By Brian Dunn
Signs in both advanced and emerging markets point to strong economic growth which bodes well for the shipping industry, according to Aimé Bwakira, Institutional Portfolio Manager, Fidelity Investments. Advanced economies, which include Canada, the United States, the Eurozone and Japan, should enjoy economic growth of 2.2 per cent this year and 2.3 per cent in 2015. Emerging economies of Russia, China, ASEAN-5 (Association of Southeast Asian Nations of Indonesia, Malaysia, Philippines, Thailand and Vietnam), India and Latin America are expected to see growth of 4.9 and 5.3 per cent respectively during the same period, Mr. Bwakira said during the Shipping Federation of Canada’s 13th Annual Conference on May 29 in Montreal. He was followed by André Downs, Chief Economist, Foreign Affairs and International Trade Canada, Wolfgang Schoch, Managing Director, Hapag-Lloyd (Canada) Inc. and Henriette Van Niekerk, Director and Head of Dry Bulk Analysis, H. Clarkson & Co.
The downside in emerging countries is the prospect of high inflation rates, ranging from around 2.5 per cent for China to over eight per cent in India and Turkey, compared to inflation rates below two per cent in developed countries, said Mr. Bwakira. China’s economic growth is also slowing to 7.5 per cent annually from 10 per cent in recent years, while internal consumption is replacing investments as the main driver of the economy, resulting in less demand for commodities from Canada. “Japan’s economic growth is slow, but it’s still the third largest economy in the world,” Mr. Bwakira pointed out. “Monetary stimulus, fiscal adjustment and structural reform (to make the economy more competitive) haven’t been working.” While economic growth has been picking up in Europe, the continent faces deflation and political risks, he noted.
The outlook for the U.S. looks considerably brighter, with manufacturing rebounding, an easing of the budget deficit, an unemployment rate that is down to 6.3 per cent from nine per cent and the end of political dysfunction. And while the government is reducing its monetary stimulus, interest rates should remain low which is good for economic growth, said Mr. Bwakira.
Turning to Canada, a weaker Canadian dollar should boost exports and the Federal budget was well received in most circles. On the downside, high personal debt and lagging exports, despite the weaker Loonie, are cause for concern, Mr. Bwakira noted. “While economic growth is strong, we’d like to see more business investments and more exports.” Canada’s merchandise trade exports dropped by 30 per cent during the economic crisis, but the country has moved to a trade surplus from a trade deficit since the end of the crisis, said Mr. Downs. But it still faces competitive issues and a lack of productivity growth.
The country’s share of exports to Asia doubled to 10 per cent of total exports between 2000-2013, while exports to the U.S. are expected to drop from 76 per cent to 70 per cent of total exports by 2040. “It takes time to increase exports to the rest of the world. We’re losing our preference in the U.S. market which is signing a number of free trade agreements with other countries.
We continue to grow our exports of services which now account for about 15 per cent of all exports, but energy still makes up one-fifth of total exports.” Exports by water and rail are increasing at the expense of road transport which has fallen from 40 per cent in 2007 to 34 per cent in 2013, Mr. Downs pointed out. The three sectors where Canada is the most competitive are in wood products, meat and animal products and aerospace. We are least competitive in apparel, machinery and electrical equipment. Canadian energy and automotive products are only competitive in the U.S., Mr. Downs noted.
“We’re relatively successful in diversifying our export markets, especially to Asia where the share of our exports has doubled. But Canada is not competitive in all markets and not in all products. Canada’s exports to emerging markets have been growing rapidly, but we are still lagging our G7 peers in terms of intensity of exports to these markets. Most of Canada’s trade continues to be with slower-growth traditional markets.”
