An evaluation of BR do Mar and the future of Cabotage

Rapid expansion of the Brazilian coastal trades has led to a pending shortage of carrying capacity. Brazilian domestic cabotage reached 667,849 TEU in 2019, up 13% from 591,921 TEU in 2018, according to ABAC, the Association of Brazilian Cabotage Operators. The BR do Mar bill of law, which is the legislation put before Congress over the last few days, may be the solution to free up urgently needed extra capacity.

 

The backdrop for Brazil´s coastal shipping

Brazil’s domestic cabotage trade has been among the most consistently fast-growing containerized trade in the world for more than a decade, averaging more than 10% growth per year, and at times hitting 25% for specific quarters.  The overall market now totals almost 700,000 TEU per year, not including feeder and Mercosul cargoes. The latter, also known as international cabotage, along with feedering.

 

Also, since the hugely damaging truckers strike in Brazil – which paralyzed the country for more than 11 days back in May 2018 – the trend away from road transport and towards cabotage has increased further still.  This has added significant pressure on the existing capacity of the three players in the market to deliver regular, reliable, and decently priced services for shippers throughout the country.

Owing to strict flag requirements under Brazilian maritime law – guaranteeing coastal movements to Brazilian flag vessels crewed by Brazilians along the lines of the Jones Act in the US – Aliança Navegação e Logística (operated by the Maersk and Hamburg Sud group), Mercosul Line (owned by CMA CGM) and Log-In Logistica Ltda have all had to initially build up a fleet of vessels in Brazilian shipyards, or pay heavy import taxes on foreign-built ships and then re-flag them onto the Brazilian Special Register (Registro Especial Brasileiro, or REB). Today Aliança holds between 52- 57% of the market with the rest split between its two rivals, who work very closely together in a series of joint services.

Building at expensive Brazilian shipyards became increasingly difficult after 2014 with the ‘Operation ‘Car Wash’ police inquiries – involving corruption at the highest levels of Petrobras and Brasilia – gaining momentum and spreading rapidly into the shipyard sector.  This led, eventually, to the closure of several shipyards, including Estaleiro Atlantico Sul, which had signed a Memorandum of Understanding (MOU), back in 2017, to build two 5,000 TEU vessels. The Maersk Group is now looking again at Chinese yards, namely Shanghai Shipyard Company, where it successfully built (and then imported at huge cost) two 4,828 TEU vessels back in 2015: the Vincente Pinzon and Bartolomeu Dias, still the largest vessels deployed in ECSA cabotage and coastal trades.

Since building new ships in Brazil is no longer a viable option, the three carriers have each had to stretch their ingenuity to find ways to increase capacity and stay the right side of the regulations, especially regarding bareboat chartering and the REB.  As long as they had several Brazilian flag vessels operating – or even under construction – they were allowed to charter in foreign vessels.

Currently, REB rules allow Brazilian Shipping companies to bareboat charter (BBC) and register foreign vessels under the Brazilian Flag. The limit is 50% of the company’s owned Deadweight tonnage (DWT), added to twice the DWT under construction at a Brazilian yard.

An exception is applied when the company owns a single Brazilian vessel. In this case, it can register a foreign vessel under the bareboat charter as REB up to their Brazilian vessel’s DWT. This has led some companies, such as Log-In Logistica, to split into multiple units in order to increase their REB registration capacity. They did this with the recent addition of the Log-In Endurance to their fleet (see below).

 

Why the need for change?

“For many years there was often a fair amount of spare capacity available under that system but it has nearly all been used up now,” said Armando Freigedo Rodrigues, a director with the Rio de Janeiro based Aquapar consultancy, which has been advising companies on cabotage regulations for more than two decades.

“There is still some wriggle room for chartering in more foreign tonnage but not much. Cabotage has been growing like that [more than 10% every year] for about 10 years now, especially since 2018. BR do Mar could open up the coast to much more competition.”

Newcomers into Brazilian cabotage will be encouraged – via BR do Mar – to go for new routes and to find markets that don’t currently exist.

Armando Freigedo told DatamarNews: “there are some possible shipments, from the South to the North of Brazil that today are too expensive but if you do a simple Time Charter it becomes feasible. This is one idea, that BR Do mar will be better able to develop new business in cabotage and discover new routes that do not exist today; as well as improving the Container Transportation that already exists.”

The veteran consultant, who used to work for the Brazilian Department of Merchant Marine (DMM), puts the continuing rise of cabotage down to two things: The continuing growth of commerce in Brazil and cargoes migrating from road transport to sea transport.

