Overcapacity, Not Trade Wars, to Blame for Falling Demand on Asia-US East Coast

Oversupply of shipping capacity rather than trade wars caused the recent rationalisation in transpacific and Asia-US east coast container services, with US tariffs on Chinese goods largely hitting non-containerised goods, so far.

Last week, 2M and Zim agreed to combine their Asia-US east coast container services, dropping from seven independent loops to five. Overall, the second quarter of the year saw Asia-US east coast traffic plunge 13%, year on year, in April, and 8% in May.

However, industry analyst Drewry today said this had followed a 19% upturn during the first three months of the year. Some had speculated the falling demand was the result of shippers bringing cargo forward to pre-empt additional costs of the then-pending US-China trade war.

Drewry said: “It is possible that shippers did expedite some cargo when the US tariffs were first announced in mid-March, but when it later became clear that the affected goods were largely non-containerised, normal service was resumed. “It remains to be seen whether the same phenomenon occurs if the proposed second wave of tariffs affecting $200bn of Chinese exports (inevitably involving more containerised goods) is approved and comes into effect in September.”

Drewry also suggested the “sudden decline” in demand during April and May had caught carriers off guard, and they failed to adjust capacity accordingly. As a result, ship utilisation fell below 80% during the two-month period – its lowest point since 2016 – and nullified carriers’ opportunity to secure spot rate gains. “It is perhaps a testament to the underlying demand that exists in the trade that spot rates held firm in April and only saw a gentle slope in May after a start-of-month boost from a general rate increase.

“Drewry’s World Container Index Shanghai to New York benchmark spot rate has risen in each of the past three weeks so that as of 19 July it stood at nearly $2,700 per 40ft container, the highest point since the start of March,” Drewry continued.

The upward trend through the first weeks of July indicated that the demand momentum from June had been carried into the next month. However, Drewry suggested the “heady pace” of growth in US imports in June, recorded by PIERS at 19.5%, indicated it was “too early” to draw conclusions about shipping patterns.

“It is tempting to view every service suspension through the prism of the brewing trade war between the US and China. “However, the cutbacks seen on the west coast are also a corrective measure to the low utilisation within that trade, and the 2M-Zim changes on the east coast might have more to do with chasing greater scale economies and cost-saving at a time of low profitability, without actually reducing capacity.”

Despite this, Drewry believes the agreement between 2M and Zim may portend “greater storms” ahead, if and when additional tariffs come into play. “Details of the service and deployment changes have yet to be announced, but it is almost inevitable the joint capacity will be reduced, although that could be mitigated by introducing larger ships on to the new services,” it added. “With Panama now allowing ships of around 14,500 teu to transit, there’s room for 2M and Zim to grow; at present, the largest ships operated on the route by any of the concerned lines are 11,300 units on 2M’s TP11/America. Zim’s largest is 10,100 teu on the ZCP loop.”