We start July with a couple significant occurrences affecting global trade.
Tariffs: This past week, The United States and China held meetings at the G20 Summit in Japan. Presidents Trump and Ji Xinping spent time discussing the ongoing tariff war between the two major global economies. The results released from meetings highlight two major results; first, the US has agreed to call a truce for the time being, confirming that no additional tariffs will be levied on goods originating from China. The second, being that all tariffs currently in place will remain in place for the moment.
This result, if nothing else means that there will not immediately be a new tariff deployed on list 4 goods, which President Trump had been threatening for many weeks leading up to the summit. It does however mean that importers battling the recent increases on list 3 will continue to face those added costs if still sourcing from China.
Rates: The other topic? Price increases on ocean transportation from Asia. While a truce was reached temporarily, there is still a high probability that list 4 goods could be hit by 25% tariffs at some point in the not so distant future. The market has reacted; major importers are sending surges of products from China as quickly as possible to land and store with a guarantee of no additional tariffs. Additionally, with significant demands in shipping increasing from countries such as Vietnam, Malaysia, Indonesia and other surrounding areas, steamship lines are increasing base costs from these regions in step with the growing demands. The future outlook on pricing indicates that costs from these SE Asia regions may be elevated over the cost of China’s base port shipping rates as demand is at a high. Cambodia’s exports were up 45%, Vietnam up 21.9%, Thailand 10.6%.
Fuel costs have also become a major concern for vessel operators. Bunker fuel costs are extremely unpredictable at this time. OPEC+ has plans to cut production by 1.2 million barrels per day. Also, oil trade is based on the US dollar, and with rising interest rates, other countries are losing purchasing power. Oil prices are expected to rise over the second half of 2019 and steamship lines are now growing weary of fixed rate contracts, considering to eliminate Bunker charges as part of the ‘All-In’ rates that have been offered.
Adding to the equation is the challenge of IMO 2020 sulfur regulations. These new regulations stipulate that by January 1, 2020, all bunker fuel used by ships must have sulfur content no greater than 0.5%. Costs globally to achieve these new requirements is estimated at $10 billion and carriers currently appear to have no clear plans on how to reach the objectives. Perhaps rates will continue to be increased so that carriers can build a cash surplus for vessel modifications necessary to meet the new IMO standards.
*Chain Logic will be closed July 4th!