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Under the Banyan Tree - Asia and the trade boom: Has the cargo ship sailed?
17 Plays2 years ago
With the peak-pandemic trade surge a thing of the past and freight rates plummeting, Fred Neumann talks to Shanella Rajanayagam and Parash Jain about the outlook for shipping and trade, and what it could mean for export-reliant Asian economies. Disclaimer. To stay connected and to access free to view reports and videos from HSBC Global Research click here
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Transcript
Introduction and Access
00:00:00
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Thanks for listening, and now onto today's show.
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Meet the Experts
00:00:45
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Hello and welcome to another edition of Under the Banyan Tree, where we put Asian markets and economics in context.
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My name is Fred Newman, Chief Asia Economist at HSBC.
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And while my regular co-host Harold van der Linde is still away, I'm joined today by trade economist Shanela Rajanayagam in London and later by Global Shipping and Ports Research Head Parash Jain here in Hong Kong.
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That should give you a pretty good idea of what we're discussing in today's podcast.
Asia's Export Dynamics
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Exports, of course, are critical to growth here in the Asia region, but are the good times fading?
00:01:18
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We'll be discussing that and a whole lot more in this episode on shipping and trade in Asia and beyond.
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So step into the shade and join us under the banyan tree.
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A bit of context for you before we kick off the conversation.
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Trade was a really rare bright spot during the pandemic.
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Even as demand for services crumbled, we saw appetite for goods soaring, which of course was good news here in Asia, where a great many of these consumer goods are actually manufactured and then exported.
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Now, currently globally, we've seen export volumes are still up about 5% year-over-year.
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But in terms of manufacturing, the cracks are already starting to show with orders now in contractionary territory.
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Add to this the fact that Asian exporters are often exposed to highly cyclical industries, and it all points to a looming trade recession that threatens to drag on economic growth.
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Joining me now to talk us through all of this is our trade economist Janela Rajanayagam.
00:02:22
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Shanela, great to have you with us.
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Thank you for having me.
Trade Boom and Logistics Challenges
00:02:26
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Shanela, paint us the big picture here.
00:02:29
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How big was really the latest trade boom?
00:02:31
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We've seen headlines about container shipping shortages in many parts of the world.
00:02:38
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How does this compare in a historical context?
00:02:41
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Yes, so I think the only way to really describe the trade boom over the past couple of years has been quite extraordinary because that's really what it was.
00:02:51
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Even though we had a lot of supply chain disruption, we did also have surging trade volumes,
00:02:58
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And so mainly over the past couple of years, consumer demand was very strong from Western consumers for the likes of things like pandemic-related products, electronic goods.
00:03:09
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And this was really supported in part by sizable fiscal stimulus measures in some parts of the world, mainly in the U.S.
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So all this essentially caused global goods trade to rebound more strongly than expected in the second half of 2020.
00:03:25
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It's also worth noting that mainland China was very quick to actually restart production given their initial supply chain disruptions.
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But of course, at the same time, we did have a lot of disruption with logistics.
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So it was mainly to do with land side logistics rather than shipping per se.
00:03:44
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But there was a lot of shortages and labor and equipment and some of the key ports around the world.
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And so this essentially led to a huge backlog of containers.
00:03:55
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So the way you describe this is an unprecedented sudden demand for goods that was so large it put stress on global logistics networks.
00:04:05
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But now lately you've been talking about the risk of a trade whiplash.
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What do you mean by that?
Risks of Excess Supply in Trade
00:04:12
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Yes, so over the past couple of years, a lot of businesses tried to build up some buffer stocks in anticipation of further consumer demand.
00:04:22
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And now that we are seeing the trade cycle starting to turn, there is certainly a risk that there could be a bit of payback for those businesses.
00:04:30
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They might have overdone it and they could essentially be left holding excess supply as goods demand normalises.
00:04:38
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And the reason we do think that the trade cycle is starting to turn is for three key reasons.
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The first is that this pandemic induced trade boom is bound to fade.
00:04:48
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We're not buying the types of goods that we did previously.
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Secondly, inflation.
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So prices are continuing to soar, particularly in Western economies.
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That could lead some consumers to actually cut back on certain spending.
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And lastly, this idea of stocked up inventory.
00:05:05
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So the shift from just-in-time manufacturing to just-in-case manufacturing over the past couple of years, it essentially means that some of these businesses do have excess supply and they have to look at ways to deplete that going forward.
Globalization and Trade Protectionism
00:05:19
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So what signs are you seeing then in the data now that there is a crack in trade, that things are breaking lower, if you will?
00:05:28
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The WTO, for example, just cut its forecast for global export volumes.
00:05:33
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Is that something you see in the data as well?
00:05:35
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And what are some of the indicators that you're watching right now?
00:05:39
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That's right.
00:05:39
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So some of the indicators that we look at are the PMIs, for instance, and you do see that contraction in new export orders continuing over recent months.
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And when we look at that by sector, new export orders actually fell for all key sectors that we monitor in August.
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And that's the first time that that's happened in over two years.
00:06:00
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So yes, very similar to the WTO, we do expect trade growth momentum too slow both this year and next year.
