No trade is an island
Latin America’s growth is attractive, but carriers to the region face potential for overcapacity.
In January, U.S. Commerce Secretary Penny Pritzker announced the government’s “Look South” Initiative focused on increasing U.S. trade with 11 Latin American economies with which the United States has free trade agreements: Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, and Peru.
The Commerce Department’s interest in promoting trade with Latin America comes as many shipping companies are also focusing on enhancing their services to the region
“These markets are fertile ground for more U.S. exports: Tariffs are low, if they exist at all,” Pritzker said in a statement. “Many of these countries are developing high standards in areas such as intellectual property protection, customs procedures, and openness in government procurement. Most importantly: Businesses, governments, and consumers in these countries want the high-quality goods and services that our companies offer. These considerations are vitally important to U.S. firms looking to do business abroad.”
Pritzker added that trade with Latin America would further benefit if the Trans Pacific Partnership (TPP) trade agreement is implemented. The United States, Chile, Peru and Mexico are part of TPP.
The World Bank said the economic outlook is “fairly upbeat” for Latin America and the Caribbean with growth strengthening from 2.5 percent last year to 2.9 percent in 2014. While that’s lower than the bank’s projection for global growth of 3.2 percent, it does forecast economic growth in the region climbing to 3.2 percent in 2015 and 3.7 percent in 2016.
However, the World Bank offers this caveat: a continued decline in commodity prices threatens to reduce export revenues from the region this year and capital flows to Latin America are projected to decline by 3.7 percent in 2014 as a result of the U.S. Federal Reserve tapering its quantitative easing.
Ben Hanslip, an analyst with Clarksons, cautioned “while North-South box trade is expected to remain a source of strong volume growth over the coming years, supported by demand from the developing economies of Africa and Latin America, the health of freight on these trade lanes is unlikely to be isolated from the supply dynamics of the industry as a whole.”
Latin Attraction. Carriers expanding in the region include Maersk Line, which announced in January that it would revive the SeaLand brand for intra-America container services.
Initially Maersk said it would deploy about 30 ships with 22 devoted to feedering cargo from Maersk and other carriers and eight operating in two commercial services between the United States and ports in both the Caribbean and Central America.
Since then, Maersk announced the startup of a new service between the United States, Jamaica, Panama, Colombia, Peru, and Chile.
Germany’s Hapag-Lloyd and the Chilean container carrier CSAV agreed in April to merge and form the fourth largest container shipping company in the world.
Oscar Hasbún, CSAV’s chief executive officer, said the combination with Latin America’s leading container shipping line “considerably strengthens Hapag-Lloyd in this growth market and adds a strong position in the North-South traffic to the company’s global network and to its established strength in East-West traffics.”
By acquiring CSAV, Hapag-Lloyd’s container business linked to Latin America is expected to increase from 1.2 million TEUs to 2.6 million TEUs, according to a CSAV presentation.
Their decision to combine came after Hapag-Lloyd and Hamburg-Süd, another powerful player in the Latin America trades, could not agree on terms for a possible merger.
Big Ships. Hasbún noted CSAV has seven vessels, each with capacities of 9,300 TEUs, scheduled for delivery in 2014 and 2015 that are specially designed for the South American trade.
“The use of optimum tonnage in the trades is one of the key prerequisites for successful operations in the face of international competition,” Hasbún said.
Hamburg Süd has also been upgrading its fleet with new ships, adding the first four of a series of 9,600-TEU “Cap San” newbuilds in 2013. Those are the largest ships in the Hamburg Süd Group and with 2,100 refrigerated container slots on board are the world’s largest reefer capacity vessels, the company said.
The vessels will be introduced into the services between Asia or Europe and South America’s east coast. The Hamburg Süd subsidiary Aliança also introduced four 3,800-TEU ships in a Brazilian cabotage service that it said well be more cost efficient than older ships with similar capacities that it’s replacing.
Beltran Felipe Urenda Salamanca, chairman of Chile’s other large shipping company, CCNI, has raised the possibility of deeper cooperation with other shipping companies.
Writing in CCNI's annual report, he noted that difficult conditions in the industry “have revived the process of consolidations, as well as the creation of strategic alliances much deeper in coverage than the traditional ones, even among the main players."
He said the P3 Network of Maersk, Mediterranean Shipping Co. and CMA CGM was the start of this new trend, and Hapag-Lloyd's merger with CSAV "will probably cause the disappearance of another local player in regular lines.”
“Therefore, the company does not rule out the possibility of deepening cooperation agreements with other players in order to achieve greater stability, both in fleet and in service coverage. Moreover, agreements with other shippers are part of the culture of CCNI, so the adjustments required to implement such partnerships are not alien to our practices,” the carrier’s chairman wrote.
Like CSAV and Hamburg Süd, CCNI and its parent company Empresas Navieras Group (GEN) are investing in bigger ships, including four 9,000-TEU ships at a cost of $340 million, a step the company believes will allow it to substantially improve its position as a major player in the Latin American trades.
In April, APL, MOL and Hyundai filed a vessel-sharing agreement to operate a joint string between the U.S. East Coast and Chile, Peru, Colombia and Panama, and in May, Saltchuk Resources acquired Tropical Shipping, a container carrier that specializes in moving freight between the United States, Canada and the islands in the Caribbean as well as the Bahamas.
