Trade Report. Maersk Group. The Expanded Panama Canal An Enabler for Trade Q LATIN AMERICA

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1 Maersk Group Trade Report Q LATIN AMERICA The Expanded Panama Canal An Enabler for Trade As one of the most important waterways in the world, the Panama Canal currently serves 12,000 vessels per year, connecting 144 maritime routes and 160 countries. The expanded Panama Canal commences operations this year, allowing vessels of up to 15,000 TEUs to transit, effectively tripling the capacity. The Panama Canal expansion, which began in September 2007 at a total cost of US$5.2 billion, has been long cited as a catalyst for trade and a turning point that will double revenues from the for the nation of Panama. Looking at it logically, more capacity, in principal, should stimulate more trade. However, with global trade demand at its PAGE 1

2 lowest in decades, the full benefits of the Panama Canal expansion will unlikely be seen until demand picks up. Looking towards the future though, when trade does pick up, the Panama Canal expansion will prove to be a long-term trade enabler. In effect, the project has and will propel the long needed investment in infrastructure in the Americas, ensuring that when trade improves, the continent is ready to manage it. It will also alter trade lanes once the modernized infrastructure comes into play. Maersk examines the state of trade in the Americas at current and the expected benefits of the widened canal. Latin America Although the canal is coming into operation at a time where Latin American trade is at its lowest level in many years, due to local currency devaluations in many countries, falling commodity prices and the impact of economic slowdowns in traditional trade partners such as Europe and Asia, it will encourage greater infrastructure investment so that when trade picks up, Latin America will be more competitive and productive. The greatest benefit is expected to be seen on the West Coast of Latin America, as the canal is a strategic route for trade with Europe and Asia. Many ports on the West Coast, including Balboa and Manzanillo in Panama, Lazaro Cardenas in Mexico, Buenaventura in Colombia and San Vicente and San Antonio in Chile, have already made the necessary investment in infrastructure to manage Neo-Panamax vessels. The East Coast of Latin America, on the other hand, will see less benefit and is currently not able to manage such large vessels. Investments are also being made in the Caribbean region, for example a new modern terminal in Moin, Costa Rica, as the area expects to receive more traffic in the future. United States 60% of the Panama Canal traffic either starts or ends in US ports. The expansion will mean an estimated 3% increase of the cargo volume and will have a direct notable impact on the trade lane between Asia and the US East Coast since 60% of the Panama Canal traffic either starts or ends in US ports. From Asia to the US East Coast, the strong US Dollar also offers potential to grow exports, particularly car parts and electronics. The canal expansion will transform the Americas logistics landscape, including ports, rail, logistics centers, global trade patterns, and sourcing. US East Coast ports are investing heavily in infrastructure development to reap the benefits of the Panama Canal expansion. Major investments that will change the trade landscape include the modernizing of the Port of Miami and the Port of New York. While the Port of Miami will be completed on time for the expansion opening, the Bayonne Bridge raising, which will allow larger vessels to come into the Port of New York, is expected to be completed in Boston Consulting Group stipulated in a report in 2015 that, After the new set of locks is implemented (assuming that economic and shipping trends remain steady through 2020) it is estimated that the East Coast will gain an additional 10% share of container traffic from East Asia to the US. PAGE 2

3 Panama Brazil Q volumes have shown a slowdown compared to the same period of 2015, mainly driven by fewer construction projects being implemented in the country which stimulate the import sector. The only active project which is set to drive import volumes this year is the Metro Line 2 project, for which machinery, technology, construction materials, steel, iron and electronics are expected to be imported from Europe and Asia within this year. On the other hand, international commodity prices have risen for scrap metal and wood which affect positively the exports, especially to Asia. It is uncertain if this trend will continue in the future. It is important to note that commodities being shipped out of Panama are highly dependent on international fluctuation of prices. The trend on the reefer sector is slowing down due to lower incentives to export and the low price of the products, making it more attractive for farmers to sell their products locally. Needless to say, the canal will increase traffic to the country in containers as well, as Liquefied Natural Gas (LNG) ships bound for Asia. Panama continues to invest in a fully-fledged logistics zone around the canal area which looks set to cement Panama as a key logistics and transportation hub. The project will allow many multinationals to develop distribution centres in the country to supply the whole region. Some advantages of using Panama as a hub include its dollarized economy and special economic free trade zones. Higher trade volumes using the canal mean more opportunities and development into the Central America. Mexico Despite a lower than expected performance in Q1 2016, with an 8% increase in imports and 1% increase in exports, Mexico continues to position itself for success as the Americas manufacturing an automotive hub. Mexico is now the world s 6th largest automotive exporter an achievement made possible thanks to its focus on developing free trade agreements, its proximity to the US, and its skilled and competitive workforce. Mexico continues to trade primarily with the US. However, with the Trans Pacific Partnership TPP, coming into force there could be an opportunity to increase exports to Asia, which would make the Panama Canal a strategic point, as would an increase in trade with Europe. There is expected to be a light recovery in Brazilian global commerce in the second quarter after imports reached their worse level in seven years in the first quarter and Brazil became a net exporter for the first time since There was a drop of 31% in imports and 16% growth in exports in the first quarter compared with the same period of the previous year. Brazil s new focus on exports is paving the way for a greater presence of Brazilian products in strong growth markets such as Asia and the Middle East. As it stands, it is unlikely that Brazil will be much benefited by the expanded canal, as infrastructure does not accommodate Neo- Panamax vessels. Colombia Trade figures for the first quarter of 2016 show an encouraging outlook for Colombian exporters. Foreign trade in containers increased 4%, compared to the same period last year (9% increase in exports and 0.1% increase in imports to be specific). Fruit was the main product exported in containers from Colombia during the first three months of Fruit sales, excluding bananas, grew 29%, partly due to the replacement of traditional sugar cane plantations by a variety of fruit crops, such as pineapples and strawberries. Including banana exports in the statistics, exports growth soared by 87%, relative to the same period last year. Colombia s exports have been helped by the devaluation of its peso making the country more competitive. Colombia is betting heavily on exports with investments in Antioquia to develop Hass avocadoes in order to compete with other markets, and a shift to exporting bananas out of Turbo in containers which allows for greater economies of scale. The expanded canal will directly benefit Colombia with additional capacity for their growing fruit exports. Chile January brought some good news with 7% growth in containerized trade out of the country compared with the same month in the previous year 8 % growth in exports and 7% growth in imports. Strong exports year-on-year in January can be attributed to very high growth in wood and metals, as well as solid growth in fish and berries among others. The Panama Canal will prove to be a viable route for the country in the future. PAGE 3

