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TRANSPORTCEO - 21/05/2018
A tough recovery ahead.
There is evidence of a demand recovery in the North America-East Coast South America container trade, but slow economic reform and political uncertainty will make it a tough grind.
From this edition Drewry has switched sources for demand data in this trade so that the geography aligns with our supply data, enabling us to provide information on ship utilisation. According to new statistics supplied by Datamar container traffic in the headhaul East Coast South America to North America trade fell by 1% in the first quarter 2018 to 137,000 teu.
Figure 1: Northbound ECSA to North America container traffic ('000 teu)
Brazil dominates the northbound leg with an approximate 85% share, leaving the remainder to the ‘Plate’ economies of Argentina, Uruguay and Paraguay. The slowdown in traffic from Brazil in Q1 was the result of significant waning in US demand for major commodities such as stone materials (down by 13% year-on-year in tonnage), iron and steel (-38%) and plastics (-32%). However, wood shipments, Brazil’s biggest commodity in tonnes to America, improved by nearly 15% to mitigate lower volumes for other goods. Coffee, the largest export in value, decreased by 15% in US dollar terms and by 5% in tonnes.
Figure 2: Southbound North America to ECSA container traffic ('000 teu)
Trade was more buoyant in the opposite direction as southbound container volumes rose by 2% year-on-year in 1Q18. Much of the impetus occurred in January when annual growth touched 20%, before softening in February and declining in March (see Figure 2).
Once again Brazil takes the lion’s share of the trade, but to a lesser degree than in the northbound leg, this time accounting for approximately 70% of ECSA imports from North America. US customs data derived from Global Trade Information Services (GTIS) showed a significant uptick for Brazilian container imports of mineral fuels, precious metals and organic chemicals in Q1.
Mixed economic signals make it hard to predict the future for this route. In February, Fitch Ratings downgraded Brazil’s credit rating from BB to BB-minus, taking it deeper into speculative junk territory. However, two months later the IMF upgraded Brazil’s GDP outlook for both this year and next. The IMF said that it now expects the country’s economy to grow by 2.3% in 2018 (instead of 1.5% as expected in October 2017) and by 2.5% in 2019 (instead of 2.0%).
Despite its junk credit status Brazil has continued to attract less risk-averse foreign investment, while a recovery in the commodities market has also helped pull the economy out of the deep recession suffered in 2015-16.
That is not to say everything is rosy. The country will hold a general election in October, but at this stage the outcome is far from certain with voters angry after years of political scandal. Former president (2003 to 2010) Luiz Inácio Lula da Silva of the Workers’ Party (PT) was jailed for 12 years in April on corruption charges. Despite his incarceration and Brazilian electoral laws forbidding him from running, Lula is comfortably ahead in opinion polls, leading nearest rival Jair Bolsonaro, an extreme right-wing candidate, by around 20 points.
The list of candidates will be finalised in August, but it remains to be seen if a change in political leadership will alter the economic policy. Much will depend on which candidate receives Lula’s endorsement.
The Argentinian economy has been hampered by a drought that slowed agricultural production, but economic reforms are not delivering results as quickly as hoped. Until very recently, the peso currency was at a record low versus the dollar, which made foreign-debt repayments more expensive and added to the high inflation rate that current stands at 25%, about 10 points above the central bank target.
The peso recovered some ground earlier this month when the central bank hiked interest rates up to 40%, while the country has requested financial assistance from the IMF (reports indicating a loan of $30 billion). With more benign weather conditions and less currency volatility there is every reason to expect more from Argentina’s container imports and exports soon.
Figure 3: Northbound ECSA to North America capacity ('000 teu)
Figure 4: Southbound North America to ECSA capacity ('000 teu)
There are only five weekly services operating in the North America-ECSA trade, four of which deploy a total of 30 ships of approximately 6,000 teu in size and one service using nine vessels of 3,400 teu. As of April 2018, the four major players in the trade were MSC (operating nearly 30% of nominal capacity), Hamburg Sud/Maersk Line (27%), Hapag-Lloyd (23%) and CMA CGM (15%).
Based on forward schedules Drewry anticipates that capacity will rise in May and June as a consequence of an extra loader and ship upgrades on the MSC/Hapag-Lloyd/ONE - GS1/US Gulf/ANG service, taking the average ship size on the loop from 6,100 teu to 6,230 teu.
The decision to operate an extra loader is puzzling considering how over supplied the trade is. Drewry estimates that ships on the southbound voyage are not even half full while on the northbound leg ship utilisation has struggled to get much above 60% in the past year or so.
With such poor utilisation, North America-ECSA spot market freight rates tend to stay in narrow, low band. Drewry’s Container Freight Rate Insight shows that benchmark spot rates from Santos to New York were about $2,600/40ft in April, where they have resided for most of this year, while New York to Santos spot rates have stuck close to $1,200/40ft.
Figure 5: Northbound ECSA to North America utilisation v rates
Figure 6: Southbound North America to ECSA utilisation v rates
Table 1: North America-ECSA - estimated monthly supply/demand position
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