Ocean shipping inLatinAmerica: Not so hot, hot, hot
Now that Latin America's economic growth has cooled, the market is suffering from overcapacity, plunging rates, and more intense competition.
By Toby B Gooley -- Logistics Management, 1/1/1999
For two or three years prior to 1998, Latin America was hot--and we're not talking about climate. As the region's economies and political systems stabilized, inflation slowed, and companies shifted production from Asia to Central and South America, those countries experienced unprecedented economic growth. Trade volumes took off, and demand seemed unlimited.Ocean carriers, recognizing the region's growth potential, headed south in droves. The Latin American market--once the province of government-owned and smaller niche carriers--quickly became overcrowded as large, multinational carriers entered the trade and existing players added more vessels.
That exerted downward pressure on rates, which have been falling since last year. That pressure has become particularly intense in the last six months, as countries like Brazil and Argentina were hit hard by the financial crises in Asia and Russia. Trade volumes now are flat at best and are likely to remain so well into next year. Add to that the impact of natural disasters like Hurricanes Georges and Mitch and the potential effects of ocean shipping deregulation in the United States, and it's clear why the Latin American shipping market is reeling.
The Bigger They Are ...
Ocean shipping might have been better insulated from Latin America's economic slowdown if carriers had not poured so much money and so many resources into the market so quickly. As demand grew, ocean carriers that already served South and Central America began to add new ports of call and introduce larger, faster ships.
One of the most active has been Jacksonville, Fla.-based Crowley American Transport. In mid-1997, Crowley launched two new CAT-class container ships in the U.S.-East Coast South America trade lane, each with a capacity of 2,100 TEUs (twenty-foot equivalent units). Later that year, the carrier replaced two small ships in the West Coast South America lane with three 1,100-TEU ships, which allowed it to launch service to Chile. Crowley also introduced a weekly roll-on/roll-off service from the U.S. Gulf to Central America. Since that service began in August 1997, it has expanded to three times weekly. In April of 1998, the carrier added a third CAT-class vessel to its South American fleet.
Rivaling Crowley in its growth in Latin America is Hamburg Süd subsidiary Columbus Line. Columbus in mid-1998 slashed transit times and introduced larger, faster vessels in both its East and West Coast South America services. According to Senior Vice President Robert Ellis, the "Bullet Pass" fixed-day weekly service from the U.S. East Coast to Argentina, Brazil, and Uruguay is up to three days faster than any of its competitors. In addition to increasing frequency on the East Coast, Columbus added a new fortnightly service between the U.S. Gulf and Mexican, Panamanian, and South American ports. In October, the carrier announced a second major reorganization that further cut transit times and added port calls on its U.S. West Coast service to South and Central America. In December, Columbus upped the ante yet again when it introduced twice-weekly, fixed-day service between the East Coasts of the United States and South America.
Well-established companies like Crowley and Columbus are facing increased competition on two fronts. Many smaller carriers like Seaboard Marine, Industrial Maritime Carriers, Grupo Libra, and Frontier Liner Services have increased their sailing frequencies this year. And ship charter rates are low--as much as 50 percent less than they were last year--says P. Elliot Burnside, president of Crowley American Transport. That makes it easier than ever for even the smallest carriers to add tonnage, he notes.
More worrisome for the carriers, though, is the entry by some of the world's largest ocean carriers into Central and South American trade lanes. Last May, Taiwan-based Evergreen began service between the U.S. and South American East Coasts. Two years ago, APL Ltd. jumped into the market; today it serves 29 ports in South and Central America. They join other relative newcomers, such as Maersk Line, P&O Nedlloyd, and Mitsui O.S.K. Line--all of which increased their capacity last year.
These big carriers have entered the Latin American market for two principal reasons. First, they need to offer truly global service to their multinational customers. The second is that they need to reduce their dependence on the money-losing trans-Pacific trade. Entering new markets is one way a carrier that is heavily exposed in Asia can spread its risk.
... The Harder They Fall
Although ocean carriers have entered the Latin American market for sensible reasons, too much of a good thing is proving no good. That indeed is the case today, when overcapacity has collided with instability in the region's largest economies.
The effects are easy to see. Rates, which reportedly have fallen by 30 percent or more for some commodities, are unlikely to rise very soon. "Rates have plunged on both the East and West coasts [of South America]," says Burnside. They're not much different from what they were in 1988, he reports. "If that trend continues--and I'm hoping it won't--it's going to be real ugly before it all settles." John Urban, vice president, Latin America for APL Ltd., also is pessimistic. "We're seeing some cases of almost foolhardy pricing," he says.
