Brazil facing container shortages & soaring freight rates due to this year’s international trade disruptions

An overview of Brazil’s trade trends this year

Both imports and exports have been on quite a journey this year. Datamar figures show that imports were 216,839 TEU in January and steadily fell to a year’s low in June, with 119,492 TEU (down a massive 40% compared with the 2019 figure of 199,666 TEU). At the same time exports have steadily risen every month from 201,140 TEU in January up to 251,376 TEU in August and then to 258,462 TEU in October, which is the latest figure to be released. The only exceptions to this rise/fall scenario were in April, when imports rose slightly and exports fell a little, and in September when exports fell slightly (by just 2,800 TEU) compared to the previous month.

After Brazilian imports started the year with healthy increases of 15% and 13%, respectively, for January and February, they began to nosedive as the full effects of COVID-19 started to kick in. By May imports were down by 21% (to 152,504 TEU, and in June they were down a catastrophic 40% (to 119,492 TEU) compared with 2019. However, since June, imports have risen significantly to the surprise of almost everyone as shown in the graph below:

Imports data 2019 e 2020 and the difference

Source: DataLiner

The following graph uses Datamar’s DataLiner data to illustrates how the import/export balance has fared in recent months. The month of October showed only 48,500 TEU more exports than imports yet back in June there were 113,000 more TEU exported than unloaded. During both January and February of this year, the gap was just 15,000 (in favor of imports) and 16,000 (in favor of exports) TEU difference.

Trade Imbalance in Brazil (TEU: Jan 2019-October 2020)

Source: DataLiner

With heavy demand for empty containers currently a worldwide phenomenon, a fair degree of “prioritization” has been going on as carriers’ logistics departments try, wherever possible, to send the empties to the “highest paying routes”. There also seems to be a tendency to avoid the longest distance routes as this can mean empties taking 40 plus days to get back to an exporter ready for the next round of stuffing. To a large extent this has meant getting boxes from the US, or Brazil and ECSA as well as Europe back to vessels on the trans-pacific trades which have seen record freight rates, and high profitability for carriers per nautical mile.

Shortage of containers on East Coast South American trade…

As we went to press the Real was trading at 5.3 to the US dollar and 7.0 to the Pound Sterling, up from an average of about 4.2 to the greenback between 2016 and 2018, which are close to historic highs, and massive increases over recent years. It peaked at R$ 5.89 to the dollar on May 14 of this year. Throughout 2019 the average exchange rate was around 4, and 3.2 in 2017.  In 2014 the average was 2.3 Reais to the dollar and throughout 2011 it averaged just 1.65, so over the past five to six years Brazilian goods have become 250% cheaper to buy on the international markets.

And since COVID-19 broke and consumers around the world cannot spend their cash on holidays and travel (because it is banned or, at best, restricted), or eat out (many restaurants are closed) or even use services and entertainment (such as beauty parlors, gyms, sports clubs, movies, and the theatre), they have instead since mid-year been spending on better quality food and home improvements and re-equipping their offices and homes with TVs and electronic goods. This has led to a dramatic increase in meat and fruit exports out of Brazil, in the first instance, and then, once some consumer confidence had returned, on items for the home such as fridges. Regular handouts from the Bolsonaro government to the poorest sectors of society have also kept cash circulating and oiling the economy, especially via online and direct shopping.

And the thirst for electronics has accelerated recently with the Black Friday sales (November 27) and the perennial Christmas rush which, in turn, has led to a chronic shortage of empty containers (see below) especially in Brazil and loading ports on the East Coast South America.

“Currently Brazil faces container shortages partly because of the record freight rates on the Trans-Pacific trade lanes between China and the US,” Patrik Olstad Berglund, the CEO for Xeneta, the Norway based freight rate benchmarking outfit, told Datamar.

Berglund explained that with Transpacific rates soaring ever higher since mid-year, when North Americans decided they would spend on DIY and home improvements as well as refurbishing their home offices, empties from all around the world have been quickly funneled back to China by shipping lines who are keen to make hay while the profitable sun is shining, thus leading to Brazil facing container shortages.

“It is first and foremost about supply and demand,” explained Berglund. “This year, on top of that container shortage, there has been a heavy demand for boxes so the situation is that shipping lines do not want to transport cheap containerized agricultural products to Asia because it takes too long to get the box back to the front haul where there is so much demand and the rates are very high.”