“The truckers strike in May 2018 was a tremendous boost to the cabotage operators as shippers in Brazil discovered that they could send their cargo by sea in a very efficient way and change their traditional way of doing things,” added Rodrigues.

“At the same time, since then the container lines have been improving their logistics operations and have turned themselves into multi-modal operators, adding lots of short distance trucking operations to their portfolios.”

Indeed, they have.  During the 2018 truckers’ strike Aliança beefed up their trucking operations in Manaus with an extra 50 trucks so that they were not so dependent on the 1 million-plus freelance truckers who had led the strike actions, and Aliança – which also handles inland trucking operations for Maersk and Hamburg Sud – has also invested in an inland logistics terminal in São Bernardo do Campo (part of the ABC industrial region located between Santos and São Paulo, heavy in auto manufacturers including Ford, Mercedes Benz, Toyota, Volkswagen, and Scania). The extra trucks now serve shippers in the state of Sao Paulo, with regular trips to Campinas, the second-largest city.

Freigedo Rodrigues says that “having the right inland infrastructure is key to winning over any reluctant shippers from trucks” on a more permanent basis, and Aliança seems to be following that.

Mark Juzwiak, the head of institutional affairs for Aliança Navegação and a Hamburg Sud executive, concurs with Rodrigues and said that in the aftermath of the Truckers’ strike there were many opportunities to convince shippers to “give cabotage a chance”. Many did and liked what they experienced.

By the end of 2018, despite losing nearly two weeks of business due to the shutdown, coastal carryings were up by 12%, and the boost in June and July of that year was over 20%.

“I think everyone woke up to the Cabotage option back in mid-2018,” explained Juzwiak, who has been heavily involved with the Association of Brazilian Cabotage Operators (ABAC), along with his contemporaries from Mercosul Line and Log-In, in lobbying Brasilia for new legislation such as BR do Mar. ‘Let’s give it a try’, said many of our shippers and it’s worked out pretty well for them since then,” he added.

The figures just keep rising, despite a small hiatus due to the coronavirus pandemic. And that means that with further continuous 10% annual increases expected to resume again next year, much more capacity is now required.

The successful growth of cabotage and feeder volumes over more than a decade, means that capacity problems have only been averted this year because the COVID pandemic – and its effects both in Brazil and its trading partners, especially China – has slammed the brakes on the 10% plus growth prospects. ABAC figures show a fall of 7%, to 293,000 TEU for the first six months of 2020, compared to the same period of 2019.

 

What is being done about it?

By the second to third quarters of next year, the coastal operators are expecting a full recovery of the Brazilian economy after the ravages of COVID. This will take them back towards full capacity and more vessels will be required – probably in the 2,500 to 5,000 TEU range – so the Minister of Infrastructure, Tarcisio Gomes de Freitas, will be stepping up his radical plan, called BR do Mar, to open up the 7,400 km long Brazilian coastline to long-term charters flying foreign flags, but with provisions for two thirds Brazilian crew.

Ever since the BR do Mar plan originated –  during early 2019 – there has been stiff opposition to it, from maritime unions and shipbuilding interests, but over the past few weeks, the initiative to bolster cabotage capacity and possibly bring in new players has made significant progress.

BR do Mar is the brainchild of Tarcisio Gomes and has the backing of President Jair Bolsonaro although it is now no longer as strong as it was, owing to the expected opposition – from Sinaval and Sindmar and the powerful trucking lobbies – that might affect his core voting base. Various analysts say this is the reason why the BR do Mar was not brought in as a Provisional Measure, which would have had immediate legal effect. By dragging the process through Congress, many groups and political groupings can have their say and, therefore if it is not well accepted, Bolsonaro will take less of the blame, so the argument goes.

But the optimists say that after two readings in Congress it could become law by Christmas.

Luis Resano, the executive director of ABAC is one of the optimists.  He says, “this is a good scheme to incentivize the cabotage sector and the aim of the program is to increase the capacity for carrying freight in the container sector by 40% over the next five years,” Resano told  DatamarNews. “It’s a very aggressive program and if all goes well it could be law by Christmas.”

However, he added that ABAC members were still “paying more for bunker fuels” and this will not change with BR do Mar as it is.

 

Political Process

If the original concepts are not watered down too much by Brazilian Congress, the BR do Mar legislation should open up the long Brazilian coastline – some 7,400 km – to foreign flag vessels on Time Charters for the first time, and new companies, such as MSC, Hapag Lloyd and Posidonia could provide new competition for the three existing players.

One experienced shipping consultant, who preferred not to be named, said that although existing cabotage players could gain by increasing their fleets, there was a danger for them if brand new players – such as MSC or Hapag Lloyd – entered the fray and took away some of their business.

