Impact of China’s weakened economy on Shipping

The continuation of negative macroeconomic trends at the global level—principally emanating from China is having a major impact on shipping. Chinese retail sales were up by 11 percent year-on-year in 2015, but the country saw exports fall by 6.9 percent over the same timeframe in value terms, while the import decline was even worse at 18.8 percent.

China’s unstable economy has contributed to an uneven flow of goods to and from the United States, report trade analysts. The impact is significant to ocean shipping providers since China is the largest trading partner for USA outside of the North America Free Trade Agreement (NAFTA).

According to data from INTTRA –  a multi-carrier e-commerce network for ocean shipping – prices for imported goods moved via containers continued in a downward trend in May 2015, led by a 1.2 percent drop in computer prices from China. This is the largest decline since May 2013.

“Since one in every four containers in global trade is ordered on INTTRA portal, we have a good statistical view, yet it may differ from government statistics that include other types of cargo,” says Inna Kuznetsova, President, INTTRA Marketplace. “Our data shows that U.S. exports to China rose by 30 percent year-over-year in the second quarter after a 30 percent year-over-year drop in the first quarter,” adds Kuznetsova in an interview. She believes that some of this swing may be attributed to West Coast port congestion in the first quarter. “ We experienced record volumes on the INTTRA platform last month, as exports rose 76 percent versus June 2014,” says Kuznetsova. “We hope this indicates a strong production and shipping season.”

Raw Materials – the U.S. largest export to China – rose by 31 percent in Q2 year-over-year, including a spike of 47 percent in June. This happened after falling 13 percent in Q1 vs. 2014

At the same time, the Ocean Freight Index notes that nearly 43 percent of overall container import decline was due to decreased imports from China.

Excess capacity woes … Idle ships fleet increase

International Shipcare, a Malaysian company that mothballs ships and rigs, assists beleaguered operators with excess capacity. There are 102 vessels laid up at the company’s berths off the Malaysian island of Labuan, more than double the number in 2015. More on the way as operators are requesting International Shipcare not to lay up one ship but 15 or 20.

The global idle containership fleet at the end of December 2015 hit a record high with a total capacity of 1.36 million TEU, which represents five times more compared to 0.23 million TEU at the beginning of the year, market analyst Alphaliner reports.

Excess capacity woes.... Global idle ship fleet increases

The idle containership fleet stood at 331 vessels at the end of 2015, with the number of idle vessels under 7,500 TEU increasing due to tough market situation.

Additionally, the analyst said that the containership fleet reached a total slot capacity of 19.94 million TEU at the end of 2015, growing by 8.5 percent over a period of 12 months. Furthermore, a record number of 214 new containerships entered the market in 2015. The new ships added 1.72 million TEU to the global fleet, while only 0.20 million TEU were deleted as a result of scrapping, vessel conversions or casualties.

However, the weak market did not stop owners from ordering more containerships in 2015. A total of 255 vessels was ordered with a total capacity of 2.34 million TEU, contributing to further oversupply in the market. Alphaliner said that a significant reduction of the idle fleet is not expected before April, due to blank sailings scheduled to continue in February.

The slowdown of Chinese economy & fall of the Yuan has had major impact on ocean shipping

The rise and fall of China

Shipbuilders, container lines, and port operators feasted on China’s rise and the global resources boom. These were same organisations are now among the biggest victims of Chinese slowdown and the worldwide decline in demand for oil rigs and other gear amid the oil price plunge. China’s exports fell 1.8 percent in 2015, while its imports tumbled 13.2 percent. The Baltic Dry Index, which measures the cost of shipping coal, iron ore, grain, and other non-oil commodities, has fallen 76 percent since August and is now at a record low. Shipping rates for Asia-originated routes have dropped, too, and traffic at some of the region’s major ports is falling. In Singapore, the world’s second-largest port, container traffic fell 8.7 percent in 2015, the first decline in six years. Volumes at the port of Hong Kong, the fourth-busiest, slid 9.5 percent last year. Beyond Asia, the giant port of Rotterdam in the Netherlands recorded a dip in containerized traffic for the year.