Continuing rate instability was a contributing factor in the demise last fall of the West Coast South America Rate Agreement, the ocean freight conference that covers trade between the United States and the West Coast of South America. The Inter-American Freight Conference (IAFC), which applies to the East Coast of South America, is under similar pressure with the resignation of several members, including Maersk, Sea-Land, and French carrier Compagnie Générale Maritime, last year.
Conferences no longer make sense in the Latin American market, Urban believes. "Whether the economies had weakened or not, I think we'd still see [Latin American] conferences dissolving," he says. For one thing, severe overcapacity makes it difficult for competitors to get together and work out differences, he explains. Pending deregulation of ocean shipping in the United States also is fueling carriers' decisions to operate as independents in that market rather than be constrained by conference regulations. Finally, Urban says, the South American conferences, which cover just a handful of countries, don't fit the needs of carriers and shippers that want to sign global contracts.
With the market in such turmoil, carriers are taking actions that will allow them to survive a potential shakeout, says Kim Gadegaard, Maersk's vice president for Latin American services. "Some carriers already have decided to leave, some are reconsidering their tonnages, some are changing their services, and some are creating alliances and consortia," he says.
Several carriers, including Maersk, recently have formed alliances and consortia as a way to reduce tonnage, operating costs, and individual risk. This tactic has been widely used in Europe and Asia, but carriers just now are starting to apply it in Latin America. Next month, Maersk and Sea-Land, which have offered joint service for several years, together with a recently formed agreement between Columbus Line, Aliança, and P&O Nedlloyd, will join together with Chile's CSAV and Euroatlantic Container Line to create a seven-line joint service in the U.S.-East Coast South America trade. Although complete details were not available at press time, several members have confirmed that they will withdraw some tonnage in a move to shore up rates.
The Crowley-APL alliance has undergone a similar evolution. What started last March as a two-line vessel-sharing agreement on the West Coast of South America in May grew to include the East Coast of South America and added Norwegian-flag Ivaran Lines. In August, APL and Crowley launched joint service from the U.S. Gulf Coast, and in November, Brazil's Libra Navegaçao joined the East Coast service, bringing the number of participants to four.
Another sign of a potential shakeout is the advent of mergers in the trade. Last year, Columbus Line's parent Hamburg Süd bought Aliança, its Brazilian partner in European and U.S. trade lanes. CP Ships last year bought Ivaran Lines, then created a joint venture involving Ivaran, CP subsidiary Lykes Lines, and Mexico's Transportación Marítima Mexicana (TMM).
Maersk's Gadegaard believes the mergers; the formation of alliances, consortia, and joint ventures; and the carrier decisions to leave the market altogether are likely to continue. "If the situation stays poor enough long enough, I think any of those things ... could happen," he says. He is cautiously optimistic that as these changes take hold, they will begin to push rates back up.
Which carriers will be able to ride out this intensifying storm of competition in Central and South America? Urban believes the answer will be no different in Latin America than it will be in the rest of the world. He says, "Companies that survive, whether in Latin America or anywhere else, will be the companies that clearly understand their mission and have a clear strategy, regardless of national flag and whether they are global carriers or niche players."
Too many ships, too little cargo?
Rocketing trade growth enticed several major ocean carriers to enter the Latin American market. Meanwhile, carriers already operating there increased their sailings. Now that the region is suffering a downturn, too many ships are chasing too little cargo. How crowded is the field? A brief search found these 54 companies operating containerized, roll-on/roll-off, and breakbulk vessels between the United States and South and Central America--and there probably are more:
Aliança
Amazon Lines
American Freight Liners
APL
Associated Transport Line
BHP International Marine
Transport
CCNI
Cho Yang
Coler Ocean Independent Lines
Columbus Line
Concorde Line
Crowley American Transport
CSAV
Despatch International
Di Gregorio Navegaçao
Ecuadorian Line
Euroatlantic Container Line
Evergreen
Frontier Liner Services
Frota Oceanica e Amazonica
Global Lines
Gran Golfo Express (Orion)
Great White Fleet
Grupo Libra
Gulf Bridge Ro/Ro
Industrial Maritime Carriers
Ivaran
Kent Line
King Ocean Services
Lineas Agromar
Lykes
Maersk
Maritima Seafreight Venezolana
Maruba
Mediterranean Shipping Co.
Med Pacific Express
Mercury Lines
Mitsui OSK Line
Nordana Line
Pan American Independent Line
Panamanian Carriers Corp.
Peruvian Amazon Line
P&O Nedlloyd
Seaboard Marine
SeaFreight
Sea-Land
Sea Star (PR)
Star Shipping
TMG (Transportacion Maritima Grancolombiana)
TMM
Transroll
Tropical Shipping
Wing Bridge Shipping
Zim
Talkback
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