How Inflation Hits Asia’s Traders

By Charles De Trenck

A PIECE I WROTE for the RE- VIEW last year ("Shatter ing Shipping Myths," June 2007) might have seemed overly pessimistic at the time. I sketched out a scenario where de mand for manufactured goods from Asia and China fell off steeply as a result of a property bust in the United States, as food and energy costs rose further. Events have unfolded faster than I expected, largely because shipping demand in Eu- rope slowed quickly and there was a sharp decline in U.S. inbound volume. The one bright spot has been a healthy rebound in U.S. exports.
Shipping, as ever, is a window into global trade and the global economy. Look- ing deeper into the global container indus try can today elicit a better understanding of shifting trade patterns, rising produc tion costs and declining consumer de mand. And in comprehending the current slowdown in Asian exports and in global trade in general, we should now be looking at the slackening pace of economic activ ity and its impact in terms of how far along we are on the downward slope, and more importantly, how might growth trajecto ries shift us further down or back up.
Right now, we should be close一a mat- ter of months perhaps一to a bottom in terms of export deceleration from Asia to the U.S. As for the European side of the equation, we are perhaps another six to 12 months away from a bottoming of ex port growth rates. Yet there are likely to be some notable differences from previ ous downturns. Inflation一coming after a long period of low interest rates一com bined with China and commodity booms and a shifting role for the dollar are all part of this potent cocktail.
Using the economic slowdowns of the 1970s and 1980s for comparison is not straightforward given that global supply chains for manufactured goods were still relatively embryonic back then. Even so there is much to learn from what hap- pened to bulk and tankers after the 1970s boom. What we should try to track is the difference between trade growth by volume and value, focusing on the flows of manufactured goods. Today, container- ized trade transports far higher amounts of high一tech goods, as well as steel parts and agricultural commodities than was the case 20 years ago. With container trade tracking, we can look at both con- tamner port performances and vessel transport growth in order to better trian gulate patterns.
China's container port volume growth is slowing more than nominal trade sta tistics indicate. Total port volumes grew 17% in May and 15% in April, this level representing a significant slowdown from the 23% levels one year ago. Shanghai, Shenzhen, Hong Kong and Qingdao have all seen overall volumes significantly be- low the current average. Trade export values in dollars grew 28% in May and 22% in April (versus averages of around 28% one year ago) .The difference repre sents a decline of about four percentage points.
China container ports have seen volume growth rates shift down from per- centages in the mid一20s range to percentages in the mid to high一teens (when we exclude Hong Kong), represent- ing a decline of about seven percentage points. The change in differential is at least a few percent, with the issue of the yuan only indirectly related. When we ad- just to include Hong Kong in the calcula tion, which we must do at some stage given that Hong Kong still handles sub- stantial chunks of China trade, up to 10 percentage points of growth are lost in the differential between value and volume.
Since 2007, trade volumes on contain- er ships out of Asia have slowed to low single digit growth, but the value of trade relative to the volume of trade一the rise of prices in the system一has shifted up. The Asia export value data taken against container export volume growth, shows a distinct pattern: The value of goods' exports is increasing faster than the volume of goods. The China export data, which of course represents the single largest component of Asia exports, shows the trend even more clearly.
The China trade and Asia container data for May give a clear warning that the value-volume differential is growing rap- idly in 2008. This is starting to look a lit- tle like inflation with Chinese characteristics-which takes us back to the potent inflation cocktail of low real rates and high commodities prices brew- ing in recent years.
That China volume growth would slow down somewhat was expected. And yet everyone has continued to think of China as the world's workshop for cheap goods without realizing that volumes can lose out to higher prices. China's input costs have shot up as have transport costs, of which one一third are fuel costs, while developed country demand in volume terms is shifting down more rapidly than can be seen using conventional terms such as store sales. Could it be that infla tion as glossed over with cri一adjusted sta tistics is the wrong measure to use? Our tracking of the value一to-volume gap tells us instinctively this has been one of the built-in problems in tracking trade for years. It did not matter when volumes and values were similar. But it matters now.
The markets recently learned the U.S. consumer has shifted down demand, es pecially in volume terms. No doubt the U.S .consumer will stage rebounds in de mand, especially if oil prices come back below some magic number such as $100. But what if the American consumer is forced to dispense with his or her dispos able consumer society behavior for a cou ple more years because the pocketbook has shrunk and goods are structurally higher in price?
Inflation that has progressed from commodities to finished goods-higher steel prices to higher ship prices, to high- er prices of Chinese goods一should work in reverse once demand slows. But not be- fore bringing down average volume de mand growth rates further. Until 2007, long-term growth of volumes from Asia to the U.S. was about 10%，with 2007 it- self already coming at zero. The current run rate for 2008 is looking to be minus 2% if we stop decelerating in the first half of 2008. To put that in perspective, long- term global containerized trade has run- ning around 9% to 10%, with the U.S. driving the largest portion of that growth until 2006 and 2007, and Europe taking over in 2007.
Now the picture we are getting in 2008 is worse than expected in volume terms. Into the U.S.，growth not only has slowed into flat or negative year一on-year growth for a few months, but we are now down for the last 12 months on average. We have to go back to 1995 and 1996 to find the same kind of volume slowdown. And Europe inbound container volume, which has seen long-term growth closer to 15% and about 19% in 2007, has also decelerated rapidly and is now running at the 10% level in 2008, and even that level is thanks to some continued pockets of strength in the newer markets of Eastern Europe. The areas of weakness encom pass most of old Europe.
To make matters worse, new ships are increasing the supply of shipping capac ity. Demand in volume terms has deceler ated about 10 percentage points on the key Asia一export trade lanes, while the more expensive recently ordered ships (regardless of operation speeds) will only be coming on line faster in the coming two to three years.
Inflation is still on the rise. Input, pro- duction and transport costs have all gone up. The question is when and how prices might fall as excess capacity forces ship- pers to compete for scarce customers. For the moment, we can't assume cost pres sures will ease soon. Thus we can't as- sume demand volumes are finished declining-though we can speculate as to a potential deceleration in declines. As demand declines, there will be great op portunities to lower transport costs, and also to identify investment opportunities once lower growth gets priced in. But Asia needs to face the fact the run rate of demand is shifting down and that we don't know just yet how this story will end.