Over several years, U.S. containerized exports to South America doubled and exports from the region to the U.S., Asia and Europe were also strong, helping the region carve out an increasingly important role in global trade lanes. Trade was growing at such a rapid clip that ocean carrier executives were more concerned about the ability of South American ports to handle the cargo volume than they were about generating new business.
In 2009, however, the financial contagion that plagued the U.S. and Europe spread to South America, and this year the southbound trade to South America is projected to decline by a third and northbound shipping to the U.S. also will drop sharply, putting the trade lane firmly in the midst of the world’s economic downturn.
“It shows how hard we hit the wall,” said Frank Larkin, senior vice president at Hamburg Sud.
Virtually every major cargo in both directions saw a sharp drop in volume in the first half of 2009, according to figures provided by Hamburg Sud. U.S. export cargoes such as paper products, resins, general cargo, automobile parts, automobiles, chemicals, machinery and fabrics are all down 15 percent to almost 40 percent.
Major South American export cargoes to the U.S. such as bananas, lumber products, fruit, granite, tiles and tires are likewise off 15 to 25 percent. The only South American exports to the U.S. that registered a gain in the first half of the year were coffee and wine.
A similar story is unfolding in the U.S. trade with Central America and the Caribbean. Until July containerized cargo in both directions was down about 25 percent, said Carlos Velez, vice president and managing director for Latin America at APL. The carrier serves Mexico, Central America, the Caribbean and the north and west coasts of South America.
This story may have a happy ending, however. Although trade volume between the U.S. and all of Latin America will be down by double digits for the year, cargo volume began to pick up in mid-summer. Carriers are experiencing strong enough load factors to warrant selective rate increases in the final quarter of 2009.
APL noticed a sudden change in fortunes in July. Vessels experienced “significant improvement” in utilization, Velez said. With inventories depleted, retailers in North and South America had to begin the replenishment process. U.S. consumers appear to be spending money for back-to-school and holiday merchandise, especially clothes, Velez said.
Carrier executives, although not yet bullish, believe the U.S.-Latin America trade has hit bottom and will return to positive numbers in 2010. “Maersk Line expects the market will stabilize in 2010 and slowly start to recover with a very modest 1 percent to 2 percent growth in 2010 over 2009,” said Mary Ann Kotlarich, a spokeswoman for the world’s largest container line.
PIERS Global Intelligence Solutions, in a first-quarter update of its forecast for global container shipping, said containerized export volume from the United States to South America fell 28 percent in the first quarter compared to a year earlier and projected southbound volume would fall 25.7 percent for all of 2009 from last year.
PIERS, a sister company of The Journal of Commerce, said northbound volume, measured in TEUs, fell 19.6 percent in the first quarter. It projected a 7.8 percent drop from last year after U.S. containerized imports from South America fell 12.1 percent in 2008 from the year before.
The lane should turn positive in 2010, however, and PIERS is even projecting U.S. containerized imports from western South America — primarily Chile, Colombia and Ecuador — will grow 4 percent this year over 2008. PIERS forecasts overall northbound container volume will grow 8.1 percent next year while exports will grow 8.5 percent.
Trade prospects vary from country to country based on local economic conditions, but generally, Latin America is better equipped now to weather tough times than it was in the past. Most of the nations have moved beyond the era of protecting their domestic industries and are embracing market economics. Likewise, Latin American nations did not devalue their currencies to promote exports.
Although Latin America has experienced a credit crunch like the U.S. and Europe have, most consumers in the region did not go heavily into debt. Peru, for example, did not experience a housing bubble because buyers there did not take out large loans to purchase homes, Velez noted.
Ocean carriers in the U.S.-Latin American trades are well-positioned to recover from the especially difficult year they are experiencing. Larkin noted carriers last fall began taking steps to reduce capacity, such as eliminating vessel strings or entering into vessel-sharing agreements. Hamburg Sud and its Brazilian affiliate Alianca joined a vessel-sharing agreement with CSAV of Chile. On one of its services, APL entered into a VSA with Japan’s MOL.
At first, however, carriers in the U.S.-Latin American trades panicked just as they had in the major east-west trade lanes. Freight rates plummeted southbound as well as northbound. “These rates are not sustainable,” Larkin said.
Carriers such as Hamburg Sud had to make a decision: cut back on service to the point where customers suffered, or increase freight rates to sustain the frequency and reliability shippers in the region have come to expect.
“Quality is at the core of what we provide for our customers, and quality comes at a cost,” Larkin said. By late summer, with cargo volume beginning to pick up, most carriers on South American trade lanes had announced general rate increases to take effect in the fall.
In its service from the U.S. to the east coast of South America, Hamburg Sud announced a $350-per-TEU general rate increase to take effect in October, Larkin said. Carriers in U.S. lanes to the west coast of South America participate in a discussion agreement, and the member lines will likely consider a rate increase this fall, he said.
Maersk, citing steps taken by carriers to rationalize services, sees shipping trends in the region stabilizing. Maersk announced a $300-per-TEU increase in the North America to west coast of South America trade effective Oct. 1. “We intend to launch further GRIs in 2009-10,” Kotlarich said.
With vessel-utilization factors improving, APL is likewise implementing selective rate increases and even a peak-season surcharge, Velez said. “Rates are so depressed we need to increase rates to cover space requirements,” he said.
Although trade conditions likely will soften by the end of the year because of normal seasonal trends, the decline will not be nearly as steep as it was last winter because the countries of Latin America already are experiencing modest growth of 1 to 2 percent in their gross domestic product, Velez said.
But prospects for growth in Latin America are a double-edged sword for carriers. While increasing trade volume will produce increased revenue, it also will raise the specter of congestion at the ports and inland infrastructure networks.
Port congestion was a way of life in Latin America until trade volume plummeted this year. In the first nine months of 2008, Hamburg Sud reported its vessels calling at South American ports accumulated more than 15,000 hours of waiting time. The German carrier canceled 187 vessel calls, or 9.5 percent of its scheduled vessel arrivals, during the same period.
Governments in Latin America recognized the threat inadequate port and infrastructure presented to the health of their economies, and some 40 port expansion projects were announced. However, the global financial crisis and credit crunch have delayed the start of many of the projects.
Carriers are concerned and believe South American countries should be investing in the future during the lull in trade. “So far we have not seen ports use the slow period to invest in expanding their terminals to cope with future demand,” Kotlarich said.
APL on several occasions has urged governments to move forward with terminal expansion projects despite the current downturn in trade, Velez said.
Although carrier executives do not expect 2010 to be a banner year for trade between the U.S. and Latin America, most lines expect that low single-digit growth next year will set the stage for more normal growth rates in subsequent years.
Contact Bill Mongelluzzo at email@example.com.