In the past when there was less of a differential it might have been possible for shippers to get US$500 for the back-haul box, carrying something like fertilizers or soya beans, but now that would be to the detriment of profits on the front haul.

…Leading to record freight rates…

Freight rate pricing index platform, Xeneta, reported that spot rates from China (main ports) to West Coast United States in 2019 were stable, averaging about US$1600 per dry FEU during 2019, and ranging from US$1300 to US$2200. At the start of 2020, these spot rates continued in that vein until May/June after which there were large incremental jumps during the middle of each month (General Freight Increases) taking the spot rate up to US$3000 per FEU by July and just under US$4000 from the end of September up until early December.

Xeneta also posted that rates from China to Panama (where a lot of West Coast South America and ECSA cargoes are transhipped) had rocketed this year from a low of US$1263 per dry FEU on June 13 to a high of US$5,028 on September 16, an increase of 291% in just two months! The average for July was US$1481, for September US$5000, and for October US$4,400 per FEU.  In early December they have now reached US$4,841, according to Xeneta.

Regarding China-ECSA, which is always a volatile trading lane, Berglund said this year had been in keeping with that tradition.

“From November 2019 rates were already trending upwards because of costs involved in IMO 2020 compliance,” he told Datamar. “Then by January 2020, spot rates from China (main ports) to Santos were US$1934 per TEU and US$2513 per FEU.  From January to the end of July rates continued downwards until they hit their lowest in July, of US$836 per FEU and US$760 per TEU. After that they rapidly increased to record levels of more than US$5000. From mid-year rates have increased on this volatile trade lane by more than 500%, which is unprecedented.”

Xeneta figures then reveal that rates from China to Brazil went exponential. By the end of August to the beginning of September, rates hit a record US$4,616 per dry FEU and US$4,521 per dry TEU: the previous record was US$3,800 back in 2018. By mid-October, they had reduced slightly to US$4,085 per FEU, but then, as we went to press in early December, smashed through the US$5,000 barrier to US$5,300 per FEU. which is now the highest in the world, although not per nautical mile.

“Most of the increases came in August and September, and then rates were fairly stable after that until mid-November when they pushed upwards again,” explained Berglund.  “It’s due to a combination of equipment availability and capacity relative to the market.”

Not only have the rates been much higher all year on the Trans Pac routes but the voyage time there is much shorter (12 to 14 days from Shanghai to LA/Long Beach) compared to ECSA to Shanghai, which is 34 to 38 days (from selection of carrier offerings, including Hamburg Sud and MSC). Those voyages involve intervening ports of call but a direct sailing, at 15 knots, from Santos to Shanghai in China would take 30 days to cover the 11,140 nautical miles, while Shanghai to Los Angeles would take 16 days covering 5,741 nautical miles, which is half the time. Therefore, you can see clearly that to maximize their profits it makes much more sense for shipping lines to get their empties back to Trans Pac vessels as quickly as possible, to the detriment of ECSA trade routes.

Whilst demand has heated up, another factor that has helped keep freight rates strong has been better control of the supply side of shipping.  Carriers have, for the past three years, been very careful not to provide too much capacity on ECSA to Asia and most other routes, so as to prevent the catastrophic (from their point of view) consequences of early 2016 when rates were very low and even went below $100 per TEU (China to Santos) at one point.  Carriers lost millions of dollars that year and have been taking careful steps – by slashing capacity that year by 40% and restricting new capacity – to make sure that doesn’t happen again.

Even this year, after China shut its ports and closed many factories, carriers introduced several blank sailings to keep capacity low and rates high but from mid-year it has been, regarding vessel deployment, “all hands [of ships] on deck”, as Drewry’s Heaney told Datamar, to deal with the pent-up demand. Once that demand kicked in all the laid-up vessels were gainfully deployed and very few ships were available on the charter market.

“Because shipping lines have found ways to control capacity like we have never seen before they have managed to keep rates high,” said Gustavo Costa, a highly regarded consultant and former logistics and cabotage manager at Hamburg Sud.

He noted that MSC and others were buying second-hand tonnage and “the chartering market is sky high with 5,000 TEU vessels costing US$15000 per day, compared to just US$9000 a day 3 months ago.”