Rate Watch. Whether the optimism of these companies about Latin American and Caribbean trade will be justified remains to be seen.
Dirk Visser senior shipping consultant at Dynamar, said freight rates on services to and from Latin America are likely to be depressed this year, largely as a result of ships in the 5,000-8,000 TEU range being cascaded into the trade.
He also said trade in the region is “always growing slower than anybody expected.”
Clarkson’s Hanslip wrote the Far East-Latin America trade is estimated to have grown by just 0.5 percent last year to 4.1 million TEUs as Brazilian economic growth remained limited. That’s much lower than other North-South trades in other parts of the world. For example, growth in the Far East-Africa trade reached 7.2 percent to 3.7 million TEUs last year and the Far East-Oceania trade registered 9.6 percent expansion to 2 million TEUs supported by a robust Australian economy during the same period.
“The Far East-Latin America trade provides an example of the powerful effects of cascading,” Hanslip said. In 2013, through September, Clarkson stated “capacity deployed on the Far East-Latin America trade increased by 22 percent as the number of 8,000-plus TEU ships deployed on the trade rose from less than 30 to more than 50, raising the average vessel size by 13 percent to over 5,700 TEUs. Over the same period, spot freight rates on the route fell by 70 percent to just $676 per TEU, the lowest level since July 2009.”
While Shanghai-Santos rates in the Shanghai Containerized Freight Index (SCFI) rebounded last fall to over $1,300 per TEU, they fell to $677 per TEU on May 9 of this year.
Hanslip noted at the start of March 2014, 82 percent of containership capacity on order were sized at 8,000-plus TEUs, including 151 units in the 8,000 TEU-to-11,999 TEU range and 111 ships of 12,000-plus TEUs. “Over the coming years, a delivery schedule that is heavily skewed towards the larger sizes will likely drive continuing cascading onto and upsizing on North-South routes,” he said.
Those ships are too large to pass through the Panama Canal until the new set of locks open.
London-based shipping consultants Drewry said the outlook for Panamax-size ships is not so rosy. There are 58 ships with capacities of 4,000-5,000 TEUs that operate between North America’s east coast and the west coast of South America, and “many of which need to be replaced by larger vessels. Ocean carriers desperately need more economies of scale than are available with Panamax ships to turn losses into profit,” the firm said.
Drewry predicts that when the new Panama Canal locks come on line at the end of 2015, it is “likely to lead to a massive surplus of Panamax container vessels between 4,000 TEUs and 4,999 TEUs, many of which will have to be scrapped regardless of age. It will also be further bad news for North-South trades not using the canal.”
Optimistic. John Abisch, non-vessel-operating common carrier Ecu Line’s regional chief executive officer for the United States, Central America and the Caribbean, and president of its Miami-based Econcaribe unit, said “typically the rates to and from the U.S. are a little bit more stable than the rates from Asia into Latin America. But with that said the rates from the U.S. are lower today than they were a year or two ago.”
The NVO executive doesn’t expect the merger of Hapag-Lloyd and CSAV to have much of an impact on the trade, “especially since it’s not a market where there are only four carriers and two of them are merging. There are a lot of options and if the two of them cooperate more strongly, I don’t think will have a significant impact in the market.”
The new APL/MOL/Hyundai direct service “is an interesting development,” Abisch said. “There is faster service than there has been in many years and it looks like they’re all anxious to get their share of it, so they’re certainly very rate competitive right now, from the U.S. East Coast into the west coast of South America.”
“In general, it seems like the level of cooperation between the carriers continues to get bigger and better,” he added. “The fact that competitors can cooperate and utilize their assets jointly for mutual benefit makes a lot of sense.
“I think that trend is here to stay and hopefully a lot of those carriers figure out there’s enough room for everyone to live if they don’t have to kill each other. It’s not a zero-sum game,” he said. “They can sort of cooperate and utilize assets to make it more efficient and potentially more profitable for all the parties involved.”
Abisch said Maersk’s move to create the SeaLand unit completely focused on the trade lanes in Latin America and the Caribbean “makes a lot of sense—it seems like they’re getting the best of both world’s with being small and mean and lean from a management perspective and still having the backing of the Maersk infrastructure.”
While Ecu-Line is a global NVO, the roots of Econocaribe are in the Caribbean. Abisch said he views the purchase of Tropical by Saltchuk positively, noting as long-time participants in the Alaska and Puerto Rico trades, Saltchuk “understands short-sea shipping where you have three, four day transits.”
Abisch explained that many companies seeking to do business in Latin America, particularly in fast-growing markets such as Brazil, “have been surprised and maybe even disappointed to find out it’s a very complicated place to do business and there’s different rules and regulations and things are done differently.
“People that were really very good at moving cargo between the U.S. and Europe entered Latin America with probably not a full understanding of all the idiosyncrasies of doing business in Latin America and I think a lot of them have gotten turned off very quickly,” he said. “It’s a little harder to collect your money and there are a lot of rules with the government and with customs and with delays that you don’t experience in Europe on nearly the same way.”
Abisch also noted there are major differences between Latin American countries. Cargo does not clear quickly in Brazil or Argentina, while “Chile has always been the most efficient market in the region and it continues to be. I think Peru and Colombia have gotten better, but it’s certainly still very different than shipping something to Antwerp or Hamburg,” he said.
This article was published in the June 2014 issue of American Shipper.