In the second article of a two-part series, FreightWaves examines how COVID-19 affects the Caribbean Basin’s all-important transshipment hubs. Part One addressed fallout for regional container markets and carriers.
The palm trees waving languidly in the breeze are deceptive. In the world of container shipping, the Caribbean is not off the beaten path. It’s where the big paths cross.
East-west liner alliances traverse the region with mega-ships sailing from Asia to the U.S. East Coast (USEC) via the Panama Canal. Crisscrossing that bustling lane is north-south traffic from Brazil to the USEC and services from the west coast of South America (WCSA) to the Mediterranean and North Europe. Regional carriers and feeder services interlink the islands, Central America and Florida.
It is a major crossroads of global trade, with high-volume, highly competitive transshipment terminals at its center, connecting all the dots.
Unlike smaller island ports serving local consumers, where volumes have already collapsed, the Caribbean transshipment hubs have yet to feel the brunt of the coronavirus — but they’re almost certainly about to.
Before the coronavirus
“The Caribbean hubs had a really good year in 2019 because the ratio of transshipment increased,” explained Michael Kristiansen, a former Maersk executive who heads consultancy CK Americas. “They also had a really good first quarter this year. The big question is what happens next.”
“Caribbean transshipment increased 4-5% last year, but it was unevenly distributed among the hubs,” said Caribbean Shipping Association (CSA) President Juan Carlos Croston in an interview with FreightWaves. Croston is vice-president of marketing and corporate affairs at Panama’s Manzanillo International Terminal (MIT), one of the Caribbean’s leading transshipment hubs.
Higher overall volume was not the primary driver of last year’s gains. The driver was liner service changes in mid-2019 that forced more containers to be transshipped that had previously gone direct.
Large WCSA-USEC and WCSA-Mediterranean services were canceled. In addition, as part of European regulatory approval of Hamburg Sud’s takeover by Maersk, Hamburg Sud pulled capacity out of a major WCSA-North Europe service called Eurosal XL (operated by CMA CGM, Hapag-Lloyd and COSCO).
Eurosal XL turned into more of an “express” service, with fewer stops along the WCSA coast, requiring more transshipment. Volumes from the canceled WCSA-USEC and WCSA-Med services went onto Eurosal for transshipment via MIT and Cartagena, Colombia, to ships connecting to the USEC and Med. Additional cargo was loaded aboard Eurosal ships at Caribbean transshipment terminals for delivery to North Europe.
Easier second-quarter comps
Last year’s transshipment gains carried through to the first quarter of this year. A significant portion of volume in the Caribbean system comes from Asia and was en route across the Pacific before the pandemic curbed Western demand.
Second-quarter volumes will decline versus the first quarter due to social distancing in the Americas, but the year-on-year drop shouldn’t be that bad because of easier “comps” (comparables).
Second-quarter 2020 volumes will be declining from a higher level; second-quarter 2019 predated the transshipment boost from midyear service changes.
The true year-on-year consequence of COVID-19 will begin showing up in the third quarter. “The network rearrangements that created the new transshipment volume all happened around midyear , so the comparables are more favorable in the first half and will be more realistic in the second half,” Croston explained.
Another near-term factor in the hubs’ favor: Some nations in the Americas are not aggressively social distancing.
“There is not a total shutdown of all the Latin American economies,” Croston said. “Mexico and Brazil are pretty much going as usual. There might be a little less demand because people are rightly apprehensive, but those economies are still going, and Mexico and Brazil are big drivers of transshipment in the Caribbean.”
Service changes inevitable
The Caribbean hubs are starting to feel the effects of “blanked” (canceled) sailings on the Asia-USEC route. THE Alliance (Hapag-Lloyd, Yang Ming, ONE, HMM) has suspended a service that was scheduled to call at MIT. The Ocean Alliance (COSCO, CMA CGM, Evergreen, OOCL) canceled sailings that were to call at Panama’s Colon Container Terminal (CCT).
In general, however, Caribbean hubs have yet to see major service revamps. “We know there’s going to be changes,” Croston said. “If demand goes down, the expectation is for a reduction of services. The question is how much and when.
“We understand that most of the carriers are going back to the drawing board, but for them to adjust services, they need to know what the change in demand is. And nobody knows that yet. Everyone’s working blind,” he said.
Another likely market effect is that container lines — which are under tremendous financial strain — will squeeze their business partners, including terminals, on pricing and payment timing. “There is going to be a lot of pressure, because now it’s about survival,” said Croston. The challenge for carriers, he added, is that “they’ve been cutting the fat for the last 10 years, ever since the financial crisis, and there’s now less fat left to cut.”
Could carriers switch hubs?
The disaster scenario for a transshipment terminal is for a primary carrier customer to jump ship for another hub — and the Caribbean boasts a prodigious field of competitors.
Kingston Freeport Terminal Ltd. (KFTL) in Jamaica is operated and majority-owned by CMA CGM. In the Dominican Republic, a joint venture between Dubai Ports World and local investors runs the Caucedo transshipment terminal.
Freeport Container Port (FCP) in the Bahamas is operated by Hong Kong’s Hutchison Ports and is primarily used by Mediterranean Shipping Co. (MSC), which is said to have an equity interest. FCP’s cranes survived 2019’s Hurricane Dorian intact.
To the south, SPRC runs two transshipment terminals — Manga and Contecar — in Cartagena, while there are five major hubs in neighboring Panama.
On Panama’s Atlantic coast there is MIT, operated by SSA Marine, a subsidiary of Carrix; CCT, operated by Taiwanese carrier Evergreen; and Cristobal, operated by Panama Ports Co. (PPC), a subsidiary of Hutchison.
On the Pacific coast, there is PPC-operated Balboa and PSA Panama, operated by Singapore-based PSA International (with MSC said to have an equity interest). Panama’s Pacific coast terminals are considered part of the Caribbean hub-and-spoke system because of their land connections; Balboa is connected to Atlantic hubs by rail, PSA Panama by trucks.
The last major hub switch in the region occurred in 2018, when MSC dropped Balboa in favor of PSA Panama. Balboa still hasn’t recovered.
Kristiansen believes the chance of a hub switch in the midst of the coronavirus crisis is “extremely low.”
“Since the Panama Canal expansion opened in 2016, we’ve seen significantly larger ships. With larger ships, you need to concentrate your volumes, if not in one hub then in fewer hubs,” he told FreightWaves.
“That concentration works both ways. It means the terminals are extremely dependent on very few customers but it also means the carriers are a bit stuck. It’s very hard for them to move because unless they’re playing a game of musical chairs, there’s not enough surplus capacity at other hubs to handle them,” he said.
The bigger risk during the pandemic is that a terminal’s anchor carrier goes bankrupt.
“What’s happening now looks worse than what happened in 2009,” said Kristiansen. “It’s no longer about whether you can make a profit; it’s about whether you have enough cash to stay afloat — there’s a real possibility that a shipping line actually goes bust. And at some Caribbean ports, if they lose their anchor client, they’ll have nothing left.” Click for more FreightWaves/American Shipper articles by Greg Miller