The freight forwarders hogged the limelight in October, starting with UPS’s resurgence in U.S. inbound volumes. Panalpina and DSV both confirmed their interest in further acquisitions as the sector continues to consolidate – our analysis shows tie-ups with Asian operators makes most sense. The start of their results season saw DSV beat expectations for a fifth quarter, while Panalpina continued to struggle. In trade policy the landmarks were a disastrous fourth round of NAFTA talks – which led to an extension to the negotiation process – and the more orderly confirmation of another five years in office for President Xi of China. The President faces a full card of trade deals to negotiate in order to reignite Chinese export growth. President Trump meanwhile backed away from his “terminate” stance towards NAFTA, or did he? Among trade exposed industries exporters of washing machines were put through the wringer, while Tesla sought to break (or at least stretch) the mold with a new factory in Shanghai. Finally our overview of what to watch in trade in 4Q provided eight major items that could be resolved by year end.

#1 UPS heads up, Expeditors loses share and deals are debated (Oct 10) U.S.-inbound volumes handled by NVOCCs climbed 5% on a year earlier, led by Asian traffic. Expeditors lagged with growth of just 3%, while UPS surged ahead by 32%. That placed it third, just ahead of Deutsche-Post DHL. Both DSV and Panalpina are considering acquisitions (more on that later) – our analysis of 2,400 country-carrier pairs shows a tie up with Honour Lane, Kerry or Orient Express could help build stronger global platforms.

CLICK CHART FOR HIGH RESOLUTION VERSION. Chart shows ranking among NVOCCs over the past three months by country of origin to the U.S. in number of shipments. Dark blue indicates higher rank  Source: Panjiva

#2 13% Import-Export spread predicts wider deficit (Oct 25) Container handling at the top eight ports in the U.S. tracked by Panjiva indicate import growth of 8.8% in September outpaced a 4.5% drop in exports. Only Puget Sound was an outlier in that regard. The gap would suggest there is room for an 11th straight increase in the trade deficit, subject to price moves (which also support a wider deficit) and other transportation modes (which have yet to be reported). Incidentally, government data the following day confirmed the deficit widening.

#3 Panalpina’s deal hunger, ready for “major takeovers” (Oct 4) Panalpina’s Chairman, Peter Ulber, stated the firm is ready for “major takeovers”. That followed a series of weak earnings reports (later in the month it reported an 11th straight miss) and a loss of market share on U.S. inbound traffic. Our analysis indicates a tie-up with an Asian partner on China inbound routes would be a good fit, though most of the local forwarders already have major shareholders who may not be willing sellers.

#4 DSV beat K+N and Panalpina, confidence for acquisitions remains (Oct 26) DSV appears to have been the best performing of the forwarders in the third quarter (among those reporting so far) with an increase in its profitability to 8% from 7% a year earlier on an EBITDA basis. Management also reiterated their confidence in its ability to make acquisitions in the 1 billion euros ($1.3 billion) territory, though debt financing should not be taken for granted.

Chart compares EBITDA margin (earnings before interest, tax, depreciation and amortization divided by revenues) across the freight forwarders’ sector. Kuehne+Nagel shown inclusive of collected duties. Freight forwarders group includes CH Robins, DSV, Expeditors, K+N, Nippon Express and Panalpina. 3Q17 figures including analysts’ estimates gathered by Bloomberg at 10/16/2017. Source: Panjiva

#5 NAFTA delay a good idea, for the wrong reason (Oct 18) The fourth round of NAFTA talks went badly. The extension of negotiations into 2018 reflects a realism about the gulf in positions between the three parties. The U.S. remains fixated on cutting the deficit, while Canada and Mexico are unwilling to accept rules-of-origin and dispute settlement proposals. Ultimately though none can afford to leave – Mexico and Canada ship 75% and 80% of their exports to the U.S., and the U.S. sends 42% of its exports in return.

#6 Wrapping up a year of radical change (October 3) Our preview of global trade issues to watch in the fourth quarter include: NAFTA negotiations; America’s review of China’s intellectual property rights; KORUS negotiations; U.S. trade cases in steel, aluminum, jets, lumber, washing machines and solar panels; RCEP, TPP, EPA and others all need locking down; falling, and now rising, container rates; freight forwarder and carrier consolidation; and supply chain resilience. Phew!

#7 Tesla tests the mold in Shanghai (Oct 23) Automaker Tesla is seeking to build a factory in China without a local partner. Such a factory in Shanghai’s FTZ would be a first, but would still attract 25% tariffs when vehicles leave the FTZ. China is one of Tesla’s fastest growing markets, with 22% growth sequentially in 3Q vs. 2Q and $432 million of imports.

Chart compares Tesla Beijing’s imports (blue, most recent quarter to August 31)) to Tesla group global revenues (orange). Calculations include Tesla financial data. Most recent quarter based on forecasts gathered from Bloomberg on October 23. Source: Panjiva

#8 Another spin of the washer strategy for Samsung (Oct 6) The U.S. ITC determined that U.S. industry has been harmed by washing machine imports, and will assess policy proposals for President Trump through early December. The President will then be able to decide whether to apply tariffs or quotas. U.S. imports climbed 53% in the third quarter on a year earlier as shippers including Samsung Electronics and LG Electronics rush to get in the door. Both are already moving production to the U.S. though.

#9 “Terminate” no more, maybe (Oct 25) President Trump has stated that if NAFTA talks “don’t turn out, we’ll have to do a new NAFTA”. That’s a marked difference from prior threats to “terminate” the deal if acceptable terms cannot be reached. It is important not to read too much into this as the President’s tone regarding the talks has shifted before. One issue to consider is the seasonality of the trade deficit with Mexico, which has been the President’s central problem with NAFTA and could peak at over $7 billion in October.

#10 Xi takes the five year view, and beyond (Oct 13) China’s five yearly National Congress of the Communist Party delivered few surprises from a leadership perspective, with President Xi securing a five year, or possibly longer, term in office. The President now faces a long list of trade deals and updated relations to negotiate in a quest to ensure continued export growth, which only improved by 2% annually in the past five years.

Chart shows five year, compound annual growth rate (left and axis) updated on a monthly basis vs. total trade over prior 12 months (right hand axis). Red lines indicate five yearly anniversaries. Calculations include China General Customs Administration data Source: Panjiva