Sudden China Trade Deficit Gives Shipping Companies Profit Outlook
The last few years have been tough on carriers in the international shipping industry.
Rate wars and overcapacity were large factors for hurting the bottom line of the companies that own and operate the ocean freight ships which handle the transport of import and export shipping containers.
The debt crisis in Europe and the fragile recovery of the U.S. economy from our great recession caused the big shipping companies to face serious demand challenges in a major market downturn.
It doesn’t help that while the markets were booming, carriers were investing in megaships, costing large amounts of money and increasing capacity. Now as these huge ships hit the water, booming is certainly not a description of the market and filling the ships is a major problem.
Largely due to problems of overcapacity (yes, there’s that concept again), carriers lost billions of dollars in 2011.
In 2012, they were able to fare better largely due to several coordinated freight rate increases they placed upon the market. It was a major turnaround that carriers were able to see profits at all, slim though those profits might have been.
“The global container shipping industry barely broke even last year with an operating profit of $280 million,” according to the Journal of Commerce. “… after a profitable third quarter, many carriers lost money again in the fourth quarter. [1]
That doesn’t exactly sound like the kind of momentum that would bolster confidence for 2013 to be a profitable year.
Momentum is hugely important in sports, as you know if you watched March Madness last month. Momentum is also important in business, though it doesn’t work quite the same way. However, just like in sports, sudden momentum shifts do happen in international business, which can change the game.
NCAA basketball wasn’t the only madness of March.
Unexpectedly, China posted a trade deficit in March. Being the exporting juggernaut China is, we’re used to seeing month after month of trade surplus in the billions of dollars from the country.
There is much talk about what this sudden deficit means. I expect you’ll see their normal type of surplus reported for this month so I wouldn’t read too much into the talk of this being a turning point in China’s economy. However, this does spark great hope for carriers’ 2013 bottom lines.
“China’s imports jumped by 14 percent from a year earlier in March,” says Hellenic Shipping News and say that’s what led to the $577 million trade deficit for the country.[2]
Often, China has a month early in the year when they post a deficit due to stocking up on raw materials and having a slowdown from the Chinese New Year when many businesses shutdown to celebrate.
In 2012, February saw a $31.48 billion deficit in China’s trade. Then, of course, it bounced back to having a surplus in the billions every month until here in March, a year and a month later.[3]
Still, China IS increasing its imports.
Economists say the Chinese government plans to develop its economy by increasing domestic consumption according to Hellenic Shipping News.[4]
More imports to China could be a big piece of the solution for carriers to end up with a profitable 2013.
Certainly, countries are making moves to increase their trade with China. For example, Vietnam is working on decreasing the trade deficit they have with China by upping trade with their neighbor.
In fact, “Vietnam and China are aiming to boost annual two-way trade to $60 billion by 2015 from $41 billion in 2012,” according to the Vietnamese government.[5]
We just posted a blog on Australia making a currency deal with China that would allow them to directly convert Yuan to Australian dollars (and vice-versa) which could have a serious impact on their exports to China, not just their imports from China.
Yes, increased imports in China is big for carriers. It certainly may be the difference from a year of financial loss and a year of marked profit increase. However, it’s all going to come down to how the carriers manage their business.
Rate wars, introduction of megaships, overcapacity… We’ll have to watch and see how well the big shipping companies do at keeping their costs below their take.
How do you think the carriers will fare? Share your thoughts in the comments below.
Source: China
