How does the signing of the first phase of the China-US economic and trade agreement affect the global shipping industry?

  • Date: Jan 20, 2020
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  • Categories: News

On January 15, local time, the first phase of the China-US economic and trade agreement was officially signed at the White House. At the same time, the two sides reached an agreement that the United States will fulfill its relevant commitments to phase out tariff increases on Chinese products in stages to achieve the transition from increased tariffs to increased tariffs. After 23 months of talks between China and the United States, after 13 rounds of high-level economic and trade negotiations, this agreement did not come easily.

What is the impact of this agreement on the global shipping industry, especially the trans-Pacific trade freight volume? Maybe you don’t have to be overly optimistic.

Economic growth expectations raised

The formal signing of the first-phase economic and trade agreement between China and the United States has enabled economists to raise their expectations for economic growth in 2020 and express optimism. But they warned that the agreement should be treated with caution.

Industry observers are cautious about whether the signing of the agreement can bring a bright future to shipping demand.

Analysts and experts asked by Lloyd’s List said that after the 18-month trade war between the two largest economies in the world, the two sides are about to cease their truce, but in different sectors of the shipping industry The short-term outlook is mixed.

With the signing of the first phase of the Sino-US agreement, container shipping is expected to show limited volume growth in the short term. In addition, dry bulk shipping companies will enjoy the upcoming surge in US agricultural exports to China. News about this stage also increases the possibility that the United States will lift sanctions on COSCO Shipping’s tanker business, which may lead to repricing of the VLCC business.

In addition, there have been media reports that Washington and Beijing are about to sign a limited trade agreement that will allow the United States to make concessions by reducing tariffs in exchange for increased Chinese spending on US agricultural products. The agreement requires China to buy $ 50 billion in US crops, energy and other commodities by 2020.

Limited impact of container transportation

HuaAlphaliner’s executive consultant Tan Hua Joo predicts that the signing of the trade agreement will have a limited impact on container shipping in the short term. This is because the number of containers imported from the United States in October and November 2019 was in stark contrast to the same period of the previous year, and there were no orders that were urgently rushed due to the expected increase in tariffs. In his view, the latest rebound in trans-Pacific trade traffic in early December 2019 was driven more by the Chinese New Year and the demand for the upcoming 2020 sulfur limit order, both of which will drive up shipping costs.

Tan said: “In January 2020, shipments before the Lunar New Year will continue to maintain a strong momentum, but both shipping companies and shippers expect that shipments after the Lunar New Year will fall significantly, and in the long term, the outlook remains uncertain. Tariff reductions may help China win back some of the exports it lost to other countries such as Vietnam, but whether overall exports of trans-Pacific trade will increase in 2020 remains a big question mark. The situation will be more affected by the economic strength of the United States Push. ”

Nevertheless, some economists are ready to adjust their forecasts for positive news from Washington.

Tom Rogers, Asia director of macroeconomic consulting at Oxford Economics believes that the signing of the first phase of the China-US economic and trade agreement will boost the US’s 2020 GDP growth by 0.2 percentage points, and his organization may also forecast its 2020 China economic growth Increased by 0.3 percentage points. He said the agreement will boost confidence and, by reducing prices, have a positive impact on consumers and businesses who want to import low-priced goods. However, he also believes that a rebound in U.S.-China bilateral container trade is unlikely to occur in the short term, as limited trade agreements are barely enough to stop the ongoing Chinese manufacturing shift.

Rogers also warned of the risk of a re-escalation, as it failed to address key issues that have caused the US government to be extremely dissatisfied with technology, national security, and industrial policy, and that have fundamentally led to Sino-US economic disputes.

Dry bulk shipping will benefit

As part of the trade agreement, US agricultural exports to China are about to surge, and the dry bulk industry will benefit as a result.

LaKlaveness Asia’s Punitoza said the trade agreement shows that in the short term, there will be positive signs for ultra-Panama vessels and long-distance transportation from the United States Gulf region. He said that the fourth quarter has always been the highest quarter for US soybean exports, which is why the shipments have temporarily recovered. However, when the South American harvest season begins at the end of March 2020, freight volumes will return to the east coast of South America. The trade agreement will not prevent China from buying soybeans from the African continent in the southern hemisphere at lower prices and diversify its sources of purchase for security reasons.

Some experts believe that, in fact, the Chinese government had previously proposed the acquisition of Brazilian soybeans, and at the same time required Brazil to import US soybeans for the country’s own domestic consumption, and may even create a new trade model for such commodities. If this happens, a new form of trade between Brazil and the United States will occur, which will also have a positive impact on the transport demand calculated in the hundreds of millions of nautical miles.

A Singapore-based broker also expressed doubts about how long the US-China soybean trade boost could last. “China has obtained the quantity of soybeans it needs from other sources, and despite recent shipments from us, it seems a bit unrealistic to fully recover to the pre-trade war quantity,” he said.

Demand for tanker capacity increases

The news of the imminent conclusion of a trade agreement comes as the United States is preparing to increase oil and gas exports as domestic production has exceeded consumer demand.

This agreement may reopen the door to the flow of US energy into the Chinese market, which will boost the demand for tanker capacity. However, as US sanctions on COSCO Shipping’s tanker business may be lifted soon, this may also lead to the prospect of tariffs being hit in the short term.

China Ocean Shipping (Dalian) Co., Ltd. blacklisted by the United States owns 43 tankers, including 26 VLCCs. According to ship tracking data, despite the grace period granted by the U.S. government between October and December 20, 2019, most of these ships remain moored off China’s coast.

A shipping analysis company based in China predicts that releasing ship capacity will increase ship supply and curb market sentiment, leading to a decline in the revenue of VLCC ships.

The analyst firm pointed out that the stock market has already reflected such concerns. The stock prices of Dalian Tanker’s listed parent company, COSCO Shipping Energy Transportation Co., Ltd., both in Shanghai and Hong Kong on December 13, 2019, have increased by more than 2% from a week ago.

At the same time, China Merchants Energy Shipping, a Shanghai-listed competitor, fell 2.3%. Prior to this, the company benefited from the sanctions of COSCO Dalian.

Gas transportation price boost

China has imposed a 25% tariff on LNG imports from the United States due to trade disputes. The gas industry is also eager for a peaceful settlement of the dispute between Beijing and Washington so that there can be a clear path to its multi-billion dollar expansion.

Drewry’s senior research analyst Aman Sud told the Lloyd’s earlier that 9 of China’s 12 ethylene expansion projects have been put on hold because of concerns that ethane could be included in products subject to retaliatory tariffs. List.

OphPoten & Partners Asia-Pacific head Sophie Tan said the cancellation of the tariffs and the end of the trade dispute could prompt Chinese state oil companies to buy more US LNG. But they will seek ways to mitigate the risk of ongoing disputes, and will also have very difficult bargaining. The liberalization of new LNG trade flows from the United States into China will not only boost freight rates in this market, but also give Chinese shipbuilders the long-awaited opportunity to climb the value chain by building more gas carriers .

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