Asia-to-ECSA Trade Booms as China Seeks Protection From US Trade War

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The Asia to East Coast South America (ECSA) trade is surging – and a major factor is a greater focus by China on boosting its business with this continent.

Drivers for this include moves by China to bolster its Belt and Road Initiative (BRI) in ECSA, an upsurge in its demand for Brazilian agricultural products and a very likely desire by China to compensate for the impact of its trade war with the US by strengthening its trade with other areas. Higher utilization, higher freight rates, a Brazilian economy recovering from recession to post a 2.1 percent growth in GDP in 2019 all add up to suggest that prospects are bright for this market.

A look at recent trade figures shows a clear boost in trade links on the Asia-to-ECSA trade lane. Looking at the headhaul figures, ClipperData figures show that demand has soared from 110,000-140,000 TEU to 165,000 TEU from March 2019. 2019 year-on-year demand is forecast to swell by 26 percent – a huge increase on the 2.5 percent growth rate between 2018 and 2017.

Asia – East Coast South America – Headhaul

Source: ClipperData derived from CTS/PR News

Supply has remained steady since July 2018 – at around 140,000 TEU. The latest figures show that as of June 2019, year-on-year supply grew by 9 percent.

Trade is also strong on the backhaul leg. Steady supply of around 140,000 TEU since July 2018 can be seen, while demand has been around 60,000 TEU since January. There is a greater demand from China for Brazil’s beef, soya, pork and chicken, as well as bulk commodities like iron ore and oil.

Asia – East Coast South America Trade – Backhaul

Source: ClipperData derived from CTS/PR News

ClipperData’s latest available monthly statistics show June backhaul demand soared by 21 percent compared to June 2018 and July demand up 10 percent on July 2018. Year-on-year supply was up by 9 percent and demand by 5 percent, while total TEU demand on the backhaul in 2019 is expected to reach 0.75M TEU.

The largest country trade flow on the Asia-ECSA market is China to Brazil, at 103,000 TEU in July, 47.5 percent higher than July 2018. This suggests that as the US-China trade war has escalated over this past year, China has been focusing on boosting up non-US markets such as Brazil.

The growth of China’s BRI footprint in Brazil has also helped trade develop. For example, China Merchants Ports Holdings has bought 90 percent of Terminal de Conteineres de Paranagua (TCP), an important strategic move as TCP is Brazil’s second largest container port, with volumes of around 880,000 TEU last year.

The development of COSCO’s services in the China Brazil/ECSA market are a major driver behind the rapid growth of trade this year in the market. The shipping line has boosted its market share from 14 percent in March to 17 percent in September. While it is in second place to market-share leader Maersk, it should be noted that the Denmark-headquartered carrier saw its share decrease from 26 percent in March to 23 percent in September.

Source: ClipperData derived from CTS/PR News/Clarksons

COSCO was also the standout performer when it came to capacity in June, increasing its capacity by a whopping 60 percent compared to June 2018, leaving other carriers trailing in its wake. Its capacity hit 73,500 TEU, versus 46,000 TEU for the same month the previous year. Part of this boost includes the addition of some old Panamax vessels that COSCO has introduced to this trade lane. The number of services increased from two to three in April and the average number of vessels deployed increased from five to eight.

COSCO’s capacity developments on the trade, coupled with the Chinese merchant group’s greater foothold in Brazil, suggest that this is part of a wider strategy to increase Chinese investment and trade in Brazil and East Coast South America.

But while China appears to be the powerhouse of this trade, other factors are also behind its development. Carriers other than COSCO are also eager for a slice of this pie. In July, ONE increased capacity on this trade by 44 percent over July 2018, and CMA CGM by 18 percent.

Carriers will be attracted by strong utilization rates, which in turn have bolstered freight rates. The surge in demand on the headhaul leg has had a knock-on effect on nominal load factor, jumping from 80 percent in February to 120 percent in July 2019, although it is set to decrease to 108 percent by November as demand contracts.

These strong utilization rates and the squeeze on capacity have bolstered freight rates – no doubt another factor attracting carriers to the trade. A particular peak in rates this year came in at the end of July, when on the Shanghai Containerized Freight Index, spot rates on the Asia-ECSA lane rose to $2,180 – up 131 percent from four weeks previously.

Other countries within South America are also strengthening trade links with China – a positive sign for future trade development. Both Peru and Chile have signed memorandums of understanding with China to support the Belt and Road Initiative. China and Argentina also signed a Joint Action Plan 2019-2023, to boost co-operation between the two countries.

Strong demand, rates and utilization, coupled with the continuation of the US-China trade war and the spread of Belt and Road Initiative, suggest that the growth of Asia/ECSA trade will continue to be strong.