In the first article of a two-part series, FreightWaves examines how COVID-19 affects regional container markets and carriers serving the Caribbean Basin. Part Two addresses fallout at the Caribbean’s all-important transshipment hubs.
A monster economic hurricane has suddenly stalled indefinitely over each of the Caribbean islands simultaneously.
Coronavirus deaths remain relatively low here — it’s not yet a pandemic hotspot — but financial fallout is potentially catastrophic due to the region’s reliance on tourism.
“Coronavirus has had a huge effect on the Caribbean. It’s not immune. It’s getting rocked, just like the rest of the world,” David Ross, CEO of South Florida-based CFL Agencies, told FreightWaves.
“There are no flights, no cruise ships, the hotels have been shut down,” Ross said. “The jobs related to tourism are gone. I can’t imagine what the unemployment numbers for the Caribbean are going to look like.”
Individual island economies may be small, but the Caribbean Basin as a whole — including the coastal regions of Central America and the northeast coast of South America — punches far above its weight.
U.S. cargo transporters will be feeling the Caribbean’s economic pain.
Caribbean volume from South Florida is around 1 million twenty-foot equivalent units (TEU) per year, yet the actual land-transport effect is much greater.
Almost all of the container loads go to sea at the southern tip of Florida, and they must traverse the whole peninsula to get there. It’s about as far from the Georgia line to Miami as it is from Boston to Baltimore, inflating Caribbean cargo land-transport demand measured in ton-miles.
This year had started out strong. “Everybody, not just us, had all been humming along,” recalled Ross, whose company is a South Florida-based, full-container-load, non-vessel-operating carrier. “The Caribbean had been buoyant. It was a strong tourism season. Occupancy rates were high. We were all looking forward to the peak at Easter.”
“At the beginning of the year, it was presenting itself as a good year,” affirmed Tom Paelinck, executive vice president of Caribbean Feeder Services (CFS), a neutral carrier that provides intraregional connections for mainline carriers.
There was initial concern about the shutdown in Wuhan, China, immediately following Chinese New Year, “but it turned out that it wasn’t bad because American supplies were still plentiful and there was enough of a buffer in the warehouses,” Paelinck said in an interview with FreightWaves.
“We were all thinking we escaped this but that didn’t last long,” he said. “Once we saw the news about [shutdowns in] Europe and the U.S., we knew we had a situation.”
The moment volumes quickly collapsed was when the Caribbean tourism product shut down.
“We are now down 30-50%,” Ross said. “Our volume was holding up until two or three weeks ago. It’s remarkable how quickly this happened.”
Asked what cargoes are still moving, he reported, “It’s all about food right now. That’s the priority. It’s basic foodstuffs, medical, hygiene, cleaning products, hand sanitizer.”
Paelinck reported that there was an initial bump before the final slump. “At first there was panic-buying, so we had two weeks of higher-than-normal volume, but at this point that’s done. Now we’re seeing it really slow down,” he said.
The tourism shutdown doesn’t just erase cargoes that would have gone to hotels and restaurants; it slashes islanders’ spending power.
“All the people who worked in hotels and restaurants won’t be able to go to the supermarkets because they’ll have no money to spend,” Paelinck said. “They’ll fall back on buying from local farmers. Imported corn flakes from the U.S. have suddenly become a luxury item.”
And tourism is not the only headwind. Oil-producing nations in the Caribbean Basin such as Trinidad and Colombia — and those that hoped to be big players, such as Suriname and Guyana — are being hit hard by plunging crude prices. “Each island and each country have a different story,” Paelinck said. The ones with oil exposure “got a double whammy.”
Another negative involves textile trade under U.S. Section 807, through which fabric is sent from the U.S. to Central America, the Dominican Republic and Haiti and finished textiles are sent back to the U.S. under a reduced tariff. “Obviously, that production has to stop [due to coronavirus] and that affects cargo flows in both directions,” Paelinck said.
