President Trump announced that all existing tariffs would almost immediately be set at 25% effectively raising the second tranche of around USD 200 billion of Chinese goods that were originally pegged at 10%, while also preparing the ground for all so-far untouched goods to get the same treatment.

“Carriers and cargo owners are caught in the cross-hairs, the unpredictability making it almost impossible to second-guess the best approach to minimise the damage,” Drewry said.

Shipping lines operating in the Transpacific fared well out of the chaos last year as despite some operational challenges they benefited from rapidly escalating freight rates as shipments were front-loaded to beat tariff deadlines.

“It is unlikely they will be beneficiaries this time around. Containerised goods were less exposed to the extra duties last year, mostly residing in the second tranche at 10% and virtually offset by a devaluation of the Chinese currency, meaning that demand for Chinese goods moved in containers continued to rise. That would not be the case if the tariff blanket rises to 25% for all goods; some reduction in demand has to follow.”

Based on previous impact analysis, Drewry calculates that a 10% increase in US import prices of goods from China results in a 6% decline in TEU volume from China to the US over time, holding all other factors constant. With tariffs of 25% the potential TEU contraction would be around 15% for that leg alone.

“It remains to be seen how carriers will react to the tariff situation, but they will be wary of how average ship utilisation fell during 1Q19 and the impact it had on spot rates that dropped to their lowest point since June 2018 in March. Having been in a position where ships were full at the turn of the year, by March load factors were hovering around 85%.”

The mini-recovery in rates in April that has mostly held during May indicates that ships are fuller now, but Drewry expects that carriers will be considering some capacity retrenchment to counter potential lost traffic as a result of the trade war.