Made in USA – Is it a threat to Asian Shipping and Ports?
Though the economy of United States of America continues to struggle, for the first time in more than a decade the number of manufacturing jobs has increased. Manufacturing growth in US has outpaced many advanced nations with 500,000 jobs created over the last three years. In the past whilst consumption in the US continued to zoom, manufacturing was outsourced to Asia. Shipping and Ports used to thrive on this model; however, against all odds manufacturing is staging a comeback in the USA. The change in strategy from off shoring manufacturing to re-shoring; will it dampen demand for Shipping and Ports capacity in Asia?
Apple which is famous for its huge factories in China has decided to assemble one of its Mac computer lines in US. Walmart which pioneered global sourcing to secure cheap priced goods for customers has decided to increase spending with American suppliers by US$ 50 billion over the next decade and that again to save cost. Airbus will build Jet Blues jets in Alabama. In North Carolina’s furniture industry which had lost 70,000 jobs to rivals abroad, Ashley Furniture is now investing US$ 80 million to build a new plant. From Exone’s 3.D printing plant near Pittsburgh to Dow Chemical’s expanding Ethylene and Propylene production in Louisiana and Texas will create 35,000 jobs. Companies such as Google, General Electrical, Caterpillar and Ford Motor company are bringing back production to America.
Technology driven manufacturing with cheap energy due to oil and gas from the Shale boom has given US a competitive advantage. Cost savings from low labour cost plants in China evaporates with high global oil prices paid to fuel long transit ships and aircrafts from Asia. Besides, labour costs in Asia have increased significantly. As reported in the Time magazine quoting Boston Consulting Group, average hourly wage of Chinese factory workers in the year 2000 was US$ 0.50 which will in the year 2015 rise to US$ 4.50. To quote Paul Ashworth, the Chief US Economist for Capital Economist, “The off shoring boom does appear to have largely run its course”. Whilst these developments will be of concern to the large shipping and ports capacity set to come on stream in Asia, the good news however is that “made in USA” will be shipped all over the world. As reported in the Time magazine, “In Nairobi there is a red cell phone tower that delivers coverage to thousands of cities’ 3 million people. Inside the tower there are batteries with high tech design with the purpose of providing backup power to keep calls connected when there are electricity failures. What is surprising is that these batteries are not made in China or Japan but in a plant in Schenectady, N.Y.”
Asia –Europe trade volumes decline by 10%
As reflected in the latest data published by Container Trade Statistics volumes from Asia to North Europe has contracted by 9.7% year on year in the month of March to 698,052 Teu. As a result volumes for the first quarter 2013 declined by 2.8% to 2.1 million teu. The dismissal situation was compounded by volumes slipping 8.9% from Asia to Western Mediterranean and North Africa in March. Overall the Asia/Europe sector declined 7.2% in March to 1.1 million teu. However, on the positive side the volumes from Europe to Asia increased by 4.3% to 570,600 teu. The primary reason for the slip in Asia /Europe volume was weakness in demand. With capacity on Asia to Northern Europe remaining unchanged, has lead to over capacity.
Asia – Europe free fall of rates
The bad news for carriers is that the overall Asia to Europe price index fell below last years’ levels for the first time this year when it reached 78 points in March compared with 83 points during the corresponding month last year. Shipping Lines will not be able to sustain services from Asia to Europe when rates are approximately 30% lower than in January. It will be difficult to reverse this trend until carriers withdraw two to three loops from Asia to North Europe. Its pessimism all over with IMFs latest prediction which says the eurozones economy will now decline by 0.3% in 2013 instead of 0.1% previously forecast and United Kingdom will grow by only 0.7% instead of 1%. According to the latest analysis of Drewry’s, there were 38 out of 45 vessels over 10,000 teus expected to be delivered by May. Assuming these vessels will replace 8000 – 9000 Teu vessels currently serving Asia to Europe, West bound capacity will increase by over 5%.
Consequent to 11.5% decline in West bound spot rates from Asia to Europe during the fourth week of April average freight plunged to US$ 1705 /40ft, which is 29% lower than January this year. The fall of Mediterranean rates were even more steep, with 15.5%, taking the average down to US$ 1634 /40 ft, which is 25% lower than at the beginning of the year. The ocean carriers cannot continue with their rate war. Whilst the planned withdrawal of 9200 teus a week of CES2 – AEX service in June by Evergreen, Zim and China Shipping will reduce overall capacity from Asia to North Europe by approximately 3%, carriers will have to withdraw at least another two loops or 20,000 teus of weekly capacity to prevent further reduction in freight rates.
Whilst the current average rates are seriously loss making, according to market sources freight rates as low as US$ 1400 /40 ft. are now being quoted.
Big Ship orders continues
Despite the capacity overhang which has triggered off a rate war, new orders for ultra large container vessels “ULCVs” continues. China Shipping Container Lines will join Maersk in the ultra size container shipping club following its confirmation to procure five 18,400 teu ships. Whilst it will take some time before the latest new orders hit the waters, speculation however will continue to have a negative impact on freight rates.
To quote Drewry “Ocean carriers did a decent job over the winter months balancing supply to ensure that freight rated remained relatively firm, but the delivery of big new ships – leading to new services and upgrades of existing loops – will mean lines will find that task increasingly difficult for the remainder of 2013”.
“These new orders and speculation of more to come could be having a negative impact on rates right now. Carriers cannot shift the paradigm from the supply pressure they are facing so that they can get rates moving upwards again”.
The writer a Maritime Economist is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK), Chartered Marketer (UK) and a University of Oxford Business Alumni. He is also a NORAD /JICA Fellow