United States expects to bolster trade with South America, hastening liner carrier service changes.
By Chris Dupin
In the past month, the Obama administration has been drawing renewed attention to the importance of trade between the United States and Latin America.
In early May, the president visited both Mexico and Costa Rica, and at the end of the month, Vice President Joe Biden was scheduled to visit Brazil, Colombia, and Trinidad and Tobago. The presidents of Chile and Peru were expected to visit the White House in June.
An article in Time magazine last month suggested that this “south-of-the-border schmoozing” was a belated recognition that “many of the region’s economies are strong enough global players now to be useful to the U.S.” when competing with China for trade and financial power.
China has become an increasingly important trading partner with Latin American countries.
“I think Latin America over the past five to 10 years has shifted very heavily from being European-centric to being much more looking toward Asia. They have not stopped looking at Europe, of course, but they have rebalanced a lot of their trade,” said Mathieu Floreani, chief executive officer for the Americas at DHL Global Forwarding.
Over the past 10 years, trade between some South American countries and Asia has increased five- or 10-fold, and Floreani believes “the trend is not yet completely finished for some of these countries. For example, I think Peru and Colombia will continue to increase their share with Asia. These economies are booming because of mining, oil and gas.”
While trade with Latin America may slow a bit this year or next, he says the “underlying trend will be good” saying that imports of fast moving consumer goods and electronics, for example, will continue to increase.
American Quarterly, published by the Americas Society and Council of Americas, this spring took a look at how trade developed among six leading South American countries — Brazil, Argentina, Chile, Colombia, Mexico and Peru — between 1996 to 2011.
In 1996, the United States was the No. 1 or 2 importer and exporter from all six of those nations. China was not a big trader with any, save Peru, where it purchased 5 percent of the country’s exports. By 2011, the United States was still one of the five largest trading partners with each of those countries, but China had become a top five trader with all six, sometimes even besting the United States as an importer or exporter.
Accompanying this growth in trade is a large increase in capacity on container services between Asia and South America.
BlueWater Reporting said between January 2008 and early May, the number of vessels in the Asia-to-South America east coast trade grew from 61 to 83 and the estimated weekly allocated TEUs in the trade increased from 17,382 TEUs to 32,481 TEUs. In the Asia-to-South America west coast trade, the number of vessels increased from 66 to 76 and the estimated weekly allocated TEUs jumped from 8,220 TEUs to 19,194 TEUs.
Hamburg Süd plans to deploy 10 ships, each with a capacity of 9,600 TEUs and six of them owned by the German liner, in the Asia-South America east coast trade through 2014. CSAV said in April it’s ordering seven 9,300-TEU ships from Samsung Heavy Industries.
Spot rates in the Asia-to-South America east coast trade have fallen 40 percent since the first of the year, said Lars Jensen, chief executive officer of SeaIntel Maritime Analysis. Despite that, carriers were expected to increase capacity another 20 percent in May and June, he added.
“That’s an increase in capacity that we certainly don’t see being matched by an increase in demand,” Jensen said. “Upgrading to the 7,000- to 9,000-TEU range seems to be all the rage.
“On the surface, that doesn’t add up,” he noted. “We see it’s partly a matter of restructuring services but also cascading of larger vessels into the trade as carriers are looking to transfer out vessels from the troublesome Asia-Europe trade as well as the transpacific.”
In mid-May, it was announced that CSAV, China Shipping, CMA CGM, Hamburg Süd, Hanjin and Maersk Line will restructure their services between the Far East and South America east coast by launching three new joint services to replace four existing strings. In addition, CCNI and Hapag-Lloyd will participate in the services.
While Jensen said his calculations show the larger ships will result in increased capacity, CSAV told American Shipper “the restructuring of the Asia-east coast South America services from four to three strings will not increase capacity.”
Most liner services between Asia to the South American east coast sail via the Indian Ocean and Cape of Good Hope, while those to South America’s west coast are transpacific strings. Jensen sees that continuing, even after the Panama Canal opens, adding the westward routes from Asia to Brazil are shorter and eliminate canal tolls.
In recent years, the Chilean carrier CSAV has sharpened its focus on trades that are Latin America-related as well as some other emerging markets. From the United States, it has services from both the U.S. East and Gulf coasts to both the east and west coast of South America.
Andrés Kulka, commercial senior vice president at CSAV, said the firm expects those trades to grow “and we want to grow at these same rates.
“In general, what we plan to do is to grow according to the market. We are not in the battle for market share,” he said.
Each of the trades between the United States and Latin America has its own characteristics, said Kulka, but “the trade that has the biggest imbalance situation is the one between the East Coast of the U.S. and the east coast of South America.”