“I see BR do Mar as a very good thing for Brazil, especially for newcomers but I am not so optimistic it will be resolved by Christmas as there is a lot of politics involved, and the unions are also starting to flex their muscles,” said the São Paulo based consultant. “Shipyard association Sinaval are a powerful lobby and they want to stop BR do Mar. They want government subsidies for shipbuilding in Brazil, but there is no desire for that at the moment, so it won’t happen anymore like it did under Lula and Dilma [Rousseff].

“Alongside the big players, such as MSC, who have wanted a slice of the action for a long time, especially vis a vis feedering, there are also small outfits such as Posidonia who have been trying to enter these trades in recent years.

“Small outfits might get a foot in the door but may not have the infrastructure to offer sufficiently reliable services so that could be a problem further down the road.”

 

Some possible pitfalls

The old adage: “Be careful what you wish for”, is also applicable with BR do Mar. The “flexibilization” involved with opening up foreign-flagged time charters could lead to some unwanted consequences.

Juzwiak of Aliança told DatamarNews: “BR do Mar is an opening for us to reduce the bureaucracy by having your own ships but at the same time getting ships on bareboat charter is not that easy, as shipowners will not just give their ships away to anybody who comes along with an offer.

“I think some in the market are under-estimating the complexities of bareboat chartering. At ABAC we are also trying to limit the age of vessels because we don’t want rust buckets floating around.”

Several other senior executives also warned against the appearance of inexperienced, ill-prepared entrants into the market, “operating rust buckets” which will “drag down the reputations of all cabotage and coastal operators”.

“The decision-makers in Brasilia, when making up the final legislation for BR do Mar should remember the case of Maestra a few years back,” said one veteran shipping director.

Around six years ago there was a fourth player in the Brazilian market, Maestra Navegação, but they had old, decrepit vessels – such as the Neptunia Mediterraneo, which ended up arrested in Ushuaia, Argentina – and had just one fortnightly service.

“They did everything wrong and it was never going to work,” said the São Paulo based consultant. “Shippers will gain from new and qualified competition but not from substandard sources. I think the market here in Brazil can take one or two new entrants, but they have to be competent players.”

 

Concluding thoughts

According to Luiza Bublitz, CEO of Mercosul Line, “balancing the Brazilian transport matrix is crucial to improve business competitiveness”.  She said, “The BR do Mar is a game-changer for cabotage. It will enable customers to access broader coverage with extra capacity, and will also allow a more efficient logistic chain with cost reductions helping customers to reach new markets.  The stability and reliability of cabotage needs to be maintained nonetheless, through long-term commitment, investments and dedicated operations in Brazil.

Several ports will gain from the anticipated boost to cabotage, notably Santos (currently with 38% market share), Manaus (15%), Itaguaí, Suape, Pecém, Itajaí, Vitoria and Itapoá. These eight ports handled 90% of all Brazil’s cabotage during the first five months of 2020 according to data from Datamar, as shown in the table below:

 

Statistics of TEU handled are sometimes a moot point among coastal operators in Brazil, with players sometimes trying to keep data close to their chests. Log-In Logistica is quoted on the Bovespa (São Paulo stock exchange) and therefore has to release figures every quarter but since the start of 2019, it has stopped giving out breakdowns of coastal carryings into its constituent parts: cabotage, feeder and Mercosur shipments.

Like its rivals, Log-In has seen a small retraction in throughput during the first half of this year, with overall coastal shipping (cabotage, feeder, and Mercosur) seeing 170,500 TEU handled, down 2.8% compared to 175,000 TEU handled during the same period of 2019. The effects of COVID were more pronounced during the 2nd quarter of this year which showed an 8.4% fall, from 91,500 TEU for April to the end of June 2019 down to 83,800 TEU for the same 3 months of this year.

Log-In works closely with Mercosul Line on a number of coastal joint services, sharing slots on many of those. It also added a newly acquired vessel, the Log-In Endurance (bought by Log-In subsidiary Log In International GMbh) for $13.1million, at the start of this year, and deployed her in the South Atlantic Service (SAS) since May.

Log In posted record handling in 2019 of 357,800 TEU, up from 340,300 TEU in 2018, including feeder and Mercosul cargoes. 2018 was the last year where the results showed the coastal services split. In 2018 Log-In handled 179,000 TEU of feeder cargo, down 35% from 185,400 in 2017 and cabotage cargoes were up 13.6% from 109,000 TEU to 123,800 TEU.

Marcio Arany, the CEO of Log-In Logistica Ltda, believes in BR do Mar but also that the market should be aware of “opportunistic newcomers”.

