with Walter Kemmsies
It’s clear that U.S. economic activity is picking up, which is good news for the freight movement industry since this means growing volumes, but the pattern in terms of import and export flows is likely to shift a lot since recovery also impacts the value of the U.S. dollar relative to other currencies.
In the near term, imports could become cheaper while exports become less competitive. Furthermore the way exports are shipped could be impacted. Longer term the supply chain for U.S. exports needs to consider how it will remain competitive if the dollar continues to strengthen.
Interest, Commodity Trends.
Generally speaking, when an economy is gaining strength relative to foreign economies, inflation is relatively low and interest rates are rising, its currency tends to gain value against other currencies. These days the U.S. economy is growing while Europe struggles with recession, major Asian economies like China and India have had slower growth, and Latin America is trying to avoid recession.
Recovery in the United States, as weak as it has been, is evident in higher employment, retail sales and manufacturing activity. Some of this was due to increased agricultural, energy and capital goods production for exports. Actions by the Federal Reserve, such as pushing interest rates down to help make home and car purchases more affordable, may have also helped.
Currency markets also seem to agree with the bond market. The U.S. dollar has gained against the euro and other currencies. Given the European Central Bank (the Fed’s equivalent in Europe) has announced it is likely to lower interest rates further to help economic recovery, it seems that the dollar will likely continue to gain against the euro. Until the rest of the world economy begins to accelerate, the trends in suggests the dollar’s value will strengthen.
Commodities have had quite a run since 2001. Energy, industrial metals, forest products and agricultural goods are all trading at much higher prices in the last several years compared to the period around 2001. There were two main trends underlying this increase in prices.
Even before formally joining the World Trade Organization in 2001, China had embarked on a long-term trend of increasing investment in infrastructure. This trend gained momentum as China’s exports increased. For many commodities, over half the growth in world demand since 2001 has come from China.
Commodity prices have risen at least in part because of higher demand from China. Given that China is now slowing its investment in infrastructure, prices of many industrial commodities, like metals, are unlikely to rise in the near term. This has been the essence of the message that mining companies executives have given recently.
The second main reason for higher commodity prices has to do with the U.S. dollar having lost value against other currencies between 2001 and 2011. World trade in commodities is generally conducted in U.S. dollars. As the U.S. dollar loses value, prices of commodities decline for other countries. For example, if oil is priced at $100 per barrel and the euro gains 10 percent against the dollar, then the price of oil in Eurozone countries declines by 10 percent if oil is still trading at $100 per barrel. The law of demand says as the price of a good falls, the quantity demanded increases. Higher demand from non-U.S. dollar countries will push the price, quoted in dollars, up until the market reaches equilibrium. This process also works in reverse. As the dollar has gained value, many commodity prices have declined. Metals prices, such as copper and gold, have fallen. Oil prices should also drop, however that will likely depend on whether the political tensions in the Middle East begin to abate.
With slower demand growth from China and a strengthening dollar, it is unlikely commodity prices will return to the high levels they reached during the 2008-2010 period. Agricultural products are a possible exception given the rising emerging market’s middle class underlies the growing demand for food, while global food production does not seem to be increasing as quickly.
U.S. Freight Volume Impacts.
As the United States continues to recover and the rest of the world economy struggles along, it is likely imports will grow faster than exports. A stronger dollar supports this trend since imports become cheaper for U.S. residents while export prices go up for foreign consumers.
A stronger dollar may also impact the way exports are handled. U.S. exports have increased substantially since 2008, led by bulk commodities. Prices for many goods, such as grains and oilseeds, rose, while container freight rates declined. It is not surprising then that the proportion of U.S. bulk exports shipped in containers increased. If container rates stay where they are now or increase in the near term while the U.S. dollar strengthens, then the proportion of bulk exports shipped in containers may decline.
Over the longer term, if the U.S. dollar continues to strengthen, then exporters will have to lower their costs to compete for a share of world demand. The freight movement industry is a critical element in that regard. U.S. shippers and transportation service providers would do well to look North to see how Canada has managed to continue increasing its bulk exports despite the Canadian dollar having appreciated substantially over the last decade.
Kemmsies is chief economist at Moffatt & Nichol, a marine infrastructure engineering firm. He can be reached at (212) 768-7454 or by email.