Roger Williams on the international freight market

Roger Williams begins this new year with his starkest warning yet about the volatility of the international freight market—something that needs pricing in to all transactions this year.

Ports are backlogged with freight due to the ongoing fallout from the coronavirus
(© Pixabay: WorldInMyEyes)

Twenty tonnes of Australian lobster rot at a Chinese airport. Is this the ‘match’ that starts a conflagration and destabilises the world economy? The system of world trade is under severe stress with a feedback loop that is starting to make international trade more expensive.

Sanctions and tariffs are proliferating. Just this month the US announced sanctions against Turkey, and China has announced even further tariffs against a list of Australian products. Preparations for armed conflict by the US, Japan and Taiwan are rippling through the Asia-Pacific region.

Today, in addition to the increasingly tense political climate in the world, the Covid-19 pandemic is impacting demand and supply in all markets, adding to political tensions. Mere mention of an investigation of the source of the coronavirus, can seed heightened political tensions. 

In April this year, Scott Morrison, Australian Prime Minister, suggested that the World Health Organisation needed new “weapons inspector” powers to investigate the origins of the pandemic.

The Chinese response has been aggressive and unrelenting as cotton and lamb exports are the latest to join the growing list of Australian products sanctioned by China, which include beef, barley, wine, lobster, cotton, seafood and coal. The Five Eyes Alliance (Australia, New Zealand, Canada, UK and US) are considering a united response. 

Pointing fingers

There remains a smoking gun in China’s hand in relation to the start and spread of the Covid-19 pandemic. It is given credence by the Chinese Communist Party’s (‘CCP’) handling of the outbreak.

The CCP locked down all domestic traffic by the end of January 2020 but pushed and kept open foreign travel until the end of March, helping seed the virus outside China. It is readily apparent that neither outbreak of Covid, its origins nor the CCP’s handling of the virus, bear scrutiny and that a thorough, independent investigation in China will never be ‘allowed’.

Scott Morrison, Prime Minister of Australia at Singapore FinTech Festival

China is home to 1.4 billion people and is controlled by the CCP (some 90 million party members) who are led by one man, Xi Jinping. President Xi is also General Secretary of the CCP and Chairman of the Central Military Commission which makes him head of the armed forces.

The country’s military, some two million personnel, is actually an armed wing of the CCP. The media and until quite recently, our politicians, talk of Chinese private companies. These are not ‘private’ as ‘private’ would mean in the UK or USA.

In the final analysis, they cannot operate without the assistance of the CCP and must, if ‘asked’ do the bidding of the CCP. Every quoted Chinese company has a separate board appointed and staffed by members of the CCP. These are not the directors of the company, but neither are they window dressing. 

Velvet glove

The CCP rules with an iron hand as the million Uighurs undergoing ‘re-education’ bear testament. Recent investigations by the BBC show that hundreds of thousands of Uighurs are being forced to pick cotton or work in textile factories linked to their detention camps. 

The CCP’s iron hand is being turned also to hostage diplomacy. Two Canadian citizens are still being held, arrested after Huawei’s Chief Financial Officer, Meng Wanzhou, was detained at her home in Canada. She is awaiting extradition to face charges in the US.

The imprisoned Australian journalist, Cheng Lei, was arrested in August last year in retaliation to Australia’s demand for an enquiry into the origins of the pandemic. She is accused of being an Australian spy. 

Under the control of the CCP, China is really a hostile state with no underlying legal framework upon which companies or individuals can rely. It has promised to take Taiwan by force if it does not cede to China’s control.

It has reneged on its treaty commitments with regard to Hong Kong. It has built bases in the South China Seas on atolls outside of its territory, causing fears of a major conflict erupting. 

As a result the Trump administration announced the US is reforming for deployment in the Pacific its 1st Fleet, for the first time in over 40 years3. Japan has instigated new missile capability and Taiwan is increasing its purchases of military technology, both citing China’s potential hostile intent. 

Terror of Wuhan

Although the source, by negligence or design, of the world pandemic, China has been first to recover from the pandemic and exports have grown quickly. However, the impact of the disease on countries other than China has contributed to an unusual imbalance in the location of shipping containers. 

As China has increased its exports, receiving countries have been unable to utilise or return the containers which have built up to record numbers at their ports. This has created shortages of containers at Chinese ports. The result has been an increase in outward freight rates from China. Shanghai rates have increased by 300% since March this year.

This international imbalance of containers has been particularly marked in the UK and further marked at the UK’s largest container port, Tilbury, not helped by a relatively new and poorly functioning port management system and importers trying to miss the 1 January 2021 end to the UK-EU transition agreement. 

Moreover, consumers stuck at home, who have been unable to head off on holiday, attend sports fixtures, to eat out or go to the theatre or cinema, have used their unexpected additional disposable income to buy a TV, a new vacuum cleaner or kitchen appliance. 

Nearly all of this stuff comes to the UK in containers. There are only so many containers in the world at any one time and they are not in the ‘right’ places. This is made worse as congestion does not allow containers to be emptied, utilisation rates decline precipitously and freight rates skyrocket.

Last post

Major changes in world trade began with the Trump administration’s determination to confront China’s abuse of trade mechanisms and procedures, theft of intellectual property and dumping of products. Covid-19 has caused huge fluctuations in demand both by individual consumers but also by governments and companies.

This has resulted in volatility. Nothing illustrates the impact on markets better than the results of one of the world’s biggest commodities traders, Trafigura. 

According to its chief executive the company had a “stunning year” (y/e 30.09.20) although revenue fell by 14%, margins surged by 170%. Already seeing massive volatility in commodity prices, witness oil moving from $20 to $65 a barrel, world markets are now being impacted by massive transport bottle-necks, containers in the ‘wrong places’, passenger planes (which carry huge amounts of freight) grounded and, the potential for sanctions from a consortium of English-speaking people against an increasingly belligerent China. 

The current conditions are a fertile environment for continued volatility in commodity prices and financial markets.

The effect of swings in consumer demand and staffing shortages, which are producing volatility in manufacturing output, will be exaggerated by lockdowns and Covid-19 cases. The world imbalance of containers will not be easily resolved and freight rate volatility will increase accordingly. 

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