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Is the Chinese Ox reflating the world, one container at a time?

  • The container shortages are the result of the differing timelines of Covid-19 lockdowns and an earlier production activity recovery in Asia. Combined with supply-chain disruptions and the oligopolistic nature of the maritime shipping sector, this has led to a sharp rise in freight rates (+150% q/q in Q4 2020). This shortage is likely to continue until the summer: A survey  carried out in late 2020 found that more than 90% of container shipping enterprises in China believe it will last at least three months, with 25% of them expecting it to last for six months or longer. Part of the bottleneck can also be related to inventory management and mainly to a delay in European manufacturers rebuilding stocks following the Covid-19 shock. 
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  • Meanwhile, the strong performance of the RMB in 2020 is likely to extend into 2021 as a result of 1/ a faster recovery following the Covid-19 crisis, 2/ earlier policy normalization and 3/ measures to liberalize China’s capital account that attract foreign inflows: We expect USDCNY at 6.3 at year-end, vs. 6.5 at the end of 2020. The stronger RMB comes in a context where China’s export prices are also likely to increase: The latest data, for January, show a y/y increase in China’s producer prices for the first time in 12 months. We find that producer prices tend to lead export prices by five months in China.
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  • The rising freight rates are a boon for container shipping companies: The operating margin of the main 15 companies should rise to 10.3% in 2021 (after 8.9% in 2020 and 3.5% in 2019), before declining a little to c.8% in 2022. In line with the divergence in prices, the balance of power has turned to the advantage of container shipping companies at the expense of the two other main types of sea transport (see Figure 3). Container ships are finally bucking historic trend of underperforming the broader (transportation) market. While in the coming months regulatory oversight could step in, the container imbalance and shipping companies’ pricing power are such that we expect only a small adjustment in their operating margins in 2022 (as a comparison, the average over 2010-2015 was 5.5%).

Contact

Ludovic Subran
Allianz SE
Alexis Garatti
Euler Hermes
Francoise Huang
Euler Hermes