The U.S. stock selloff is accelerating as American and Chinese tariffs, retaliatory tariffs, and counter-retaliatory tariffs continue to pile up – with seemingly no end in sight.
The latest round of Chinese tariffs covers $60 billion in U.S. products, beginning June 1, according to China's Ministry of Finance. The new tariff structure increases previously announced levies. The finance ministry released four lists, showing the Harmonized Commodity Description System Codes (HS Codes) of all U.S. products that will be subject to tariffs of 5 percent, 10 percent, 20 percent, and 25 percent.
As previously reported by FreightWaves, the most visible impact on ocean shipping to date of U.S.-China trade tensions is the reduction and rerouting U.S. soybean exports. China's 25 percent tariff on U.S. soybeans remains in place, and the updated list for the top tier of tariffs is peppered with U.S. agricultural products.
A major change on China's new list is that the 10 percent tariff on imports of U.S. liquefied natural gas (LNG) imposed in September 2018 is now being hiked to 25 percent.
The LNG tariff jump seems more about sending a message than altering trade flows. China is the world's largest LNG buyer and the U.S. is one of the world's largest sellers, yet China accounted for only 15 percent of U.S. LNG export sales in 2017. Since China's 10 percent tariff implementation in September, China's market share of U.S. exports has dropped to only 4 percent – in other words, there's not much volume left to lose.
"If global trade is ‘going to the mattresses,' cyclical upside in some segments, such as tankers, could be capped, while more challenged sectors, i.e., dry bulk, could come under further pressure."
Jon Chappell, analyst, Evercore ISI
Also notable on the new list is that China has yet again declined to include U.S. crude oil. Chinese importers ceased most of their buying of U.S. crude starting in August 2018, despite the absence of a tariff. Future Chinese buying has the potential to dramatically increase demand for U.S. crude exports, rendering this trade an important bargaining chip.
According to Jon Chappell, shipping analyst at New York-based investment bank Evercore ISI, "Beyond the potential impact [of tariffs] on demand and China's economic health, neither of which is favorable, the sentiment and uncertainty surrounding this issue are detrimental to shipping equity values."
Chappel noted, "If the recent events step up the sense of urgency and lead to an eventual resolution, shipping stocks could see a sizeable relief rally. But if global trade is ‘going to the mattresses,' cyclical upside in some segments, such as tankers, could be capped, while more challenged sectors, i.e., dry bulk, could come under further pressure."
Ocean shipping stocks are particularly vulnerable to U.S.-China trade tensions, because the shipments between the two countries require one of the longest voyages in world trade.
Ocean shipping demand is measured in ton-miles (volume times distance), not tons, so a decline in long-haul U.S-China trade – to the extent it's not replaced by other U.S.-Asia trade – has an outsized negative effect on vessel demand and spot employment rates.
The latest tariff-induced slide for shipping stocks ensued after U.S. President Donald Trump's tweets on Sunday, May 5, which culminated in the U.S. tariff increase on May 10 and China's retaliation on May 13.
Most shipping stocks are down by mid-single digits since those tweets – except for dry bulk stocks, many of which are down by double-digits. These equities are often seen as a proxy for Chinese economic strength, implying that investors are viewing trade-war escalation as a risk to that country's growth story, and thus, China's future demand for the kind of raw materials transported aboard bulkers.
Between market close on Friday, May 3 and market close on Monday, May 13, the stock price of dry bulk owner Navios Holdings (NYSE: NM) declined by 34 percent; Genco Shipping & Trading (NYSE: GNK) declined 17 percent; Scorpio Bulkers (NYSE: SALT) declined by 16 percent; Safe Bulkers (NYSE: SB) declined by 14 percent; and Golden Ocean (NASDAQ: GOGL) and Star Bulk (NASDAQ: SBLK) both declined by 13 percent.
The post Shipping caught in crossfire as trade dispute escalates appeared first on FreightWaves.
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