Tom Pirie, vice president of trade management at Hamburg Süd, whose company operates a joint service with CSAV on that trade lane, agreed with Kulka’s assessment, saying the trade has “not been as strong as we had anticipated. There is more capacity than the trade requires.”
He also said the trade has not yet seen the anticipated uptick in volumes that some are expecting to result from Brazil hosting the World Cup next year and the Olympics in 2016.
Rates in the trade “have been under pressure for years. We’re seeing all-time lows on the exports from the U.S to Brazil. Frankly they’re at unsustainable levels. Something’s going to have to give in the east coast South America trade because you can’t run this level of service at the level of rates that we’re being compensated at,” Pirie said.
Over a longer time frame, the outlook may be brighter.
Latin America’s largest economy is Brazil. It has a population of about 201 million, the fifth largest in the world, and a GDP of about $2.5 billion, one that has grown about five-fold in the past decade, according to Ambassador Luiz Felipe de Seixas Corrêa, the New York-based consul general for Brazil.
“Businesses are increasingly aware of the opportunity for doing business in and investing in Brazil,” he said, noting in the past decade an additional 40 million of his countrymen have seen their standard of living rise above the poverty line and another 20 million from extreme poverty to poverty.
“This has created an enormous boom in the consumer market in Brazil,” he said. “We are now feeling a little bit of those effects by the rise in the inflation rate.”
As to the future of trade from Brazil, Seixas Corrêa said “a lot will depend on global trade negotiations.”
He explained that unlike many developing countries whose trade is linked to a single region, Brazil’s trade is balanced with trade being more or less equally divided with the United States, other Latin American countries, Europe, and Asia.
“We are much more in favor of global trade agreements than individual agreements,” he added.
“For Brazil, the important thing would be to liberalize agriculture, which is a stumbling block. Agriculture today is not like in the past where people would grow coffee beans and ship coffee beans. Today agriculture trade is also very industrialized. It involves infrastructure, services, shipping on a large scale and we have to eliminate distortions that still exist in the U.S. and Europe,” he explained.
Seixas Corrêa said Germany makes the most money in the world exporting coffee because of tariffs in the European Union. He noted Brazil can only export coffee beans to Europe “because any sort of industrialization is prohibited by taxes in that area.”
CSAV’s Kulka said South America is a big market, with different situations in each country, port and terminal, but “in general, I would say that the majority of the countries have a reasonable infrastructure at the ports,” with Brazil, Argentina, and Uruguay having the ability to accommodate ships of 8,000-9,000 TEUs.
“On the west coast, Chile, Peru and Colombia also have terminals that allow the operation of vessels of that size,” Kulka said. “There are other markets with some restrictions, such as Ecuador for example. In general, the main problems I think are outside port facilities. There is some work to be done in terms of roads, railroads, etc.”
Seixas Corrêa said spending on infrastructure for ports, airports, and roads is a high priority for the government of Brazil, but that there has been a slowdown in the appetite by investors for these projects, including investors from China.
“Certain Brazil ports are more congested. Berth windows are tight and it’s difficult to develop schedule recovery if you miss a window, whereas in another part of the world, you can recover from that,” Pirie said.
Pirie pointed to the Port of Itapoa in Southern Brazil, a new port that was built by a joint venture of Battistella Group, Logistica Brazil and Hamburg Süd’s Alianca subsidiary, as a good example of how a new facility can take pressure off some of the older ports in the country.
APM Terminals is expanding terminals in Itajai and Santos, Brazil, Buenos Aires, as well as Callao in Peru, Moin in Costa Rica and Lazaro Cardenas, Mexico.
Kulka said that for the trades between the United States and South America “this year we see stability in the market in terms of rates. Now, having said that, in some trades the current rate level is not enough to have a profitable operation. Therefore we do see in some trades rates going up in the future. If our customers want to have stable services, which I believe is very important, they will have to understand that half of the equation to improve today’s situation is an improvement on the revenue side.
“We are doing our homework. In our side we are working every day to have a better and more efficient operation, but that might not be enough to stabilize the industry. Mid- and long-term rates in some important trades at the end will go up,” Kulka said.
One major change in services between U.S. East and Gulf coasts and South America’s west coast has been a reduction in recent years in direct service and wider use of transshipment.
BlueWater Reporting said the number of ships offering direct service has fallen. At the start of 2008 there were 89 vessels with 181,951 TEUs of capacity offering direct service on the U.S. East Coast/South America west coast trade route. That had dropped to 16 vessels with 54,034 TEUs by last month.