Another executive of a shipping line heavily involved in coffee exports out of Brazil said sometimes it was the shippers themselves who were to blame for not being better organized and for booking space on ships while covering possible future options that often did not materialize.

“Overbooking and last-minute pull-outs by cargo owners doesn’t help maximize the space that we do have on vessels so reliable advance bookings would reduce last-minute panicking,” he divulged.

…and the ‘black swan’ effect.

Simon Heaney, the senior manager for container research, at Drewry’s consultancy and editor of the Container Forecaster, has written incisively and prolifically about the “Black Swan” events [ones that are highly unlikely to happen but do occur sometimes] that are dominating container shipping during this very strange and bizarre year of COVID-19:

“The current state of the container market is one of dysfunction, bordering on chaos,” explains Heaney. “Supply chains have been stretched to near breaking point by the unprecedented volatility in demand swings this year, the result being numerous port congestion notices popping up in all continents, from Sydney to Felixstowe and many places in between.”

Drewry’s indicates that Los Angeles/Long Beach, Lisbon, and Fuzhou in China have also been heavily congested, causing delays and exacerbating the container shortage.

One partial solution to the empties’ shortage is to manufacture more containers and although that is occurring in the few plants remaining – Maersk closed down its container plant two years ago and Paulista Containers, in Santos, closed for business more than a decade ago – they can’t be built quickly enough to plug the gaps for the current deficit.

“Manufacturers of containers are fully booked until June of next year and the demand is still growing,” Costa told Datamar.  “As has been the case in the past if you have strong East-West trades then it means the North-South trades will have to pay the bills as they are the less paying freight. East-West rates are now sky high and increasing every week…”

Share prices of the few remaining container manufacturers, mostly located in China, have been booming in recent months.

Container shortages curb Brazil’s trade.

Clearly, the weaker Brazilian Real has been extremely good news for exporters –beef shippers such as JBS and BRF, plus chicken exporters such as BRF (which slaughters 7 million chickens and 34,000 pigs a day and exports to 120 countries) Aurora, Seara, Copacol and Super Frango, as well as producers of orange juice, coffee and many exotic fruits such as mangoes, melons, watermelons, bananas, lemons and limes, grapes, papaya, and pineapples – but those economic skies have, in recent months, been laced with some grey clouds in the guise of Brazil facing container shortages of empties in which to fill the lucrative export goods.

Various shipper associations, including, Sindipecas (The National Association of Brazilian Auto Parts manufacturers) and Abipeças (The Brazilian Association of the Auto Parts Industry), Anfavea (the Brazilian Association of auto manufacturers), Abrafrutas (Fruit exporters association), ABPA (the Brazilian Association for Protein producers)  and Cecafé (the Brazilian Council for Coffee Exporters) have been complaining about the shortage of empty containers that has been acting as a heavy anchor on further export flows for Brazil.

Since the middle of this year coffee exporters, led by their National Council for Coffee Exporters (Cecafé) have been complaining vociferously about the lack of empty containers impeding their expanding exports.

According to DataLiner in September of this year, Brazil achieved record levels of coffee exports, growing 15.4% year-on-year to reach 13,154 TEU, which was an increase of 14.64% compared to 2018, but it could have been many more if not for the shortage of empty containers.

Nelson Cavalhaes, the president of Cecafé, said that the month of September, when shortages of empties began to bite, also marks the beginning of the 2020/2021 harvest and he pointed out that export sales could have been up to 15% if not for the box shortage.

“We are very satisfied with the results of coffee exports in September. The sales volume set a record in relation to the same month in previous years and, in addition, we had a very significant increase in total revenue in Reais,” he told Datamar News.

“We also observed that the results could have been even 10-15% better had it not been for the logistical problems of a lack of containers and space on the vessels.”

Mark Juzwiak, the director for Institutional Relations for Hamburg Sud and Aliança Navegação, said that several high-level meetings had been held with coffee exporters and efforts had been made to meet their demands and address concerns.

“I had several meetings with the coffee association as they had concerns about the perceived lack of containers,” he told Datamar. “We brought a ship full of empties over from the US and another with 2500 reefers from Europe back in June to help plug the empties’ gap.