00:06:07
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And which sectors are especially exposed?
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And not just the sectors, but also which economies should we think of that might be more exposed than others?
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So I do think it's those sectors that are tied to consumer spending.
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So things like clothing, perhaps toys, household items as well.
00:06:28
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You do also see evidence in the data that the electronic cycle is starting to turn.
00:06:32
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So there could be a bit of a slowdown in semiconductor demand.
00:06:36
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And in terms of those economies, it really is those that supply these types of goods.
00:06:42
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So the economies that we do see as most exposed to Western consumer demand, particularly US demand, are markets like Mexico, India and even China.
00:06:54
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So some downturn in global trade and challenging headlines all around.
00:07:00
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But taking a step back, it's sort of very easy to get gloomy about globalization.
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And I know you've done a lot of analysis on this.
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Where do you stand on this idea of
00:07:12
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We're seeing the beginning of a deglobalization wave.
00:07:15
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How structural is this decline in trade?
00:07:19
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Should we worry about the reversal of some of the trends that we've seen over decades?
00:07:25
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Well, overall, I think I'm a bit more optimistic and I think there are important nuances between saying that there is this complete retreat from globalisation versus more of a reconfiguration in globalisation, which I think the latter is what we are starting to see.
00:07:41
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I mean, it is very clear that the days of hyper-globalisation are behind us.
00:07:47
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Trade openness, which is a metric that we track, has retreated since the global financial crisis and then ticked down even further.
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as US-China trade tensions started to escalate.
00:07:58
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But on a more positive note, we are in a very globalised world today, so average tariffs are incredibly low.
00:08:05
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The risk, of course, is that this has now given rise to new forms of trade protectionism, and certainly post-pandemic there is a risk that businesses and governments increasingly look to shore up their supply chains.
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and that governments do use industrial policy, which can be slightly protectionist.
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But overall, I think this is not necessarily the end of globalization.
00:08:29
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It's simply another evolution.
00:08:32
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Perhaps we could start to see a bit more trade between countries in the same region.
00:08:37
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Already intra-regional trade in Asia has been increasing over time.
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And as businesses look to diversify or even shorten their supply chains,
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this could help lead to increased regionalization.
00:08:50
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And it's always commonly said among economists, I think that unless you have trade deals that drive forward liberalization, inevitably the global trade system gums up and protectionist measures proliferate.
00:09:04
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So we need more trade liberalization to drive globalization forward.
Upcoming Trade Deals in Asia
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Do you see any sort of pending big deals coming through?
00:09:11
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Is that even possible in this environment?
00:09:14
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That's right.
00:09:15
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And some of these trade deals could actually help drive regionalisation as well, particularly in the Asia-Pacific, which has been quite prolific in striking new trade deals.
00:09:26
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I think the ones to flag are the ASVP trade deal, the Regional Comprehensive Economic Partnership that took effect at the beginning of this year.
00:09:34
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There could potentially be more economies to join that, which is anchored by mainland China.
00:09:40
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There is also the CPTPP, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
00:09:48
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Again, a very Asia-Pacific focused trade deal.
00:09:52
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The UK is looking to accede to the deal.
00:09:55
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Both mainland China and Taiwan also have their applications in train.
00:10:01
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And then also to mention India.
00:10:03
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So it has typically shied away from engaging in free trade deals in recent years, but it is increasingly looking to strike a number of early harvest deals.
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It recently did one with the UAE and is also looking to conclude one with the UK this month.
00:10:19
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So plenty of trade deals in the region to keep an eye out for.
00:10:24
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Shanela, thank you very much for your insights.
00:10:27
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Thank you.
Impact of Freight Rate Changes
00:10:28
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We're going to take a quick break now.
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When we come back, we'll be joined by Global Head of Shipping and Ports Research Parish Jain to discuss the impact of slowing exports on the container shipping industry.
00:10:49
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Welcome back.
00:10:50
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So we've discussed the big picture for global trade.
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Now it's time to zero in on the outlook for container shipping specifically.
00:10:57
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Some key stats here before we dive in.
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Freight rates, for example, have fallen about 50% since July.
00:11:04
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That's a massive, I think, what, 7.5% per week or so in declines.
00:11:08
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And that would actually mean that
00:11:10
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By the end of the year, spot rates on container shipping are probably down to the 2019 average, which is a big decline, of course.
00:11:18
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But joining me now to discuss this further is our global head of shipping and ports research, Parish Jain.
00:11:25
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Welcome, Parish.
00:11:26
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Thank you, Fred.
00:11:27
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Good to be here.
00:11:28
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So, Barish, paint us a bit of a picture of what's going on in the container world.
00:11:32
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You had the boom of a lifetime, I imagine, the last two years.
00:11:36
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Is that really fraying now in the last two months?
00:11:39
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What's really happening there?
00:11:40
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Absolutely.
00:11:41
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I mean, we have seen freight rates for certain routes, especially has jumped as much as tenfolds in March of 2021 versus 2019.
00:11:51
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but as the higher energy prices and the fear of global recession started to impact the global trade outlook, that coincide with some ease of congestion means that freight rates are reverting back to the mean rather rapidly.
