On the rise

On the rise Container terminal investment portends growth in South America trades.

By Eric Johnson

   The Brazilian coastal city of Santos is probably most famous worldwide for being the place where Pel', the legendary Brazilian soccer player, plied his trade.
   But over the next decade Santos may become known more for its cargo trade. Several projects are underway that would significantly expand container cargo handling capacity at its port ' enough expansion to make Santos the biggest container port complex in the western hemisphere outside of Southern California.
   Santos' expansion is only the most obvious example of how terminal operators are eyeing South America as the next frontier for containerized trade. Their plans hinge on expectations of increasing cargo demand to and from South American shores. Terminal operators are building where they believe shipping lines will bring capacity, and shipping lines are bringing capacity where they expect trade to flourish.
   Brazil, as the largest and most robust economy in South America, figures to play a dominant role in the region's new age. Santos already is the biggest container terminal in Latin America, but its handling capacity could mushroom from 3 million TEUs annually at present to as high as 9 million TEUs by 2014.
   DP World and APM Terminals are both involved in major terminal projects in Santos. DP World tied up a deal in August 2009 for a 2.5 million-TEU facility whose first phase will open in 2012. In August 2010, APMT bought a 50 percent share of an under-construction 2.2 million-TEU terminal that's also due to begin operations in 2012.
   Here's another view into the future of East Coast South America's container trade: this year, Maersk Line and Hamburg S'd will introduce nearly a dozen vessels larger than 7,200 TEUs in capacity into the Asia/East Coast South America trade.
   Maersk dubs the new vessels Sammax, and they have high reefer capacity ' as many as 1,700 plugs on each voyage. Previously, the biggest vessels in operation were Hamburg S'd's 5,900-TEU vessels.
   These vessels won't yet touch the north/south trades, but they could push larger vessels into those routes. And if demand is sufficient, it's not hard to imagine lines ordering more vessels of that size to eventually serve trades between North and South America.
   The recent flurry of activity in South America has somewhat obscured what's been an up-and-down couple of years for North America/South America trade. 2008 punctuated a long period of two-way growth between the two continents before the global recession reset trade levels back to 2004 levels.
   Exports from Latin America (excluding Mexico) to the United States increased 217 percent to $160 billion in the decade leading up to 2008, before falling 32.5 percent in 2009, according to U.S. Commerce Department data. U.S. exports to Latin America (outside of Mexico) increased 117 percent to $138 billion in the decade leading up to 2008, before falling 20.6 percent in 2009.
   In 2009, Latin America (outside of Mexico) accounted for 8.3 percent of total two-way U.S. trade, according to a February report from the Congressional Research Service, the public policy research arm of the U.S. Congress. That's an increase from 7.2 percent in 1996.
   The relatively small percentage of U.S. trade tied to South America leaves 'significant room for growth,' the report said.
   'Brazil, for example, has the largest economy in Latin America, is the second-largest Latin American trade partner of the United States, but accounts for only 10.4 percent of U.S. trade with Latin America, or only 18 percent that of Mexico.'
   The report added that tariffs on U.S. exports to Latin America have come down significantly in the last 25 years, but still vary widely country to country. The United States has tied up free trade agreements with Chile and Peru, and has reached agreement on one with Colombia that has not been ratified by Congress.
   'Some of the largest economies in South America are not part of U.S. FTAs and have resisted a region-wide agreement, the Free Trade Area of the Americas (FTAA), in part because it represented an extension of the same trade model used by the United States in bilateral agreements,' the report said. 'Many countries south of the Caribbean Basin have been reluctant to enter into such a deal because it does not meet their primary negotiation objectives. Brazil, Argentina and Venezuela are less compelled to capitulate to U.S. demands because they are far less dependent on the U.S. economy than countries in the Caribbean Basin.'
   The increasing focus on South America's container potential is largely being driven by trades outside the scope of the western hemisphere, with terminal operators and carriers from Asia and Europe leading the charge. According to Drewry Shipping Consultants' Global Container Terminal Operators ' 2010 report, none of the top global operators has an appreciable percentage of its throughput in Latin America. And for those that do, throughput tends to be focused in Central America or Mexico, not in South America.
   That's destined to change in the coming few years. Aside from the investments in Santos, APMT earlier this year won a concession to build what it said will be the largest terminal in the Peruvian port of Callao. DP World in 2008 opened a 1.1 million-TEU greenfield terminal in Callao. The Dubai-based operator also operates a terminal in Buenos Aires, as does Singapore-based PSA International, and Hong Kong-based Hutchison Port Holdings, whose primary Latin American exposure is through a network of six terminals in Mexico and Panama.
   U.S.-based SSA Marine operates two terminals in Chile; Philippine-based ICTSI operates terminals in Brazil, Argentina, Colombia and Ecuador; while Spanish operator Grup TCB runs facilities in Colombia and Brazil.
   The growth in South American terminal capacity is inevitably linked to growth in trade to all parts of the world. Asia/South America trade is booming, as American Shipper research affiliate ComPair Data noted in February ('Asia's emerging-to-emerging growth,' at www.AmericanShipper.com/links ). But expansion of terminals and services ' with bigger and more efficient terminals and larger ships calling key ports in South America ' will inevitably benefit north/south trade in the Americas.
   The rise in prominence of South America/North America trade is evident in capacity allocation figures from ComPair Data. Allocated capacity from South America to North America steadily rose from the end of 2009 through the first quarter of 2011. In that 15-month period, capacity increased 29.4 percent to more than 39,000 TEUs per week. Significantly, capacity never fell in any one quarter in that stretch.
   However, the lines operating from South America to North America pulled back significantly on allocated capacity in the following six weeks, taking weekly capacity down nearly 38 percent to below December 2009 levels.
   The heaviest deletions came on the West Coast South America-to-North America trade, where allocated capacity was reduced 55.6 percent to 5,931 TEUs weekly, more than wiping away all the capacity injected into the trade the past 15 months. But the drops were steep, about 29 percent, from both North and East coasts of South America as well.
   Nearly every carrier in the trade had deleted major amounts of capacity since the end of March, with leading line Hamburg S'd cutting 39.6 percent of its northbound capacity to North America.
   The adjustments would appear to be more seasonal than emblematic of long-term worry about the trade. For instance, Brazilian exports to the United States went from $10 billion in 1998 to $30 billion in 2008 before falling 33 percent in 2009. But they were estimated to have grown 20 percent in 2010. Clearly, 2009 was the anomaly.
   Looking deeper at the ComPair Data figures, capacity from East Coast South America to North America actually grew 10.9 percent in the second quarter of 2010. The recent second quarter deletions appear to do more with carriers better managing their capacity on the trade than a bearish outlook on trade growth.