Latin America, geographically isolated from its major export markets, is critically dependent on reliable and affordable shipping to get its products to market. Bad news then, that shipping rates have risen exponentially this year – the industry like all others has been badly hit by the inflationary pressures stemming from the crisis in Ukraine.
A Panama-based expert on maritime logistics explains, “The reality is that Latin American exporters are virtually powerless to affect shipping costs. The best they can do is to lobby governments to subsidise prices. Ultimately, increased shipping costs are passed on to the consumer but for smaller companies which are less well-capitalised it can, in the worst-case scenario, lead to bankruptcy.”
“The reality is that Latin American exporters are virtually powerless to affect shipping costs. The best they can do is to lobby governments to subsidise prices.”
Expert on maritime logistics, Panama
Shipping companies offer a variety of differently sized vessels that meet the demands of their clients. A mixture of Covid and geopolitical tensions means that where demand is reduced from customers abroad, companies look for smaller and less costly vessels, but these are often not available for all routes thus driving up prices.
A direct effect has been the increase in the use of trans-shipment, and this is because in many cases direct routes do not have the demand that justifies the use of the largest ships.
A partner at a foreign trade agency based in Argentina added, “One of the key challenges faced by Argentina’s industry is that their exports are already very uncompetitive because of soaring inflation – increased logistical costs compound the problem even further. This problem is not going to be solved in the short-term – Buenos Aires needs to consider the development of its export sector as a national priority.”
“One of the key challenges faced by Argentina’s industry is that their exports are already very uncompetitive because of soaring inflation – increased logistical costs compound the problem even further.”
Partner at a foreign trade agency, Argentina
National export policies, sadly underdeveloped across the region, would do well to define exports critical to economic growth. Alongside, administrations need more competitive exchange rates, to implement significant improvements in export infrastructure from airports to ports and lower export taxes. Doing so would reassure industry that government is on their side. Indeed, political pressure is being applied from all sides – from the producer to the intermediary to the transporter and the end consumer.
Shipping companies, just like the customers they serve, are also reacting to inflationary pressures. That said, it is unrealistic that cash-strapped governments across the region are in a position to subsidise logistical costs. Even so, a combination of increased fuel costs coupled with shipping costs could galvanise a strong reaction from unions who could paralyse export routes.
One mechanism to deal with the problem, long touted but not often enough utilised, would be for governments to turn to public-private partnerships (“PPP”). In larger federal countries, Brazil and Mexico for example, individual states could assimilate part of the market risk and through the PPP establish service contracts in which the different countries absorb part of the costs and in the same way, spread the risk.
This would be a good start to counter the effect of the imbalance between supply and demand which generates not only high costs but would, in the longer-term, give companies a better sense of whether companies are going to need a bigger boat.