Trade rebound impacting shipping costs

Daniel Richards - MENA Economist
Published Date: 01 June 2021

 

The recent spike in inflation across developed markets – see Central bankers push back against reflation narrative – has been caused in part by rising shipping costs, in turn driven by a remarkable recovery in global trade in recent months. Following the GFC, it took three years – until January 2011 – for the World Trade Volume Index to return to the pre-recession peak hit in January 2008. By contrast, last year the index had recovered to January 2020 levels by September. Not only that, but it has continued to climb rapidly in the intervening months, in contrast to the pre-pandemic period when volumes had been at best flatlining since the onset of the US-China trade wars in 2018. The world trade index has now surpassed the previous index high, hit in October 2018, and as of March its trajectory was resolutely upwards. Again, this is in contrast to the post-GFC recovery, which saw a much slower expansion in world trade as compared to prior to the crisis, and much ensuing commentary regarding the end of globalisation.

World trade volume has recovered swiftly

Source: Bloomberg, Emirates NBD Research

As a tangible indicator of this rebound in trade, the world’s two largest container shipping ports by TEU throughput – Shanghai and Singapore – have seen their January-April 2021 throughput volumes comfortably surpass 2019 levels, with even full-year 2020 having ultimately seen volumes flat on the previous year.

Major ports' TEU throughput ('000) has held up

Source: Bloomberg, Emirates NBD Research

This rapid recovery has caught the shipping sector out. Long-term overcapacity issues and depressed returns in the wake of the GFC were gradually being ironed out by a period of scrapping and company consolidation. This left the fleet insufficient to cope with the present circumstances of elevated demand, and this has driven up prices. The Shanghai Containerised Freight Index has hit a series high of 2,296 in May, more than double the series average. There has been a similar story in dry bulk shipping as the Baltic Dry Index, despite having fallen from the recent peak earlier this month, is still at levels last seen in 2013.

Benchmark shipping indices at high levels

Source: Bloomberg, Emirates NBD Research

Transitory dynamics

The rapid recovery in trade volumes over the past 12 months is testament to how different this crisis is from the last one – and indeed to any previously seen. In 2020 the global economy was effectively put to sleep as governments around the world sought to contain the spread of Covid-19 as best they could. As countries have started to ease restrictions on activity the major economies have bounced back rapidly, in many instances bolstered by significant levels of monetary and fiscal stimulus. It is worth noting also the peculiar circumstances of the present crisis, and how that has driven demand for more physical goods from people stuck at home with a desire for entertainment and no other outlet for spending – and that’s aside from the massive volumes of PPE equipment which have been shipped across the world.

It is likely too early to comment with any certainty on what this means for global trade over the longer term. Nevertheless, looking ahead it appears unlikely that this pace of growth will be maintained once the pandemic recedes, services reopen, travel resumes and the situation normalises. The protectionist bent of the previous White House administration may have appeared an extreme position, and the latest inhabitant Joe Biden is certainly more vocally amenable to multilateral solutions than his predecessor, but the Trump policies on trade so far remain intact. ‘Made in America’ has even received a boost under the new president as an executive order for the federal government to buy American goods and parts was issued by Biden in January.

While many of the worst fears around supply chain disruption at the start of the pandemic were not ultimately borne out, the dearth of domestic industries manufacturing essential goods such as PPE, pharmaceuticals and semiconductor chips was made painfully apparent to many countries, and there will likely be a push to make more of these at home. Biden has already earmarked USD 50bn for the domestic chip industry, in addition to USD 22bn already pledged by Congress, and other countries are also likely to closely examine their preparedness for future shocks and look to bolster domestic capabilities.

These more recent drivers of a likely slowing in global trade volumes come on top of longer-term issues such as the move towards 3d printing, which will increasingly negate the need for foreign manufacturing, and the simple fact that more and more purchases are consumed from the cloud rather than physically purchased and held. Music, video games, films, books, can all be downloaded in moments rather than shipped around the world, and younger generations are in any case purportedly more interested in experiences over possessions. Environmental and social concerns could see a slowdown in fast fashion and other purchases, and while the development of green industries will necessitate the transport of associated materials, this will be in part offset by slower demand growth for building materials in China. The world’s biggest importer of raw materials is pursuing deleveraging and economic recalibration, and the government there has this time around been far more reticent in its spending compared to the 2008 splurge that helped fuel the global post-GFC recovery. While Biden’s infrastructure plans are ambitious, he has to navigate a Congress held by his Democratic Party by only the narrowest of margins.

Container ship orderbook (% DWT) is ticking up

Source: Bloomberg, Emirates NBD Research

Given these dynamics, with regards to shipping at least, we would tend to agree with the constant refrain from the Federal Reserve, the BoE and the ECB that this spike in inflation will be ‘transitory’ – albeit a phase that will likely persist for several months. Shipping companies will be hoping that volumes remain at least at these levels, as the global container vessel orderbook has surged to 15.7% of the fleet (a five-year high). Past trends, however, suggest they are chasing rates that are unlikely to remain so elevated, especially once these new vessels start to come online.