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Under the Banyan Tree - Red Sea disruption and the impact on Asia
25 Plays1 year ago
Fred Neumann and Herald van der Linde sit down with Head of Shipping, Ports and Asia Transport Research, Parash Jain, to discuss the Red Sea situation and its impact on Asian shipping and supply chains. Disclaimer: https://www.research.hsbc.com/R/61/wXMcngk Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction to the Podcast Series
00:00:02
Speaker
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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00:00:17
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And now onto today's show.
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Focus on Asian Trade and Shipping
00:00:46
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Hello and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
00:00:52
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I'm Harold van der Linde, Head of Asian Equity Strategy, coming to you from HSBC in Hong Kong.
00:00:57
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And I'm Fred Newman, Chief Asia Economist.
00:00:59
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We've got a special guest with us in the studio today, HSBC's Head of Shipping, Ports and Asia Transport Research, Parash Jain.
00:01:07
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We're going to be talking trade, specifically the impact of tensions in the Red Sea region and what they mean for shipping routes from Asia to the West, as well as intra-Asian trade and the impact on shipping stocks in the region.
00:01:19
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And on that note, let's get the conversation started right here under the banyan tree.
Trade Tensions and Rerouted Shipping
00:01:35
Speaker
One quick thing to mention before we begin, our sister podcast, The Macrobrief, also has an episode out talking about disruptions in the Red Sea.
00:01:43
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It's a very global discussion with our London-based trade economist, Shanela Rajanayagam, and takes a big picture view on the situation.
00:01:52
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Indeed, do give that a listen for the global context here in the Banyan Tree.
00:01:55
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Of course, we like to keep the focus on Asia.
00:01:57
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We're going to try to steer the conversation in that direction when we can.
00:02:02
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With that in mind, let's bring in Parash, our special guest on the podcast this week.
00:02:05
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Parash, let me start off with a very simple question for you.
00:02:10
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Some of the shipping lines now can't really sail through the Suez Canal from Asia to Europe, and they'll have to sail all the way around Africa.
00:02:19
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It adds about 5,000 kilometers to the distance.
00:02:22
Speaker
How much does that add to the cost for a shipping line to actually move these containers?
00:02:27
Speaker
I imagine more fuel, longer charter times, etc.
00:02:32
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How much difference does it actually make for a container line to redirect these ships through the southern horn of Africa?
Impact of Increased Shipping Costs on Retailers
00:02:39
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Thank you for having me, Gems.
00:02:41
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And what a chaotic start for the world.
00:02:44
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It certainly adds up to two weeks of extra sailing.
00:02:49
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And now if the shipping industry continues to maintain their sailing schedule, they need to deploy more capacity, which means that you need to hire two additional ships against 10.
00:03:02
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Now you need 12.
00:03:04
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which means additional fuel, which means repositioning of some of the containers.
00:03:10
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Simplistically put, it adds cost of hiring a ship, fuel, but on the other hand, you save about a million US dollar of canal fee.
00:03:20
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So in balance, we estimate that it would cost a ship carrying 10,000 containers, perhaps about a million dollar US, so an increase of about $100 per container cost.
00:03:34
Speaker
So that's interesting what you say, that actually these ships that sail from Asia to Europe had to pay fairly high canal fees anyway, so they're safe when they go around Africa.
00:03:43
Speaker
But you're saying they need to hire more ships because it takes longer, additional crew time, additional fuel time.
00:03:50
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So you're saying about $100 per container, if I understood you correctly, in the incremental cost.
00:03:56
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Doesn't sound that much, Harold.
00:03:57
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No, Fred, I'm a little bit surprised by this because I'm not a shipping expert, Paris, but I thought I hear from people, friends of mine are in the furniture business.
00:04:07
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They're talking about cost of selling a container over to the U.S. has gone up like three or four times.
00:04:13
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So that's the cost that the retailers might have to pay.
00:04:17
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And the interesting thing about the shipping business is that it has always been the demand and supply match or mismatch which drives the freight rate rather than cost.
Limitations of Alternative Transport Modes
00:04:30
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So what you're suggesting is because these retailers still want these containers, that they call the shippers and say, I need them.
00:04:36
Speaker
And the container shippers are just increasing the prices to ship it over, right?
00:04:40
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Absolutely.
00:04:42
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Of course, they cover their costs, but they're making better money, I guess, than as well.
00:04:45
Speaker
Absolutely, because in the down cycle, they are the one who lose billions and billions of dollars as well.
00:04:52
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But if it's much more expensive to ship these products, would it be more logical for a company just to put it on a train or put it on a plane and just fly it over?
