Hong Kong shipping and logistics

US-China trade war to turn the screws on Hong Kong’s beleaguered shipping industry

The ultimate impact may depend upon whether US importers are willing to pass on the costs of tariffs to consumers, says Peter Levesque of Modern Terminals

PUBLISHED : Monday, 08 October, 2018, 9:01am
UPDATED : Monday, 08 October, 2018, 11:14am

Escalating trade tensions between the United States and China are likely to catch Hong Kong and its struggling shipping industry right in the middle, according to one of the city’s main port operators.

The US has placed tariffs on nearly half of all Chinese goods exported to the US and President Donald Trump has threatened to impose levies on nearly US$500 billion worth of annual exports as he seeks to pressure Beijing to stop what he claims are unfair trade practices. China has responded with its own retaliatory actions.

The latest round placed a 10 per cent tariff on some US$200 billion worth of goods, with the duties set to go to 25 per cent on January 1 if the US and China cannot reach a resolution.

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Peter Levesque, group managing director of Modern Terminals, said that shipments via Hong Kong between the US and China represent about 14 to 16 per cent of the city’s trade each year.

“If it goes to an all out US$500 billion there will be an impact,” Levesque told the South China Morning Post. “It’s just hard to identify the impact. A lot of it depends on how much importers in the US are willing to maintain status quo and simply pass on the increases to consumers.”

Modern Terminals owns and operates the Kwai Tsing Container Terminals in Kwai Chung. It also operates and holds a majority stake in the DaChan Bay Terminals in the Pearl River Delta, as well as equity stakes in the Shekou Container Terminals and Chiwan Container Terminal in the Greater Bay Area.

The company was founded in 1969 and opened Hong Kong’s first purpose-built container terminal in 1972. Majority owned by The Wharf (Holdings), the company employs about 930 people in Hong Kong, handling 5.2 million 20-foot shipping containers last year.

The tit-for-tat over trade comes as Hong Kong has seen declining volumes in shipments moving through the port, with total port cargo throughput decreasing by 3 per cent to 131.8 million tonnes in the first half of this year, according to the latest figures from the Census and Statistics Department.

Container traffic in Hong Kong was down 3.7 per cent, with the port handling the equivalent of 9.87 million 20-foot cargo containers in the first half of 2018, according to the report.

The Marine Department reported that monthly container throughput declined an estimated 4.3 per cent in August, the seventh straight month of volume declines this year.

The figures from the Census and Marine departments cover periods before the bulk of the US’s tariffs were put in place in late September.

Levesque was reluctant to attribute the decline in overall shipping volumes in Hong Kong directly to the trade war, noting that many of the categories of goods covered by the US tariffs imposed in July and in August were often transported by air freight, rather than sea.

He said that volume for Modern Terminals was up by about 2 per cent for the year and volumes were up in the June-to-August period over last year.

“As of right now, we have not seen a volume impact,” Levesque said. “But, there is a delay between when a purchase order is issued and when manufacturing happens. That gap is generally three to six months.”

In a report this month, the United Nations Conference on Trade and Development said that seaborne trade grew at its fastest pace in five years in 2017, with container trade up 6.4 per cent.

However, the UN group warned that the rise of trade protectionism could weigh on the industry’s outlook and the global economy.

Shipping industry stays on even keel, though tides could shift amid trade war

“Escalating trade frictions may lead to a trade war that could derail recovery, reshape global maritime trade patterns and dampen the outlook,” the report said. “Further, there are other factors driving uncertainty. Among others, these include the ongoing global energy transition, structural shifts in economies such as China, and shifts in global value chain development patterns.”

The trade war comes at a difficult time for the industry.

Several of the world’s largest shipping lines have struggled with profitability in recent quarters amid a consolidation push in the sector.

Shippers and port operators are looking to use technology to modernise an industry that still relies on paper and fax machines for its most important documents underlying shipments, such as bills of lading.

Levesque said that Modern Terminals – and the industry – wants to use automation, blockchain technologies and artificial intelligence to move its operations into the future by “streamlining those processes that are inefficient today, but at the same time applying those technologies so that we do the old things in new ways.”

Retraining older workers and attracting new ones is a major challenge for the industry as it seeks to modernise and deal with a large portion of its workforce approaching retirement, Levesque said.

About 6,000 to 7,000 people are directly employed within the Port of Hong Kong and close to 200,000 people work in some business tied to the port, he said.

“It’s a segment of the economy. If those jobs went away, they would be very difficult to replace,” Levesque said. “Really all you need to do is think about it differently and approach it from reinventing it with all the technology we have available to us.”

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In terms of the trade war, Levesque said he is optimistic the US and China will be able to reach a resolution. It may come down to US consumers, he said.

“The US consumer has not been impacted yet by these tariff increases,” Levesque said. “I don’t think you can underestimate the response from US consumers once they start to see these [price] increases.”

He said that it is possible the industry may see a rush of shipments ahead of the January 1 deadline for tariffs to increase to 25 per cent on US$200 billion of goods.

“There was definitely a rush by importers to clear customs” before the implementation of a 10 per cent levy on those goods in September, Levesque said.

Levesque said that officials at the Port of Los Angeles have told him that they are already having issues finding warehouse space because of the rush of shipments ahead of the implementation deadline.

“Regardless, I think Christmas is going to be more expensive,” Levesque said.