“We honored our commitment with the contract-based shipments and whatever was extra we tried our best to accommodate but, as we pointed out to the coffee shippers, it was not just the lack of empty containers but also a lack of space on the ships.”

Just as we went to press, Cecafé released the news that October had been even better than September, with a 21% increase up to 4.44 million bags of coffee exported. The Cecafé spokesman added that after a poor start and middle of the year exports are now 3.2% up on last year and that some, but not all of the logistical problems have been resolved.

“With COVID-19 it has been a challenging year, but it has been an amazing result to have exported 35.4million bags from January to October, with records broken in September and October,” he stated. “Our members have had problems with container shortages and rollovers, especially in September and October and we continue to have challenges, but they are fewer now than they were. Coffee exporters do still suffer from increased port and maritime expenses, but overall, it has been a good year.”

Meanwhile, on the import side, Costa commented: “Everybody is complaining about the lack of parts, those needed to assemble TVs and other electronic goods, plus, auto parts for cars,” he told Datamar. “This was because many manufacturers shut down their plants for long periods mid-year or were at half-capacity. Now, however, they are full out and have three shifts running at the same time. This has especially been the case in the Manaus free trade zone in the run-up to Christmas with the plants producing White goods.  Consumers want their goods and want it now but there is no space on vessels to accommodate those demands.”

Datamar’s latest figures (up to the end of October) show how the import of vehicle parts plummeted from 21,576 TEU in April, to 11,352 TEU in May and then to 7,230 in June before picking up again to register 113,620 TEU by the end of September.

Costa also asserted that the shortage of empties was having a knock-on effect with the Brazilian cabotage trades.  “At some ports, it looks like cabotage has been paralyzed!!  The shortage of containers in the US and elsewhere is getting critical in Brazil here as well,” declared Costa. “Due to the lack of containers from the Deep-Sea services, only Log In Logistica can manage their own. The other coastal operators seem to be handing over priority to deep-sea needs.”

In Brazil, there are three coastal carriers and two – Mercosul Line and Alianca – which are fully owned by CMA CGM and Hamburg Sud/Maersk Line, respectively. Log-In is fully focused on Brazilian interests and so has no need to hand over its much-needed empty containers to deep-sea sisterships.

Conclusion

Looking ahead to next year, most of the experts interviewed for this feature, agreed that the current high freight rates are not sustainable in the mid to long term, but that they will continue into the New Year.

“But how long will this boom last? I think it could last at least until after the Chinese New Year, [which is the year of the Ox and starts on February 12, 2021], so we are not expecting a first-quarter dip,” said Drewry’s Heaney. “All export trades out of Asia are still soaring, back-haul trades as well, so the trend to get containers back to Asia asap will continue for carriers for a while.

“What we are also seeing is that other freight rates, such as China to ECSA, are leveling up and there is an optimal ceiling as to how high rates can go…they are very high and its v profitable… chasing the money but as the other trad lanes are coming up as there are shortages everywhere and so carriers are having to put their rates up in other areas, which will become equally expensive. It’s been a rising tide for all trade lanes.

“But the bubble will eventually burst, probably after Chinese New Year, due to the fundamentals.  If it’s for immediate consumption that is one thing. but if it’s for re-stocking that will eventually create a vacuum and even with the vaccine coming there is the economic damage that must be dealt with; high unemployment will come, and government debt is going up. A few more months of this and then it will settle down.  The supply chain will right itself back to normal then. Too many ships, etc and lower rates for shippers.”

Xeneta’s Berglund was of a similar opinion: “Over the past year we have never, ever before seen anything like this, in either the China to WC USA or China to ECSA,” he explained to Datamar. “The rates have quintupled on ECSA since midyear and are still rising due to the shortage of equipment. However, I think with the arrival of the vaccine spending will switch away from physical products and back towards services and travel, probably at some point during the first half of next year, and that will see volumes calm down.

“From a shipper perspective, contract negotiations are ongoing and many are asking for extensions on existing long-term contracts which have risen by 30% in recent months [from $1528 per FEU to $2010], before they rise again”

Berglund also pointed out that regulatory authorities might also be set to intervene if rates go too high. “Our data shows that the spot rate from China to US west coast was very stable, around $3,900 from late September through into October, and I have not seen that before. This suggests the carriers have been warned that their rates are too high for shippers. Ever since Xeneta opened for business, we have never seen this flattening of the spot rate before for such a long time.”