More containers are being transshipped over ports such as Cartagena or Balboa, Panama.
Some carriers are moving to hub-and-spoke type networks, “which in some cases indeed makes sense,” Floreani said, noting this is one reason why DHL has invested heavily in Panama.
Hamburg Süd uses Cartagena and ports in Panama to link services calling the U.S. West, Gulf, and East coasts, Europe and Asia.
An executive at one large global carriers said transshipment creates a cost-effective way for it to participate in trades served by niche carriers such as Crowley Maritime and Seaboard Marine that offer reliable service to locations in Central and South America and the Caribbean from ports in Florida.
However, his company can reach the same destinations in Central America, from ports all over the world. Even in the United States it can offer shippers the ability to reach those destinations from ports further up the U.S. East Coast, instead of having to send containers by truck or rail to Florida. “That has worked out better than offering direct products where it is unprofitable for us,” he explained.
Floreani of DHL thinks in some cases transshipment may be a reflection of massive overcapacity. “If you look out five, seven years I would rather bet that some of these direct services will be put back whenever the situation allows for a little bit more slack,” he said.
Ashaf Ashar, a research professor with the National Ports & Waterways Initiative and an independent consultant, believes after the expanded Panama Canal opens in 2015, giant hubs in ports such as Kingston, Jamaica may be developed and large containerships coming from Asia will turn around in the Caribbean instead of sailing to U.S. ports. Feeder ships carrying cargo from New York or Boston might shuttle cargo moving to and from not only Shanghai, but also Brazil and Chile at such a hub, he said.
Other shipping executives feel there will always be sufficient volume in the U.S. East Coast-South America east coast trade to support direct services.
Floreani said one source of growth he sees is intra-Latin America trade. He attributes this to the rise in “multilatinas,” or multibillion-dollar companies that have shareholders and business in multiple Latin American countries. He explained this growth in intra-Latin American trade has allowed DHL to develop new services — “for example, out of Panama into the Caribbean and Central America, but also southward to Colombia, Venezuela… Also from Chile to Peru or Ecuador. This is really us following the market, or anticipating what we see locally happening.”
Another trend that Floreani sees emerging in the Latin America trades is a restructuring of supply chains as economic growth results in demand for more “fast consumer goods.” Panama, for example, is becoming a hub, serving Central America, the Caribbean, Venezuela and Colombia.
He said DHL has developed less-than-containerload (LCL) services to many destinations in Central America and the Caribbean. As an example, he pointed to an LCL service between Panama and El Salvador. Despite the proximity of the countries, he said “transit times are usually more favorable than trucking.”
When the Panama Canal expansion is completed, “we expect to have a lot more short-sea shipping,” said Rodolfo Sabonge, executive vice president for planning and business development at the Panama Canal Authority. He said with the global economic downturn, retailers are looking to South America as an area for growth and view Panama as a location not only to distribute to the north, but also to the south.
He said Panama has ambition to move into more sophisticated logistics offerings and provide value-added services “to be part of the supply chain of the global players.”
Colon and Balboa at either end of the Panama Canal are today the leading two ports in Latin America and the Caribbean and Sabonge said the authority wants to build logistic businesses in Panama that will eventually result in more transits for the canal.
The canal authority is looking at developing a new port, Corozal, on the Pacific end of the Panama Canal that could have the potential to handle 3.9 million TEUs per year, and possibly adjacent distribution facilities.
“The Pacific side is very critical to the transshipment in the region. There is really no other port that can handle these big vessels” that is nearby, he said. Sabonge said ships would be able to transload cargo from all over the west coast of Latin America.
Kulka expects the size of vessels in some trades to increase, saying “it is important to operate efficient vessels in each trade. Now, that doesn’t necessarily mean additional capacity. In our case, for example, we have increased the average size of our operated vessels, but not the total capacity we carry.”
One of CSAV’s strategies has been to rely less on chartered tonnage — the company, which owned just 8 percent of its ships two years ago, now owns 37 percent of its fleet and after delivery of the 9,300-TEU vessels will own 55 percent of its capacity.
“The best model for this industry is where you have bigger vessels, and more carriers participating on the same service, taking advantage of the economies of scale, having more efficient services, contaminating less and offering a better service to our customers,” Kulka said. CSAV has increased the percentage of services in which it has alliance partners from 30 percent to 100 percent in recent years.
Even fruit growers are making greater use of liner companies.
In January, Great White Fleet, the in-house shipping arm of Chiquita, began using space on a Hamburg Süd service between the west coasts of the United States and South America to move bananas between Guayaquil, Ecuador; Quetzal, Guatemala; and Port Hueneme, Calif.