Load factors: Growing trade strains weigh on transatlantic trade

Trade tensions between the US and Europe are clouding the outlook for the transatlantic trade. The ongoing threat of tit-for-tat tariffs between the two trading blocs poses major questions over future capacity deployment, as carriers face the increasingly difficult task of juggling supply with demand.

Load factors on the transatlantic should tighten in the fourth quarter off the back of significant cuts to supply. However, the balance of the market fundamentals could swing if trade tensions escalate

BOX carriers have a job on their hands to ensure that transatlantic utilisation levels are upheld amid the prospect of an all-out trade war.

Trade tensions between the US and Europe are high, as the two trading blocs continue with the threat of tariffs on imports from either side.

While regarded as allies on several fronts, they increasingly seem to disagree in other areas — from the use of Huawei equipment on the 5G network to the impact of China’s Belt and Road Initiative and Iranian sanctions.

In July 2018, the outgoing European Commission president Jean-Claude Juncker visited the White House expressing hope that the relationship between the EU and the US would improve. Instead, points of disagreement seem to have increased.

Last year, President Donald Trump reiterated his discontent with the European Union stating that “the EU is worse than China, just smaller. It treats us horribly.”

The commission and its incoming president Ursula von der Leyen are now facing a threat from the Trump administration to introduce tariffs on automobile and automobile parts imported from Europe, starting from November.

This begs the question as to whether the EU should try to negotiate with the US with the aim of avoiding tariffs — and the inevitable retaliation — or whether it should wait and hope for a different administration after 2020.

It is reasonable to assume that Brussels will not wait and it will attempt to suggest some specific deals to (at least) minimise the risk of automobile tariffs.

It is also likely that the EU will try to bring together China and like-minded countries to support and reform the World Trade Organisation and solve the Appellate Body crisis.

Washington has recently worked closely with Tokyo, compromising on automobile tariffs in return for Japan allowing market access to some US agricultural products. That a similar agreement could be reached between the EU and the US appears unlikely. Although Germany relies on imports of automobile parts from other EU members, it is improbable that the EU member states will make concessions to save German car makers.

‘No agreement’ could result in the EU facing higher tariffs for its largest importing partner of cars and this could equate to an additional €10,000 ($11,028) per car. This scenario would also result in the EU “strengthening its toolbox to use sanctions when other countries adopt illegal measures and simultaneously block the WTO dispute settlement process” as it recently stated. In the meantime, EU producers and consumers would not be unharmed.

Goodwill to solve the dispute is emerging with, for instance, the deal to improve US access to the EU beef market and the offer made by France to compromise on digital taxes, in which it would repatriate revenue from the tax if there is a global deal on taxing technology companies.

These, however, are temporary solutions. Although crucial, they may not be enough and the need for proper engagement with Washington appears inevitable given that the US tariffs on European automobiles and automobile parts would affect a market about 10 times bigger than the EU steel and aluminium exports combined. A cohesive EU will be crucial to work productively on this task.

An equally urgent matter to sort out with the US is the settlement of the long-standing dispute over the Airbus subsidies.

After a 15-year battle over illegal state aids given to Airbus and Boeing, at the beginning of October the WTO ruled that the US can impose tariffs on $7.5bn of goods it imports from the EU (the list includes aircraft, cheese, olives and jumpers) from October 18.

This marks the largest penalty decided by the WTO despite being cut down from the circa $11bn in goods proposed by the US. These tariffs will mainly affect France, Germany, Spain and the UK. The EU has threatened to retaliate against US goods with the WTO expected to decide on what tariffs can be imposed against the US next year. The EU proposal would accumulate to $20bn of US goods.

In this geopolitical context, we estimate that during the first half of 2019, the transatlantic trade lane saw a marginal contraction of 0.1% in demand. Based on our preliminary projections we expect volumes to have reported an annual increase of circa 3% during the third quarter of 2019.

For the third quarter, overall deployed capacity on this trade lane declined in the region of 2.5%, with an increase of over 9% on the Mediterranean- North America and a decrease of circa 13% on the North Europe – North America route. The decline in supply accompanied by an increase in demand meant an improvement in the utilisation level, increase from 76% last year to 81% in the third quarter of 2019.

For the fourth quarter (based on the assumption that no tariffs are imposed on this trade lane) the expectation is for the level of the utilisation to remain above 80%, as carriers have made significant cuts to capacity in recent months. (see side bar).

Transatlantic capacity changes (Q3 2019)

• The 2M Alliance – NEUATL4/TA4: Service began in September 2018, near the end of Q3 2018; it deploys five ships of 5,400 teu between Northern Europe and East Coast North America
• CMA-CGM/MARFRET – MEDCARIBE: Previously only trading between the Mediterranean to Central America and the Caribbean; in Q3 2019 this was expanded to include North America calls, resulting in the addition of 236,000 teu of deployed capacity on the transatlantic trade
• MSC – SAWC/US/NWC: The service called into North America (port of Philadelphia) in Q3 2018 but the rotation was modified to exclude the North America element, removing some 500,000 teu of annual deployed capacity
• Maersk Line - Colombia Express: The loop which served North Europe, North America and Central America ended in Q2 2019, resulting in the loss of 133,000 teu of annual deployed capacity
• The Alliance – AL6 (5 x 4,500 teu) and Ocean Alliance – AMERIGO/ATM1/MENA (6 x 4,500 teu) services were replaced by the jointly operated Ocean Alliance/The Alliance - AMERIGO/AL6 service deploying larger vessels of around 8,500 teu
• In March 2019, the MSC – Canada Med Express 2 (4 x 4,200 teu) merged with the MSC - W MED/GR/TR (5 x 4,300 teu) to create the MSC – Turkey Canada (8 x 4,700 teu) which was also stretched to include a call at the port of Liverpool

First published on Lloyd's List website October 2019