MAERSK has confirmed a severe decline in China-US trade volume, echoing comments from other carriers, but it said the shipping industry is managing the tariff-induced disruption well — at least so far.

“China-US volumes dropped 30%-40% in April,” said Maersk chief executive Vincent Clerc during a conference call with analysts on Thursday.

The good news for Maersk is that China-US trade represents just 5% of its global volumes, and the remaining 95% is still healthy.

“The uncertainty so far has been very US-centric rather than global,” Clerc said. Outside the US, volume is growing at around 4%.

“As long as this is the case, it offers some significant offsetting opportunities in other geographies, such as emerging markets and intra-regional trades, where demand continues to be robust.”

Carriers cut capacity and maintain rate discipline

Carriers have adjusted to the China-US drop-off by reducing capacity. Outside of the Gemini alliance, Clerc said, 20%-22% of transpacific capacity has been blanked.

Gemini members Maersk and Hapag-Lloyd have done it differently, not by blanking but by swapping out larger ships for smaller ones, reducing their capacity in the transpacific by 20%-21%. “You swap an 8,000 teu ship with a 6,000 teu ship and put the 8,000 teu ship in another trade where there is better demand, and you get better asset utilisation,” he explained.

Capacity management has kept rates stable despite the tariff-induced cargo plunge.

“Freight rates have been decreasing sequentially for three quarters in a row, from July through March, but in the past six weeks, rates have been the most stable they’ve been in the last few years,” Clerc said.

“We are seeing pricing discipline across the industry. If you look at the back end of Covid in 2023, we finished the year with a very difficult quarter. Prices hit the floor before they rebounded. In this case, prices didn’t hit the floor. They actually normalised at a level that is sustainable, and they have been stable.

“I cannot provide any guarantee for the rest of the year, but we are seeing much more responsible pricing behaviour this time around than we did last time.”

Importers have no ‘Plan B’ if China tariffs are ‘entrenched’

Not surprisingly, analysts peppered Clerc with questions on how his US customers were handling the disruption.

The 30%-40% drop in April “was the customers reacting very, very fast to cancel orders and stop orders as they waited to see if this was going to resolve itself”, he said.

“What is important to realise is that for some products, there is some make-up capacity to source the goods elsewhere. But there are also certain products where this is either non-existent or fairly limited, and there is a strong dependency on getting these goods from China.

“If there is a de-escalation, there would be a catch-up effect, and we would see much stronger demand out of China. The second possibility, of course, is that things get entrenched.

“If it does get entrenched, I don’t think our customers, at this stage, have a good playbook. I’ve talked to 20 or 30 of our top customers, and there is not a good view of what they would do if this gets entrenched.”

US importers scrambling to hoard inventory

“What is happening as the volume is not moving [from China] is basically our customers are drawing on inventory and trying to wait and see what is going to happen for as long as possible.

“Not only are they drawing on their own inventories in the US, but also from inventories they have in Canada and Mexico, because if you deplete you inventories in Canada and Mexico, it’s easier to replenish those.

“They’re also drawing on distributors and other vendors of the products and the parts they need inside they US,” he continued. Those suppliers “may be willing to sell it to you for something that is much more advantageous than having to pay to bring it in from China”.

“So, all this haggling is happening in the US. There is a race to get their hands on as much inventory as possible. They’re looking to get the inventory based on the SKUs [stock keeping units] they’re most concerned with — because you want to be last one that runs into a problem with that SKU.”

When will US inventories run dry?

Predicting when US inventories could run dry is very difficult, he said, “because not all companies are running out of all SKUs at the same time”.

“For some, especially in industrials and automotive, and with restrictions on rare earth and semiconductors, it’s going to bite fairly soon. For retail and certain other things, it may take longer for it to really be meaningful.

“Pictures of empty shelves at big box retailers in the US may not be right around the corner, but let’s be clear: if we don’t get something done before the summer, it’s going to start to hurt quite a lot across the board, because there are certain commodities and things where you can’t substitute imports freely, both in terms of SKU and quantity.”

In some cases, there are alternatives in other countries, which could redirect cargo flows. “You do have alternative sourcing for garments, footwear and some commodities. You can go to Guatemala, Bangladesh or Indonesia,” said Clerc.

In other cases, US importers may have no choice but to order in China and pay the tariff. “There are certain things where you might have to just pay for it, because there is no alternative to China. And this will eventually lead to inflation for the US consumer.”

Commenting on the upcoming meeting between US and China trade representatives, Clerc said: “Maybe that’s the first step towards de-escalation. That’s a process that will take some time, but there is a scenario where you could see a type of retreat to something that’s more bearable to the US economy.”

Alternatively, there could be “a hardening of the stance in the coming weeks, which, in my book, would increase the risk of a recession in the US. Because, ultimately, given the lack of alternatives to China, both in terms of scale and breath, you will have to pass this on to consumers.”