00:05:02
Speaker
That's relatively cheaper now, right?
00:05:05
Speaker
So it's important to put things into perspective.
00:05:09
Speaker
First of all, more than 90% of global goods moves through sea, and the remaining 10% is taken care by air to an extent rail and road.
00:05:19
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So we do not have infrastructure to bring significant chunk of the cargo off from the ship to the rail.
00:05:28
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Simply imagine if you need to replace one full container ship going from Shanghai to Rotterdam into the rail network, you need to secure as much as 100 trains.
00:05:42
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Okay, so there's simply not the capacity to deal with this and most companies will be stuck with the higher rates that these shippers are now asking for.
00:05:51
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At this stage, it will still remain one of the most economical ways of transiting goods.
Impact on Asian Economies and Global Trade
00:05:57
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As a rule of thumb, moving a ton of cargo by air would cost you about 20, 25 times more than moving it through a sea.
00:06:07
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So if the shipping costs have gone up by three or four times, clearly that must be a worry for economists, Fred.
00:06:16
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To some degree, yes, because we are actually facing a demand weakness in some parts of the world.
00:06:23
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The global economy is slowing.
00:06:25
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And so this adds to the headwinds for trade, particularly for Asian exporters who are actually quite reliant on Europe.
00:06:31
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So in volume terms,
00:06:34
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Europe is comparable to the US for Asia as a whole in terms of export destination.
00:06:39
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So that obviously raises headwinds.
00:06:44
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One thing I would say, though, and I also wanted to throw this back at Parash, is that the price effect,
00:06:51
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from say more fuel, higher freight rates, it's probably digestible in the grand scheme of things for the economy, but it's the time delay that matters quite a bit because Parash mentioned about two weeks of extra sailing
00:07:07
Speaker
Two weeks, that's a lot of activity that is kind of parked for two weeks on the sea without entering supply chains, components that are not arriving, etc.
00:07:17
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So there is a time cost here that is actually quite significant.
00:07:22
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Well, to extend that, and I'd like to get Parrish views on this,
00:07:25
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It's not just the shippers, I guess, but it's also the freight forwarders and there's a retailers, everybody who needs to take that into consideration.
00:07:32
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So I guess this has got bigger kind of implications for other industries along the supply chain as well, right, Parash?
00:07:40
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Yes, it's very important to understand that container ships or the sailing between the port is only a small part of a big supply chain that enables the cargo, leaves the factory and reaches to the warehouse at the other destination.
00:07:56
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and two weeks of delay, the impact of that will spill over to the unavailability of equipment at the origin.
00:08:07
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It further means that the cargoes which are arriving on the destination sites gets delayed.
00:08:14
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That in turn means that there is a strain on the port side of infrastructures.
00:08:20
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that further can move into the land side.
00:08:22
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And as they say in supply chain, you are as strong as your weakest link.
00:08:27
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This is precisely what the world has witnessed in 2021 and 2022 during COVID time, where at different time, different part of the supply chain was strained.
New Shipping Capacity and Trade Disruptions
00:08:39
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Can I take a step back very quickly?
00:08:42
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Because you mentioned COVID and the period, right, we had enormous supply disruptions globally.
00:08:49
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Correct me if I'm wrong, but it seemed to me that we came into COVID with a scarcity of ships, of capacity, because we had a shipping downturn before, people were not ordering new ships.
00:09:02
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But then there was a boom time and we've ordered a lot of ship and there's a lot of extra supply that came on stream over the past year.
00:09:09
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Does that extra supply help us in this particular crisis because there's more ships available who can sail around Africa?
00:09:17
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And does that alleviate a little bit the pain?
00:09:20
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Would the disruption have been bigger if we had not had this extra capacity come on stream or am I overthinking that?
00:09:27
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No, you're right.
00:09:28
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And let me give you a yes and no answer.
00:09:31
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If you take a step back, if you look at the impact of last few weeks of disruption on the freight rate, today's spot freight rate is the highest it has ever been since the record begin with respect to Shanghai containerized freight index that we track closely, barring the COVID times.
00:09:53
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So because of the recency biased, our benchmark has been set versus COVID.
00:10:00
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Bear it in mind, COVID was the time when these shipping companies has made profit that they have not made in past two decades put together.
00:10:11
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So to that point, you're right.
00:10:13
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In terms of the supply situations, probably it is not as chronic as during the COVID days.
00:10:20
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But it is sufficient enough to make the freight rate comes to the level that we have not seen in a pre-COVID era.