Scrapping of vessels increase… New orders for ships drop!

Globally, orders for new vessels dropped 40 percent in 2015, to $69 billion, according to London-based consulting firm Clarksons Research. The demolition rate for unwanted vessels jumped 15 percent.

Just a few years ago, as the global economy improved and oil prices rose, many companies ordered more fuel-efficient ships. There were more than 1,200 orders for bulk carriers that transport iron ore, coal, and grain in 2013, compared with just 250 last year, according to Clarksons. Many of the ships ordered are now in operation, says Tim Huxley, chief executive officer of Wah Kwong Maritime Transport Holdings, a Hong Kong-based owner of bulk carriers and tankers. “You have a massive oversupply,” he says.

The damage is especially severe in China, the world’s leading producer of ships. New orders for Chinese shipbuilders fell by nearly half last year, according to the Ministry of Industry and Information Technology. In December, Zhoushan Wuzhou Ship Repairing & Building became the first state-owned shipbuilder to go bankrupt in a decade.

The fall of the Yuan…the slowdown and its impact on Ports & Ship building
The yuan has dropped 6 percent since last August. While that should help exports, Hutchison Port Holdings Trust, a company controlled by Hong Kong billionaire Li Ka-shing that runs some of China’s top container terminals, has yet to see an increase in outbound business. According to Ivor Chow, chief financial officer of Hutchison, the devaluation is leading to a slowdown in traffic as customers wait to see how much lower the yuan will fall. “People are really hesitant to commit to orders at this point,” he said on a conference call with analysts on Feb. 2. 2016

The slowdown is hurting many Chinese ports. Sales at Shanghai International Port were 7.5 billion yuan ($1.1 billion) in the third quarter, down from 7.6 billion yuan the year before, and net profit was 1.4 billion yuan, a decline of 18 percent. The Shanghai Shipping Exchange’s containerized freight index has dropped 27 percent since the start of 2015. While container volume at Shanghai’s port, the world’s largest, grew 3.7 percent last year, that was down from 4.8 percent growth the previous year and was largely the result of taking market share away from high-cost rival Hong Kong, according to Bloomberg Intelligence analyst John Mathai.

The slide in oil prices is especially painful in Singapore, home to Keppel and Sembcorp Industries, the world’s two largest producers of offshore oil rigs. Orders for the two companies dropped in 2015 to their weakest levels in six years. Temasek Holdings, which has major stakes in both Keppel and Semcorp is discussing the sale of noncore assets or issuing new shares. It’s in discussions with company executives about raising cash by selling noncore assets or issuing new shares. “We have to plan for a longer winter,” Keppel CEO Loh Chin Hua said on a call with analysts on Jan. 21.

South Korea in December announced plans to establish a $1.2 billion fund to help local shipping companies pay for new vessels they’ve ordered, according to the Ministry of Oceans and Fisheries. The government will push shipyards to downsize and focus on their core businesses—one shipbuilder operated a golf course. Hyundai Heavy Industries, the world’s biggest shipbuilder, said on Feb. 4 that it had suffered its ninth consecutive quarterly operating loss, following a 1.7 trillion-won ($1.4 billion) loss in 2014.

The recession in shipping is causing trade friction. Daewoo Shipbuilding and Marine Engineering is in the worst position among Korea’s shipbuilders. Korea Development Bank and another state-owned lender, Export-Import Bank of Korea, are leading a 4.2 trillion-won bailout of Daewoo. “We see this case as a problem,” Shinichiro Otsubo, director of the shipbuilding division at Japan’s Ministry of Land, Infrastructure, Transport and Tourism, told Bloomberg in December. “If this aid package keeps the firm from cutting capacity, the effect will be potentially big.” Japan hasn’t ruled out the possibility of filing a complaint with the World Trade Organization.