On a positive note, he sees one trade that’s not being affected: Caribbean Basin fruit and vegetable exports. “Fruits are still growing, people in the U.S. on lockdown are still eating fresh fruit, and I haven’t seen any coronavirus effect on this yet,” he said.
How carriers will cope
Exports to the Caribbean Basin come from three primary sources: the U.S. (mainly South Florida), Asia (either through Caribbean transshipment hubs or U.S. supply chains), and Europe. South Florida remains the top source, particularly for perishables, with Asia strong on electronics.
Cargoes are mostly loaded at the Port of Miami and Port Everglades, and are brought down from the north largely by truck but also via the Florida East Coast Railway, which connects at Jacksonville.
A cadre of ship operators specialize in the fronthaul-weighted South Florida-to-Caribbean Basin trade, led by Seaboard, King Ocean, Crowley and Tropical Shipping. Global carriers such as CMA CGM, MSC, Hapag-Lloyd and Hamburg Sud also run Caribbean services. Transport between the islands is offered by CFS, in addition to the South Florida players.
Asked how carriers would respond to the coronavirus crisis, Ross predicted, “If there’s not enough volume to support four or five sailings a week from South Florida to a particular market, there’s going to be some type of operational consolidation where you start sharing space on ships. I think there’s a whole lot of conversations going on right now on how to control capacity.”
Those plans are already in motion. An application by King Ocean, Seaboard and Crowley has been filed with the Federal Maritime Commission (FMC) for the Caribbean and Central America Emergency Cooperative Working Agreement to “minimize the impact of the coronavirus pandemic.” Requests have also been filed for space-charter agreements between Crowley and King Ocean, and between Crowley and Seaboard.
“The Florida carriers have been fierce competitors for decades,” said Paelinck. “This new crisis will bring a new reality. It may very well create an opportunity for them to do things differently, rather than sending three ships more or less simultaneously from Florida in the direction of the same three islands.”
Florida carriers don’t own ships; they charter them for varying periods. Fleet elasticity is one of their primary skill sets. If they rationalize Caribbean services, they’ll cut their costs by letting ships roll off expiring charters.
That, in turn, would lead to an increasing number of small, idle container vessels at anchorage in places like Kingston Harbor, Jamaica, and rising losses for the largely German owners of such vessels — which is what appears to be happening.
“The number of ships available for charter in the Caribbean right now is higher than I have ever seen before,” said Paelinck, who noted that Florida carriers could increase their use of CFS feeder services to further reduce charter-in exposure while maintaining network coverage.
What if volumes are down 30%-50% for an extended period? What if this lasts a year? “I think that is the kind of question everybody’s concerned about,” Ross said.
“How quickly can the tourist trade pick up? How soon will people want to get on a plane and book a vacation at an all-inclusive hotel in the Dominican Republic or Jamaica? How long until some would get back on a cruise ship? How long until we see some form of normalcy?” he wondered.
Paelinck pointed out that summer is always the slow season for Caribbean tourism. “The earliest you can hope there’d be new motivation to travel would be November or December,” he said.
Meanwhile, the fragility of government finances in the region will exacerbate the fallout. Many of the islands were heavily indebted before the coronavirus outbreak. Several governments will be challenged to support unemployed residents, let alone underwrite a future recovery.
According to Juan Carlos Croston, president of the Caribbean Shipping Association, “Some of these governments have high levels of debt. In big economies, there’s a lockdown and a government rescue. In small economies, there’s a lockdown and governments have little or no room for fiscal or monetary policies.
“They are going to have to rely on the IMF and World Bank and governments in the U.S. and the Europe,” Croston said. “A large part of what happens next will depend on that. What happens will be different from country to country and from island to island.”
“Some of these countries, like Jamaica, signed agreements with the IMF and went through a lot of discipline and were just starting to show good results,” said Paelinck, who lamented, “Suddenly, this has all been washed away. It’s a real setback.”
“There challenges ahead, for sure,” acknowledged Ross. “But we just have to ride it out. I’m the eternal optimist. We will survive and bounce back.” Click for more FreightWaves/American Shipper articles by Greg Miller