00:10:27
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And I think this is a great time then to take a quick break.
00:10:30
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And when we come back, we'll look at the implications really for Asian shippers.
00:10:34
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More when we come back with Parash Jain.
Effect on Intra-Asian Trade and Stocks
00:10:46
Speaker
Welcome back.
00:10:47
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We're here with Parish Jain talking about the impact of the Red Sea disruptions on supply chains, on shipping and on Asia as well.
00:10:56
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Parish, we already covered a lot of ground providing the context in terms of the global repercussions, what it means for shipping containers from Asia to Europe, for example.
00:11:07
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Let me reverse that perspective a little bit.
00:11:11
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What does the Red Sea disruption mean for Asian, intra-Asian supply chains?
00:11:16
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Are they affected by this?
00:11:18
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Because within Asia is obviously smooth sailing between ASEAN ports and Chinese ports, for example.
00:11:26
Speaker
Or is there a ripple effect that also spills back into Asia's own production supply chains?
00:11:33
Speaker
So we live in a globalized world and any disruption in any part of supply chain does have a ripple effect across different routes.
00:11:43
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If you look at container shipping, as we discussed at the start of the podcast,
00:11:49
Speaker
A detour via Cape of Good Hope needs additional 15 days of sailing, perhaps additional two more ships.
00:11:57
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Where will these ships come from?
00:12:00
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And that's where the rest of the world's capacity comes into play.
00:12:04
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The capacity is pulled out from all the other regions, including intra-Asia, which in turn makes the demand and supply within intra-Asia tight.
00:12:16
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And eventually reflected into the freight rates.
00:12:18
Speaker
Absolutely.
00:12:19
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Well, this will have implications, I guess, for Fred in terms of economic forecasting.
00:12:24
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But a quick question for you, Parash, on the stocks.
00:12:28
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That's what I'm interested in.
00:12:30
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There are listed shipping companies in Asia, right?
00:12:33
Speaker
Where are they listed?
00:12:34
Speaker
And what has happened with the share prices of these companies?
00:12:38
Speaker
Yes, so they are listed in all the major stock exchange in Asia, including Hong Kong, Japan, Taiwan, even in mainland China.
00:12:48
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And as you would expect, essentially there's a strong correlation between these companies' share prices and freight rates.
00:12:57
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As we discussed, freight rates has gone four-folds.
00:13:00
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These stocks also have reacted positively, of course to a different degree for a variety of reasons.
00:13:05
Speaker
As we all know that the local market dynamics sometimes are more overpowering than the sector fundamentals.
00:13:11
Speaker
But yes, they are off their late last year lows.
00:13:14
Speaker
So if I would say a stock was at late last year lows at $100, what is it now and what would have been the peak in COVID for the share prices?
00:13:24
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So if you, at index level, if you are 100 in November, you are somewhere around 130 today.
00:13:33
Speaker
Wow, so it's gone up 30% from the bottom, yeah.
00:13:35
Speaker
Yes, and you would be somewhere around 200 during COVID times.
00:13:39
Speaker
Okay, so we're far off from the peaks of COVID, yes.
00:13:42
Speaker
Does that mean to me, I don't want to sound flippant, but does that mean that at the moment shippers actually see higher freight rates because of these
Benefits to Shipping Industry from Disruptions
00:13:53
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disruptions?
00:13:53
Speaker
And for them, actually, it's not a bad environment because they should have higher freight rates, even though they have a slightly higher cost space.
00:14:04
Speaker
But really, is it fair to say that these disruptions ultimately are somewhat helpful for if you are a shipper?
00:14:12
Speaker
That was my opening statement.
00:14:14
Speaker
Shipping thrives in chaos, whether it's a geopolitical chaos, whether it's a climate-related disruption.
00:14:21
Speaker
And we have seen this over and over and over again.
00:14:25
Speaker
The only difference that I could think of
00:14:28
Speaker
that a lot of these disruptions in isolation may be manageable.
00:14:34
Speaker
But what is very, very important for everyone to understand is that it's a known unknown theory in the sense that we have started to see a disruption in Panama Canal late last year for some of you who is following this space.
00:14:51
Speaker
It was not a big deal.
00:14:53
Speaker
Then we have seen a Swiss Canal disruption.
00:14:56
Speaker
And if you will ask me what potentially might happen if this issue is not resolved, is that a lot of the retailers will start to enter into longer term contracts at an elevated rates.
00:15:11
Speaker
They may choose to front load some of their orders and they may rethink about building inventory.
