The correlation between the behaviour of ports and freight rates in Latin America and the Caribbean during the COVID19 pandemic

By Ricardo J. Sánchez and Eliana Barleta

The sudden and prolonged action of COVID-19 on health, living conditions and the world economy, among others, has been of great magnitude until now, being characterized by four fundamental elements: the pre-existence of adverse conditions, the extent of the effects, the speed of the impact and finally, its intensity. 

Similarly, international maritime trade, throughout the world, has had notorious effects. The falls worldwide in container traffic were particularly marked in the months of April and May, lasting in Latin America a bit longer, after it was observed that in January and February activity was still on the rise. In the cumulative period from January to September 2020, the fall in containerised maritime trade worldwide was 3.5%, and in Latin America almost 11%.

In the first quarter of 2020, partially, and strongly in the second quarter, due to the adoption of strict measures by countries to control the COVID-19 pandemic, international transport and trade systems have been put under great strain. As a result of current circumstances, container trade volumes have varied significantly during the first 3 quarters of 2020. 

For exports and imports between regions, for the period January-September 2020, the effect of the coronavirus has been tremendously strong. There is a particularity in Latin America, which shows positive figures in exports, with the exception of intraregional exports, with a fall of -13.4%. With regard to imports, Latin America has been one of the hardest hit regions, showing a strong imbalance between variations in exports and imports in the region. According to the information provided by Container Trade Statistics (CTS), in forty-two of the forty-nine trade routes considered, volumes were lower than in the same period of the previous year, as can be seen below:

Variation in the volume of exports and imports between regions (in percentage), from January-September 2020/2019

Source: With data based on Container Trade Statistics (CTS), 2020

With regard to sea freight rate, despite the fall in the volume of containers mobilized globally, no significant falls have been observed in sea freight rates for containers. 

The falls suffered by sea freight rates in the first three quarters of 2020 have been less drastic than those of the same period in 2019. However, it is significant to note that, at the same time, they were much lower than in 2009 compared to 2008 considering similar drops in demand. It should be noted that on that occasion, during the period of maximum fall in transport demand, the reduction in freight rates was greater than at present. This is important to note because it shows a more pronounced capacity to manage quantities (and influence price levels) than that observed during previous crises.

At the beginning of 2020, the WCI (World Container Index, assessed by Drewry) was at a similar level to that observed at the beginning of 2019. In spite of this, and although the WCI has suffered, in both years, a decrease between January and April – which is influenced by the seasonal decline that normally occurs every year, between February and the beginning of March – the behaviour of the index during 2020 has almost always remained at higher levels than in the previous year. From October 2020 onwards, freight rates have exceeded 100% increase with respect to the same time in 2019. 

In the following graphics, it shows that from January to September 2020/2019, the cumulated growth of full sea containers around the world was of an average of 4% (first graphic). At the same time period, in October 15th 2020, global freight rate index was 100% above at the same period in 2019 (second graphic):

Trade in containers v/s freight rates 2020/2019

Source: With data based on DynaLiners, various editions; and Container Trade Statistics (CTS)

The case of freight rates from Asia Pacific to the US West Coast, which began to increase rapidly after the Chinese New Year (which is always associated with a seasonal decline), and in Europe since May. On the other hand, rates to South America East Coast remained in the markedly declining trend of cargoes mobilized, but already in May they show a reversal of the trend. In summary, four of the five major trade routes show an increase in freight rates in May and a completely different performance from what happened in the previous crisis.

The situation of the relationship between freight rates and containerized cargoes is similar, in some cases, to the above-mentioned antecedents. 

As it can be seen in the following graphics, the trade volume in Latin America and the Caribbean are not in line with the increase of freight rate. The graphics show three main routes with their origin in Shanghai: US West and East Coast, which influence Mexico, Panama and the Caribbean. Nevertheless, it does not mean that the increases from Shanghai to both coats in the US and the increase in Mexico, Panama and the Caribbean have been equivalent. Finally, rates from Shanghai to South America, that includes the East Coast of South America (ECSA).

Also, it is very important to mention that the increase is greater in spot freight rates than in contract freight rates. Spot rates affect small and medium sized importers, in which increases in freight rates were identified of up to 3 times their value in 2020 compared to the same period in the previous year. While contract rates have shown an increase of 15% of their value in 2020 compared to same period in 2019.

Another thing that might be influencing the increase in freight rates is the lack of containers in ports and the whole tangle of problems in logistics that are caused by this.

The following set of charts represents the reference rates for the most important maritime routes from Asia Pacific (towards the East Coast of the United States, the West Coast of the United States and the East Coast of South America). It is important to note that, in all cases for which data are available, the falls in sea freight rates in the first months of 2020 have been less drastic than those for the same period in 2019. However, it is significant to note that, at the same time, they were much lower than those of 2009 compared to 2008 considering similar falls in demand. It should be noted that on that occasion, during the period of maximum fall in transport demand, the reduction in freight rates was greater than at present (see the differences in the level of June and July 2009 with respect to 2008). This is important to note because it shows a more pronounced capacity to manage quantities (and influence price levels) than that observed during previous crises.

Reference freight rate index Asia Pacific – North America, base December 2017=100

Source: based on Shanghai Shipping Exchange (2020); Note: Data for 2008 and 2009 are not available for the East Coast

Reference freight rate index Asia Pacific – South America east coast, base December 2017=100

Source: based on information from Shanghai Shipping Exchange (2020)