Insight – Region must keep a sharp eye on changing trade patterns

By Grantley Stephenson, President, Caribbean Shipping Association

On 20 March the United States Federal Maritime Commission (FMC) announced that it approved the P3 Network Vessel Sharing Agreement between Maersk Shipping Line, CMA CGM and Mediterranean Shipping Company (MSC), authorising the parties to share vessels and act in a cooperative way in the trades between the USA and Asia, northern Europe and the Mediterranean.

This agreement took effect on 24 March. The FMC said its decision was based on a determination that the agreement was “not likely at this time, by a reduction in competition, to produce an unreasonable increase in transportation cost or an unreasonable reduction in transportation service.” 

The Commission noted, however, that circumstances might change to cause the P3 Agreement parties at some point in the future “to unreasonably reduce services or unreasonably raise rates that could raise concerns; and as such the Commission directed staff to issue alternative reporting requirements to the P3 Agreement parties to assist the Commission in its ongoing close monitoring of the agreement.”

In coming to its decision, the FMC said it had taken into consideration a comprehensive analysis conducted by its staff and comments received from shippers and other stakeholders; and that it believed the agreement would produce operational efficiencies for the benefit of the US consumer.

Apart from regulatory hurdles in China, commentators believe the arrangement has the green light. The fact that US, Chinese and European regulators met in December and that the FMC has approved the undertaking could be a sign that the other regulators will approve without much further delay. 

In fact, the attitude of the European regulators seems to be that the lines can go ahead and implement the P3 arrangement because the arrangement does not represent a merger; and the European Union will reserve the right to intervene if it sees any uncompetitive practice at a later date.

According to the Journal of Commerce in January, the P3 Alliance will control 42 per cent of Asia-Europe capacity; 24 per cent of transpacific capacity and 42 per cent of transatlantic capacity.

Mindful

Alliances are nothing new and most of the top 20 shipping lines are in some form of alliance. We welcome any development that provides a benefit to the markets we serve. Nevertheless, we in the Caribbean need to be vigilant and mindful of how the evolving alliances will affect trade in our region, both in terms of prices levied on the markets we serve and in relation to the effects on the business of our ports. 

For example, a review of the suggested P3 routes points to a preponderant use of the Suez Canal for cargoes destined for US East and Gulf Coast ports. We also see strong usage of US West Coast ports and intermodal routes, with very minor P3 traffic in the Caribbean region.

This does not necessarily signal a negative outcome for the Caribbean, since these three lines and others will maintain other strings that serve the region; but it is worth keeping our eye on the ball to ensure that we can respond quickly to protect the considerable investments that Caribbean ports have made, particularly in recent years, in anticipation of a growing demand for logistics services.

Such keen attention is necessary when it is considered that Suez Canal traffic for cargoes destined for the US East and Gulf Coast ports is now roughly equal to Panama Canal traffic, on which most of the ports in the Caribbean and Central America depend. It has also been announced that Maersk will restore the SeaLand name in a new company dedicated to the intra-Americas market. It will be important to observe how this will affect the business of carriers focused on the Caribbean trade; and what effect the competition will have on shippers. 

While we focus on changes in the global shipping landscape, it is equally important to keep a watch on the regional economy. Our ports have a better prospect of competing if we can expand regional economies and stimulate trade within the Caribbean.

It is pleasing to learn that both the Inter-American Development Bank (IADB) and the International Monetary Fund (IMF) are forecasting a growth of three per cent this year for Latin America and the Caribbean. The IADB also projects a growth of 3.3 per cent in 2015. Both organizations pin this growth on improving economic conditions in the USA and Europe. The IADB says growth could be even higher if the region’s economies were to carry out growth-inducing reforms to boost productivity.

Exports

The IMF concurs with the IADB assessment of Latin American and Caribbean growth, citing world economic growth rising to 3.75 per cent, China at 7.5 per cent and the emerging markets at about five per cent. The IMF predicts that global demand will boost tourism and exports in Central America and US construction activity will lift remittances, which was already on an upward trend in that subregion. The IMF sees Central America as a whole growing by 3.2 per cent in 2014 but considers high public debt and budget deficits as representing a risk to the outlook for some Central American countries.

In the Caribbean, the IMF expects tourism-dependent countries to recover on the back of rising US activity but forecasts that growth will remain low at just one and a half per cent. Caribbean commodity exporters would enjoy stronger growth at 3.7 per cent; but for some Caribbean countries, as in Central America, elevated public debt poses risks.

Overall, the outlook is better for most Caribbean and Central American economies. Such growth, if it can be sustained, will benefit the national economies of the Caribbean and Central America and, by extension, the region’s ports. It is very welcome news.

Another positive development is that agreement has been reached for the Panama Canal expansion work to resume. Clearly, the diversion of US East and Gulf coast cargo to the Suez Canal and other competing routes will take away potential benefits from all ports in this region. It is thus in the interest of CSA members that Panama should resolve any impediments to the smooth completion of the canal project.