00:15:21
Speaker
which means that in three years time, as congestion starts to build,
00:15:26
Speaker
the demand led by restocking may start to go up.
00:15:31
Speaker
And that will be a perfect storm when the shipping industry will make money.
00:15:36
Speaker
So after years and years of a dearth, really, in the shipping industry up until COVID, we have now a very different scenario.
00:15:43
Speaker
And also that contrasts with all these headlines you read about deglobalization, less trade, et cetera.
00:15:49
Speaker
You think that shippers are negatively affected by this, but the way you described it, there's other factors that work that actually could help
00:15:57
Speaker
sort of the outlook for the industry overall.
00:16:00
Speaker
One thing I wanted to come back to, and I think I made this point earlier, Harold, is that it's not just about the price impact.
Complexities in Economic Forecasting
00:16:08
Speaker
It's about the length it takes to ship goods, which has an economic cost built in for supply chain, for production.
00:16:17
Speaker
And I think that's, again, I wanted to make the point with Asia as well, is that actually a lot of Asian producers rely on components from Europe, right?
00:16:25
Speaker
We tend to think of it a one-way street, but actually, if you are an automotive factory in China, you may use certain German engine parts, for example.
00:16:36
Speaker
And if it takes two weeks longer to ship this stuff,
00:16:41
Speaker
then that is a delay for two weeks.
00:16:43
Speaker
Now you can't maybe offset with better inventory management, but if you need custom components very quickly, well, it takes two weeks longer.
00:16:51
Speaker
You're absolutely right, Fred.
00:16:52
Speaker
That is the case.
00:16:53
Speaker
And we saw this during COVID, right?
00:16:55
Speaker
There were all the components and components, I believe, in certain computers and chips and these sort of things from Japan that were suddenly in short supply, which then have other ripple effects in other industries.
00:17:07
Speaker
The fear is, just as what Paris says, if this situation gets resolved soon, it's OK.
00:17:12
Speaker
But if this continues for weeks or months to come, that these effects become more prominent and unintended consequences suddenly become available.
00:17:21
Speaker
And that must be something that puts you back behind your spreadsheets, Fred, because what does it mean for economic forecasting in Asia?
Inflationary Pressures from Shipping Costs
00:17:29
Speaker
It's tricky to quantify this, and I'm sure Parash grapples with that as well.
00:17:33
Speaker
Tell me how long this lasts and I can give you a much more substantive, quantitative answer to this.
00:17:40
Speaker
I think we look at this from an Asian perspective in two ways.
00:17:45
Speaker
One is there's a slight drag on economic growth, slower exports and slower component availability for our own production that maybe shaves off a bit of activity right off the top.
00:17:58
Speaker
Not super meaningful, but it's going to be some perceptible impact on the manufacturing sector in Asia.
00:18:06
Speaker
The other impact is prices, right?
00:18:08
Speaker
And so, particularly in Europe, there's bound to be some sort of retail price implication.
00:18:14
Speaker
We can argue how high this is, but there's a slight inflationary impact.
00:18:18
Speaker
And for Asia, that spills back as well.
00:18:20
Speaker
There's going to be a slight inflationary impact from this.
00:18:24
Speaker
Now that gets dwarfed by movements in oil prices and other effects that impact consumer inflation, but it is there.
00:18:30
Speaker
And so as the world is hoping for more disinflation, this is not necessarily very helpful in the very near term.
Concluding Insights on Ripple Effects
00:18:40
Speaker
And so that's where the economists come down.
00:18:44
Speaker
I think broadly speaking, and this is why it was interesting to talk with Parish today, it's very important.
00:18:49
Speaker
It's not isolated.
00:18:51
Speaker
It's not an isolated incident.
00:18:52
Speaker
It has enormous ripple effects, consequences to other sectors that are not immediately visible, I think, to the broad observer.
00:19:02
Speaker
But it's certainly a delight to explore with you, Parish.
00:19:10
Speaker
Now, we could no doubt talk a lot longer about the subjects, but we're going to have to wrap it up here.
00:19:15
Speaker
Our thanks to Parash for his valuable insights.
00:19:17
Speaker
And thank you, as always, for listening.
00:19:20
Speaker
And remember to check out the macro brief for HSBC's global take on the Red Sea situation.
00:19:25
Speaker
And if you haven't done so, do subscribe to our weekly podcast here on The Banyan Tree.
00:19:30
Speaker
Thanks again for joining us.
00:19:31
Speaker
Till next time.
00:19:51
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:19:54
Speaker
We hope you enjoyed the discussion.
00:19:57
Speaker
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