Transpacific Outlook 2019

By Henry Byers – Director of Pricing and Partnerships at Steam Logistics

This year’s peak season in ocean shipping was one of the most challenging in recent history, testing the strength of supply chains around the world. This was especially true for the tradelane from Southeast Asia to the US, which is known widely as the transpacific eastbound (TPEB). This lane was plagued by a variety of challenges this year: blank sailings, volumes at an all-time high, trade disputes, tariffs, congestion, delays…the list goes on. So, the question now for most shippers (BCOs) and NVOCCs is how those issues will affect this tradelane for 2019 and beyond?

There are a few differing perspectives on how contract season (and ocean shipping overall) will materialize next year. Some experts expect that both consumer demand and the US Economic output will sustain a high level, and therefore will enable ocean carriers to charge higher rates than previous years. Others believe that the demand that was pushed forward from the January 1st trade deadline has resulted in a buildup of inventory here in the US, and therefore, will reduce demand substantially during Q1 of 2019 and the normal pre-Chinese New Year rush. This would prevent carriers from instituting any kind of rate increase for 2019.

In my opinion, the latter is the more likely of the two perspectives. Even though the tariff increases were postponed 90 days to March 1st, shippers have little choice but to assume that these increases will be imposed and that their “costs of goods sold” will rise considerably as a result. With this reality looming over US-based shippers, most have chosen to go ahead and move their shipments forward and build up inventory to circumvent these tariff increases for the short-term. This means that a large amount of volume that would have shipped in the next 90 days is already here in the US. So, for early 2019 and for what would have been a pre-Chinese New Year rush of ocean freight, the outlook for demand on the transpacific eastbound is grim from a carrier’s perspective. This decrease in demand will force rates to drop substantially leading up to contract season (with exception of the third week of December), and will ultimately set the stage for the BCOs/NVOCCs to the have the leverage in contract negotiations.

While both outlooks for 2019 can be debated, it seems that both sides of the negotiating table would agree that it is time for an overhaul on transpacific eastbound contract negotiations. If ocean carriers continue to accept rates as low they did for 2018, they will likely move further into the red, and some ocean carriers may even be forced into a Hanjin-like bankruptcy. Ocean carriers also face rising costs alongside the implementation of the 2020 Low Sulfur Fuel mandate by the International Maritime Organization, which is sure to have a substantial impact on the overall profitability of each ocean carrier.

On the other side of the table, costs are also rising for BCOs through tariff increases and greater shipping demands from their customers through e-commerce and on-demand delivery services. These pressures are cutting into their profitability, which may lead to them passing these additional costs on to their customers, undoubtedly affecting the demand for their products.

With external pressures mounting from what seems like all sides, this is sure to be a defining year for the TPEB.  What happens in 2019 on this specific lane will play a significant role in the direction of ocean shipping in the future for both sides of the negotiating table.

Trade War 2018

Written by Steve Smith, VP of Customs Brokerage at Steam Logistics

A trade war has developed in 2018 the likes of which haven’t been seen in generations. The country has not been involved in anything of this magnitude since the passing of the Tariff Act of 1930. Commonly referred to as the Smoot-Hawley law, it raised rates on hundreds of imported products. The initial intent was to help heavily indebted farmers during the Great Depression but after a long political battle, ended up including many manufactured products as well.

Starting in March of this year, President Trump announced new duties on steel and aluminum products from a vast array of countries. The Trade Expansion Act of 1962 (Section 232) gives the President the authority to impose tariffs for imports that threaten national security. The rate was set at 25% on steel products and 10% on aluminum. These new tariffs went into effect on 6/1/18. Eventually, agreements were reached with some countries exempting them from these tariffs:

Australia – Exempted
South Korea, Brazil, Argentina – Exempted after agreeing to quotas on their products

Citing unfair trade practices by the Chinese, the U.S. opened another front in the trade war in April. Section 301 of the Trade Act of 1974 was used as the grounds for the investigation into China’s policies and practices relating to technology transfer, intellectual property and innovation. New tariffs were subsequently imposed in three waves:

List                Effective Date                   Rate                      Products Covered
1                         7/6/18                          25%                                 818
2                         8/23/18                        25%                                 284
3                         9/24/18                        10%*                              5,745

* Rate increases to 25% on 1/1/19

Retaliation to each new wave of tariffs has come swift. Mexico imposed new tariffs ranging from 15% to 25% on U.S. products starting 6/5/18. China followed with new 25% tariffs of their own on 6/15/18. The European Union weighed in a week later on 6/22/18, imposing new tariffs from 10% all the way up to 50% on U.S. products. On 7/1/18, Canada began levying new tariffs of 10% and 25% on U.S. products. The Chinese followed with two additional waves of tariffs on 7/6/18 and 7/11/18. On 8/4/18, India initiated tariffs of 50% on motorcycles from the U.S.

Where the war goes from here is as yet unclear. The end result of the Smoot-Hawley law of the 1930s was a 40% decline in U.S. imports and exports as trading partners retaliated with their own tariffs. American farmers saw crop prices collapse and exports decline. President Trump and his Chinese counterpart Xi Jinping are both expected to attend the G-20 summit in Buenos Aires in late November. The President has made clear that another round of tariffs will be forthcoming if a trade deal with China cannot be reached.

The Value of Partnerships

There is plenty of content floating around the internet that would espouse the value of taking a partnership approach in business between clients and vendors. It makes sense—if companies will work together for a common goal instead of racing towards a zero sum game, everybody wins and a sustainable relationship can be established and maintained.

But how does that shake out in reality when the storms roll in? Challenging times will test the best of relationships and it’s during those times that they tend to either shine or crumble.

These past few months in international trade have included some of those challenging times, particularly regarding the eastbound Trans-Pacific trade. It has been well documented that the market has been in an upheaval due to the overall capacity reduction of 6% to the West Coast and 1.5% to the East Coast, combined with the earlier than usual Peak Season due to the China tariff deadlines popping up in Q3, with more on the horizon in January 2019. And of course spot rates have jumped dramatically with the increase in demand and reduction in supply.

Let’s be honest. It’s been pretty ugly out there.

Challenges in maritime transportation are not new. Our industry tends to go through significant challenges like these, most recently with the Hanjin bankruptcy in 2016 and the West Coast labor strike in 2015. This year was particularly challenging though, as BCOs and NVOs alike have had to battle for fixed rate space during the critical peak season months or pay massive increases on the spot market to secure that space.

As we have navigated these difficult waters, one thing has been revealed to our team over and over—the value having client relationships that are true partnerships. Most of our clients have been extremely dialed in to the market conditions and very willing to work through them alongside us in a very transparent manner. It has made all the difference in our ability to deliver on promises and to ensure our clients’ supply chains are not disrupted.

This approach shows up in so many ways. It’s the daily calls to “triage” the freight, making sure we understand what can conceivably be pushed back and what must sail each day. It’s openness to what flexibility a client may have, and what is simply non-negotiable. It’s sharing market knowledge and trying to read the tea leaves together. It’s using our technology to provide more real time visibility that keeps both sides synced up. Ultimately, it’s both sides having a level of empathy for the other and working together to get to a solution that works for everyone. Winning in this environment means we all have to pull from the same side of the rope, not against one another.

Have there been challenges? No doubt. And we are certainly not perfect—far from it. But it’s been amazingly gratifying to have the opportunity to push through these current headwinds with great partnerships that are capable of overcoming them. After all, this too shall pass, and when the stormy seas subside, these relationships will be stronger than ever before.

–  Jason Provonsha, CEO