Fading prosperity and global shipping surplus pose challenges

Bryan Chuang, Taipei; Vyra Wu, DIGITIMES Asia 0


According to the Taiwan Institute of Economic Research (TIER), the Purchasing Managers' Index (PMI) for the manufacturing sector in the United States has shown three consecutive months of improvement, and China's manufacturing PMI returned to the expansion zone in September, indicating positive signs for manufacturing activities.

Nonetheless, Evergreen Marine, Taiwan's leading shipping company, anticipates that the economic growth driving the goods trade momentum has diminished, and the oversupply of global shipping capacity in 2024 is unlikely to change. Geopolitical conflicts in the Middle East could lead to an upswing in international oil prices, raising concerns about the global economic outlook since the shipping industry is highly sensitive to oil price fluctuations.

As per TIER's analysis and observations, the semiconductor supply chain continues to deplete its inventory, and the electronic components industry is witnessing a revival in capacity utilization. Demand for computer, electronic, and optical products has been lackluster, with dwindling orders for products such as laptops, smartphones, and network communication devices. However, there is growth in orders for servers and graphics cards.

Looking at recent international economic developments, the United States has demonstrated robust economic data, surpassing market expectations in industrial production and retail sales in September. Although the manufacturing sector in the United States remains below the critical 50-point threshold, it has been on an upward trajectory for three consecutive months. In the Eurozone, the International Monetary Fund (IMF) forecasts a mere 0.7% economic growth rate for 2023. The ever-shifting and uncertain geopolitical landscape in the Middle East poses the risk of significant oil price fluctuations.

Fortunes of manufacturing and shipping tied together

Evergreen Marine noted that the fortunes of the shipping industry are closely tied to the manufacturing sector. Evergreen heavily relies on the United States and European routes. In 2024, there is a growing trend of diversifying goods due to the "China plus one" strategy. For instance, increased investment in Mexico is boosting local cargo demand. Due to worsening supply-demand conditions on European routes, container shipping rates have fallen to just over US$800 per TEU, a level that doesn't cover the variable costs of shipping companies. An essential indicator to monitor in the future is the stabilization of the Eurozone's PMI. China's cargo volume has yet to recover from the shadow of its zero-COVID policy, and declining demand from European and American markets has kept China's PMI below the growth threshold for five consecutive months. Furthermore, China's weakening real estate market is affecting import demand.

For the shipping industry, the fourth quarter of 2023 is expected to see lower cargo volumes compared to the third quarter. Even with the demand from Thanksgiving and Christmas, it won't be sufficient to reverse the overall trend. Based on the shipping industry's experience, a 3% economic growth can typically drive a 6% increase in cargo volume, but this is no longer the case. As an example, based on the IMF's 2024 global economic growth forecast of 3%, cargo volume can only grow by 2.2%. The oversupply of global shipping capacity is likely to persist in 2024.

TIER highlights that due to various global political and economic uncertainties, weak demand in European and American markets, and China's economic and production demand falling short of expectations after its reopening, industries mainly associated with exports have exhibited weak performance. However, the resurgence in demand for specific end products varies, resulting in differing monthly revenue growth rates among semiconductor manufacturers. While over 20% of electronic machinery companies are optimistic about the monthly economic performance, more than 40% of electronic machinery manufacturers hold a pessimistic view of the monthly economic performance.