“We believe BR do Mar will improve Cabotage volumes with time, but it is very important to avoid opportunistic newcomers that may potentially compromise the reputation of the modal, by offering a bad service, not reliable, with old and not ecologically friendly vessels. The present fleet is very well adapted and adequate for the cabotage environment,” said Arany.

Arany told DatamarNews that, with the addition of the Log-In Endurance, the company now operates six container vessels (five of 2,800 TEU and one of 1,700 TEU capacity), of which two are built in Brazil, one was imported (Polaris) and three (including Endurance) are on bareboat charters and were built outside Brazil.

With that setup, Log-in is just about at the limit of what it is permitted to charter in, so its shareholders cannot wait for BR do Mar to be completed to allow more capacity to come on tap once the economy picks up.

Log In, along with Aliança and Mercosul Line, have their fingers crossed that the legislation will be passed by Christmas.

 

_________________________________________________________________________________________________________

Cabotage Data Scenario – a Datamar Analysis

A few days ago, a well-known and respected former manager of one of Brazil’s leading cabotage operators, posted an opinion piece on social media where he, with witty humor, made a very clear point about the difficulties facing potential new entrants to the cabotage market. See his article here: https://www.linkedin.com/posts/gustavo-costa-736b15123_cabotagem-ugcPost-6701200725638230016-oyic. There is no data you see. Actually, let me rephrase that: There is no good, detailed, domestic cabotage data. Data that would allow new entrants to understand where they might invest their efforts. Or that would allow existing players to make their operations more efficient. The data that does exist does more harm than good, duplicating and triplicating the size of the real market, mixing up international cabotage with domestic cabotage and feedering.

A short analysis by Datamar indicates what cabotage data can currently be gleaned from available data sets. Within DataLiner it was possible to identify Feeder volumes, Intra-ECSA volumes, and Plate cargoes transshipping in Brazil. These represent three of the four types of movements that could be considered part of cabotage shipping.

It is possible therefore to analyze some interesting aspects of cabotage shipping. Specifically, feedering and Plate transshipments in Brazil. These markets are likely to continue to grow as ship sizes grow. The number of services calling directly at Buenos Aires continues to drop, and the extension to terminal operators there means increased dredging of the canal into Buenos Aires is a long way off. That means smaller vessels picking up cargoes from Buenos Aires and transshipping them either in Montevideo or in Brazilian ports. The fight for these cargoes is especially important to Montevideo and in 2019 they were able to eat back some of the market share previously taken by Brazilian ports, as can be seen from the data below.

Competition for Transshipment of Argentinian Cargo | TEU per annum | 2010-2019

Source: DataLiner 

(To request a demo click here)

 

As far as domestic cabotage goes, however, it is harder to obtain a reading of cargo flows. Data available from Antaq, Brazil’s water transport authority, is detailed, but prone to several flaws. Since data is reported by individual ports, one container shipped from say, Santos to Manaus, will be counted as a Load at Santos and as a Discharge at Manaus. If it transships in Suape, it will be additionally be considered a Load and a Discharge in Suape, meaning one cabotage container will be counted four times. The Antaq database is not able to dismember individual container movements and therefore any grouping and aggregation of numbers leads to gross overcounting. Additionally, reporting of the same type of movement can be reported differently by different ports. For example, how does a port report a container arriving in Santos from Buenos Aires, transshipping there, and moving to China? Was that container a cabotage discharge or a deep-sea (long-haul) discharge? Was it also a deep-sea load, or also marked as a transshipment?

Making sense of the available data is truly an analyst’s nightmare. All of which represents a further challenge to those who choose to enter the market. But then again, some companies thrive on challenges.

_________________________________________________________________________________________________________

 

BR do Mar explained:

BR to Mar adds an extra flexibility to Brazilian vessel owners, as it allows them to charter in foreign vessels under bareboat charter, and to utilize them in cabotage trades. The extent to which this is permitted is based on the owned tonnage and REB capacity used. In other words, based on the DWT of the company’s vessels under the Brazilian flag. This is aimed at the container sector, although the bill in Congress does not restrict it to other types of vessels such as bulk carriers and tankers.

BR do Mar also aims to incentivize the use of cabotage for new projects, by allowing the use of foreign chartered vessels in new routes. It is intended to be used in a long-term project for the transport of commodities such as iron ore, for example.

But BR do Mar does not have any self-applicable regulations. All measures proposed will need regulation by Executive Decree and other instruments to be issued by ANTAQ, the regulatory agency.

Source: Rob Ward for DatamarNews

Sharing is caring!