4 Peru Exports dropped by 17% in January 2016 (year-on-year). This was exacerbated by a steep drop in fish, bone and meal, and fruit and nuts exports. On the other hand, imports grew 20% in January, which went some way to compensate the drop in exports and meant that the overall market grew 4%. As a member of the newly formed Trans-Pacific Partnership, Peru will be able to focus on increased trade with Asia, which will likely transit the newly expanded canal. Ecuador Ecuador experienced a negative result in import volume growth of -12%. Following the trend, imports from Asia which represent 68% of the total volume of imports decreased by 11% last year. Trade with Europe -which stands for 31% of the total volume of imports- decreased by 15%. Exports grew at 1% year on year in 2015, with one of its largest export commodities, bananas, growing in line with the average. The first month of 2016, saw solid export growth of 8% compared with January 2015, meanwhile imports slumped 22%. Fruits and nuts exports, in particular, showed a massive leap year-on-year. A dip in demand for cars, furniture, and electronic appliances accounts for the import slump which can be related to the country s lower spending power as result of inflation. Looking to the rest of 2016, it is expected that Ecuador will maintain a similar growth trend as registered in 2015, due to the steady decline in oil prices. That being said, as one of the largest markets exporting, principally bananas, through the canal, Ecuador will see a knock on effect with the expanded canal in the mid-term. Argentina Argentina grew 14% in the first quarter of 2016 compared with the same period a year earlier. The gains were driven by the new government s open policies towards free trade: deregulating exports, eliminating withholding and providing easier access to imports licenses. These measures, together with the new government s focus on attracting foreign investment is set to have a positive impact on Argentina s economy. By liberating foreign exchange control, exports are expected to pick up in the mid-term, while a slight decline in imports may be seen. In the mid-term there is likely to be little impact of the expanded canal on trade in Argentina. A Lifeline for LAM exports The 48-mile long Panama Canal allows ships to pass between the Pacific Ocean and the Caribbean Sea, saving more than 2,000 miles in a journey from Shanghai to the US East Coast via Panama vs Suez and up to 5,000 miles from Ecuador to Europe via Panama vs the southern tip of South America, Cape Horn, which is only navigable during five months of the year. In the case of Ecuador this means that bananas can get to consumer markets in Europe and Asia quicker than ever before. Bananas, as well as other fruits, fish and refrigerated good from across Latin America require special treatment in order to preserve their state during travel. With the expanded Panama Canal, there will be increased opportunities for reefer exports. This along with evolving technology in temperaturecontrolled containers offer more attractive conditions for exporters, as they allow them to ensure the quality of their product, reach new markets and diversify their economies. As Antonio Dominguez, Managing Director for Maersk Line East Coast South America, highlights: We move mainly perishables as bananas, avocados and pineapples. We see many opportunities to grow the perishable sector, moving fruit, meat and poultry exports from Latin America and have, hence, invested in 30,000 new reefer containers increasing Maersk Line s reefer fleet to 262,000. Conclusion All in all, the Panama Canal Expansion will provide better economies of scale, improved transit times as more cargo can be loaded on a single vessel reducing traffic, and a lower the cost of shipping as shipping lines can leverage greater economies of scale. The East Coast of the United States is set to benefit with its share of cargo from Asia increasing vis-a-vis the West Coast of the United States. While the Canal expansion will be less impactful in the East Coast of South America in the near term until infrastructure is improved, the West Coast of South will see more benefits as will the East Coast of the United States. In particular, Chile, Colombia, Mexico, and Ecuador will also gain business as transport for oil, coal, copper, and LNG improvements. As Antonio Dominguez explains:. With modern infrastructure and improved access to international trade, Latin America s economic growth, projected by IMF to be 1.5% by for 2017, can be significantly improved. PAGE 4

5 Maersk Group Trade Report / Q / LATIN AMERICA About Maersk Group About Maersk Line Maersk Group has more than 6,800 staff in Latin America and 89,000 in the world. Maersk Line is the world s largest container shipping company. Maersk is present in more than 130 countries. Maersk Line employs 7,600 seafarers and 22,400 land- based employees and operates 608 container vessels. Maersk Line serves customers through 324 offices in 115 countries. Latin America represents around 12% of Maersk Line s global volumes. The group is also engaged in oil and gas production, towage and emergency services at sea, oil drilling, and tankers, focusing heavily on the safety and training of its highly-skilled staff as well as sustainability. For further details and interview requests, please contact Stephanie Gillespie Maersk Line Regional Communication Lead Tel: About SeaLand SeaLAnd is present in 29 countries SeaLand connects the Americas with 35 services Concepcion Arias Boo Maersk Group International Communication Partner Tel: +45 (3363) 3509 SeaLand operates 28 vessels SeaLand employs 288 people PAGE 5