00:12:07
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So yes, as you said, freight rates has declined 50% over the last couple of weeks, but they are still more than double of 2019 level.
00:12:15
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So yeah, there is some way to go before we expect some sort of sanity return back among the players in this sector.
00:12:21
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And so it's a really famously cyclical industry, right?
00:12:25
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Shipping, we have boom and bust periods over years.
00:12:29
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How do you look at the next year then?
00:12:31
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Are we really seeing that big shipping bust after an unprecedented boom?
00:12:36
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Or are you somewhat more optimistic that we're finding a floor here over next 12 months or so?
China's Economic Influence on Shipping
00:12:42
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So this is the exact question that we went ahead and answered in our last sector note, Back to Earth.
00:12:48
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And what we are saying at this point of time that we expect the shipping company's profitability to decline as much as about 80% in 2023 versus 2022, but they still remain very comfortably profitable.
00:13:01
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And to your point about the bust...
00:13:04
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the amount of money that they have made in the last two years, it probably will need several years of losing money before they get to the birth situation indeed.
00:13:13
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Now, we always talk about container shipping, right?
00:13:16
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But there's another segment that's quite important.
00:13:19
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That's the bulk carriers.
00:13:20
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And I imagine China, Chinese demand plays a huge role there.
00:13:24
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Now, of course, China's economy slowed down very sharply over the past year or so.
00:13:30
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How is that playing out in your space in terms of bulk carriers?
00:13:35
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Are spot rates down just as much as in container?
00:13:37
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And how do you look at that sector going forward?
00:13:41
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Yeah, absolutely.
00:13:42
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I mean, in terms of volatility, the freight rate volatility is not materially different from what we have seen in case of container shipping.
00:13:51
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So if you look at BDI, it's a Baltic Dry Index, which is kind of a barometer of assessing the freight rate for the bulk commodities.
00:13:59
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They have also declined to the tune of 60 odd percent from the peak.
00:14:04
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But from the trough a few weeks back they have almost doubled as well.
00:14:08
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So this is as volatile as it can get.
00:14:11
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And unlike container, China is very, very critical for the dry bulk demand, particularly for the major bulk like iron ore and coal.
00:14:23
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And a slowdown in the property sector in particular in China already had a bearing on the capesize demand.
00:14:29
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So there is a lot of hope pinning up on Chinese stimulus.
00:14:32
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And if that can do the similar sort of magic that we have seen in the previous cycle, but time will tell.
00:14:39
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Of course, as an economist, I'm heartened by your comment that the bulk spot rates are starting to increase because it might suggest actually the demand in China is picking up.
00:14:48
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And then we might see a bit more growth hopefully coming through in China.
00:14:52
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Certainly, we expect a bit of a pickup there.
00:14:54
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But I want to shift gear a little bit.
Airline Industry Recovery in Asia
00:14:57
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You also head up our Asian transport research team.
00:15:01
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And, you know, we've seen the airline industry in Asia, as elsewhere in the world, go through a tough time.
00:15:07
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Passenger traffic being down, of course, because of the pandemic.
00:15:10
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Now we see some reopening coming through.
00:15:13
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Economies like Korea and Japan are starting to relax some of their travel controls.
00:15:18
Speaker
Are you optimistic on sort of a rebound for that sector in Asia, given that tourism
00:15:23
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likely will pick up quite a bit.
00:15:25
Speaker
I'm absolutely confident about that.
00:15:28
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In our view, the old habits die hard.
00:15:30
Speaker
There are enough evidence which showed us that as soon as we have seen control over the COVID cases domestically, the travel demand returned back to the 2019 level.
00:15:40
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We have examples of Europe and US which are ahead of us in terms of reopening and we have seen a strong pent-up demand not only for the Leaser but also for the business.
00:15:49
Speaker
If anything, going into the winter, going into the Chinese New Year next year, it's probably whether the airlines will be able to cope with the demand.
00:15:58
Speaker
A lot of pilots, a lot of the crew still needs to be hired, need to be retrained and probably capacity constrained which is probably a good problem to have from the airlines profitability perspective.
00:16:09
Speaker
Well, capacity constraints, good from an airline perspective, less so from somebody who's desperately trying to book their holiday on the beach somewhere.
00:16:16
Speaker
Thank you, Parish, for all your insights.
00:16:18
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I'm sure we'll come back to you in the coming months to get another read on the transport and logistics sector globally.
00:16:24
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Thank you.
00:16:25
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Absolutely.
00:16:25
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Thanks, Fred, for having me here.
Conclusion and Preview
00:16:32
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Well, I'm sure we could keep this conversation going for a lot longer, but unfortunately we're running out of time.
00:16:37
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Many thanks to Parash and Shanela for joining us.
00:16:40
Speaker
Many thanks to all our listeners as well for tuning in.
00:16:43
Speaker
I'll be hitting the road again next week, but Harold will soon be back here in Hong Kong ready to tackle another topic right here under the banyan tree.
00:16:55
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:16:59
Speaker
We hope you enjoyed the discussion.
00:17:01
Speaker
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