Turning to the state of the container shipping industry, Mr. Schoch noted that global container trade grew by four per cent last year and is projected to grow by five per cent this year, next year and in 2016 according to industry figures by HIS Global Insight. The biggest growth will come from intra-Asia trade at 6.2 per cent. Capacity growth was around 13 per cent between 2006-2007, much higher than trade growth. Capacity growth is now closer to six per cent, but still higher than trade growth. “We’re still in an overcapacity mode,” said Mr. Schoch, who has been at Hapag-Lloyd Canada for about nine months after spending five years at Hapag-Lloyd in Brazil. “But what counts is the effective capacity growth and not the nominal capacity growth. Effective capacity growth is less because of various reasons like operational constraints, slowsteaming and various other reasons.”
In terms of the Canadian market, container exports are modest with a projected one per cent growth this year and five per cent annually between 2015-2018 which is “optimistic and will depend on a trade agreement with Korea and the EU.” Container imports are expected to grow by 4.4 per cent over the next three years. Major exports are forest products, chemicals, and foodstuff and major imports are consumer goods, chemicals and machinery.
The challenges facing the world container industry remain high energy prices, environmental obligations, huge investment costs and the imbalance of cargo flows with unsustainable low freight rates at the same time. “Hapag-Lloyd needs to increase rates to compensate for the sharp rise in fuel costs. And it is estimated that emission controls in North America and North Europe will cost Hapag-Lloyd an additional $150 million to $200 million a year. We need a decent return to invest in new vessels and new equipment as well as to maintain our extensive port coverage and reliable service.”
In terms of the dry bulk market, Clarkson has been getting some “mixed signals” in some of its indicators, according to Ms. Van Niekerk. The composite leading indicator (designed to provide early signs of turning points in business cycles) or CLI, for the G7 and five major Asian economies turned negative in 2011. But last year, the CLI showed improvement for the G7 economies, but a slowdown in the Asian economies.
As part of its financial realignment, China has stopped lending to industries with overcapacity which includes steel, cement, aluminum and shipbuilding. There were 25 Chinese shipbuilding yards with no orders in 2013, representing 8.4 per cent of dwt on order, Ms. Van Niekerk pointed out.
There has also been a “temporary slowdown” in Chinese imports, notably in coal down 10 per cent, soybeans down 13 per cent, nickel ore off by 26 per cent and bauxite down 39 per cent. “Steelmaking continues to expand in China for both domestic use and exports. It produces almost half of the world’s steel,” said Ms. Van Niekerk.
The demand for energy in emerging markets will continue to increase, she added. While coal is still the leading energy generator in Asia, surplus Atlantic basin crude is also ending up in the Asian market.
In terms of the freight market recovery, there is tremendous volatility in dry bulk, with fleet expansion slowing down while seaborne demand remains strong. The average annual dry bulk fleet growth has declined to six per cent in 2013 and 2014 from 17 per cent in 2010. And while the demand/supply gap is narrowing, there is market volatility due to trade seasonality.
“The recovery will be led by the Capesize market. I’m optimistic economic growth will continue which will benefit the shipping market. The bulker market will lead the curve, followed by the container market.”
The keynote luncheon speaker was Minister of Transport, Lisa Raitt, who noted Canada has concluded free trade agreements with ten countries and is negotiating with thirty more. She also listed some initiatives to achieve a world-class tanker safety system in Canada, notably increased inspections for foreign tankers entering Canadian waters, expanded aerial surveillance, increased satellite surveillance and the creation of an Independent Tanker Safety Expert Panel. In addition, Area Response Planning is being established in four areas across the country with higher levels of tanker traffic, namely the southern portion of British Columbia, Saint John and the Bay of Fundy in New Brunswick, Port Hawkesbury in Nova Scotia and the Gulf of St. Lawrence.
Canada will also lift restrictions on what can be used to clean up spills, allowing emergency responders to use a wider range of technology. In addition, Ottawa is committed to pay for more research into pre-treating heavy oil products at source to reduce damage in case of a spill and is providing more money to industry and universities into research on how to clean up heavy oil. There is also a commitment to help aboriginal communities buy equipment for marine emergencies and to partner with the Canadian Coast Guard, said Ms. Raitt.