And Hamburg Sud’s Juzwiak said that many of the problems encountered earlier in the year had stabilized and that “most trade lanes were balanced now.

“At certain times this year we have had an excess of standard 40 footers, but everyone wants high cube, so we offered better rates for standard boxes to ease that problem,” he told Datamar. “I think going into Christmas and 2021 the ships will be full for a few months yet, probably till Chinese New Year and Carnival [which both start on February 12].”

Patricio Campbell, the President of ONE in Argentina, said he could not see the import impetus lasting beyond Christmas, but then again Argentina’s economy is more than Brazil’s.

Costa believes the US and China situation will still be key for international trade. “I cannot say when the next normal will be, maybe mid next year with vaccines,” he told Datamar. “But there’s a point that we cannot discard, which is Biden being elected as new US president. How will the US act in international trades next year?

“Trump was a crazy guy but will it be so very different from the past four years of craziness with Trump?

“China has a lot more power now because Trump’s policies created a power and trading vacuum so we now see new trade flows from Asia independently from the US.”

 

Container carriers

Among the container carriers there have also been winners and losers during this pandemic afflicted year.

On the imports side Hamburg Sud was the biggest loser, dropping nearly 58,000 TEU, and 14% down to around 360,000 TEU for the first nine months of this year. Second highest importer, MSC. also fell 14% (to 327,000 TEU), while Hapag Lloyd dropped 12% and Maersk fell 5%. Biggest loser in percentage terms was Pacific International Lines, which dropped 23% to 41,200 TEU.

Imports by carriers | Jan to Oct 2019-2020

 

wdt_ID	Carrier	2019 TEU	2020 TEU	Diff %
1	HAMBURG-SUD	417.965	359.493	-14%
2	MSC	380.091	326.923	-14%
3	HAPAG LLOYD	301.904	266.445	-12%
4	MAERSK LINE	245.891	232.800	-5%
5	CMA-CGM	220.485	213.518	-3%
6	OCEAN NETWORK EXPRESS	127.809	116.768	-9%
7	COSCO	102.446	87.414	-15%
8	EVERGREEN	76.890	66.176	-14%
9	PACIFIC INTERNATIONAL LINES	53.817	41.200	-23%
10	ZIM	32.299	25.396	-21%
11	LOG IN LOGISTICA SA	17.411	17.614	1%
12	YANG MING LINE	16.226	14.241	-12%
13	HYUNDAI MERCHANT MARINE	13.881	11.950	-14%
15	GRIMALDI LINE	5.106	2.513	-51%
16	NDS	532	476	-11%
17	MARFRET	4	9	125%
18	WALLENIUS WILHELMSEN LINES		4	0%

Source: Dataliner

On the export side MSC has had an excellent year, with 580,241 TEU handled, up 16%, while Hamburg Sud fell 5% down to 422,864 TEU, all for the first nine months of 2020. Maersk Line, in fourth, rose 12% (to 334, 833 TEU) and Ocean Network Express (ONE, which focusses heavily on ECSA to Far East), in sixth, jumped 8% compared to 2019 first nine months, with 95,984 TEU,

Exports by carriers | Jan to Oct 2019-2020

wdt_ID	Carrier	2019 TEU	2020 TEU	Diff %
1	MSC	502	580	16%
2	HAMBURG-SUD	443	422	-5%
3	HAPAG LLOYD	402	406	1%
4	MAERSK LINE	298	334	12%
5	CMA-CGM	258	261	1%
6	OCEAN NETWORK EXPRESS	89	95	8%
7	EVERGREEN	48	48	-1%
8	COSCO	57	48	-16%
9	ZIM	35	32	-9%
10	PACIFIC INTERNATIONAL LINES	27	21	-20%
11	NDS	13	15	11%
12	LOG IN LOGISTICA SA	10	11	9%
14	GRIMALDI LINE	11	8	-27%
15	HYUNDAI MERCHANT MARINE	7	7	-4%
16	YANG MING LINE	8	7	-14%
17	MARFRET	5	7	30%

Source: Dataliner  (To request a DataLiner demo click here)

Journalist: Rob Ward for DatamarNews

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