Box services remain fluid in Caribbean transhipment zone

Hamburg Süd vessel calling in Cartagena
Hamburg Süd vessel calling in Cartagena

For Maersk Line, the AC5 service unveiled with considerable fanfare in late January was a major move, one of the first new strings put together with just-acquired Hamburg Süd.

Initially scheduled to use 11 vessels, it called at Balboa on the Pacific side of Panama, Manzanillo International Terminal (MIT) on the Caribbean side, and then Cartagena, Colombia, before sailing on to Brazil and then eastward to Asia. It was a direct competitor to the Asia-Caribbean PEX2 service operated by CMA CGM, Hapag-Lloyd, COSCO, and Hamburg Süd (which had been scheduled to leave it). “With the acquisition of Hamburg Süd, we now have the scale and it makes sense for us to go through the [Panama] canal and serve the Caribbean market,” boasted Maersk Line chief operating officer Søren Toft at the company’s investor day event in February. But things did not go as planned when the service debuted in April. AC5 went down like a ‘lead balloon’, and Maersk, egg in face, quietly pulled the plug after just six sailings. It still technically exists, but the revised service map online today looks very familiar, because it is the map of the PEX2 service, calling in the Caribbean at MIT, Cartagena, Kingston in Jamaica, and Caucedo in the Dominican Republic. Ever since the original service was suspended, Maersk and Hamburg Süd have been loading on PEX2; the two Hamburg Süd ships that were originally intended to be removed from the service, San Felipe and San Christobal, are still in it. “They couldn’t compete. They took a big hit. It was a real embarrassment for Maersk,” said one regional port executive speaking to IHS Markit on condition of anonymity. Another port source commented on how unusual it was to see the industry giant throw in the towel so quickly. “Never have I seen Maersk do that before. They used to always be about prevailing and being number one, no matter what. It’s like a new Maersk,” he said. According to Juan Carlos Croston, marketing vice-president of MIT and vice-president of the Caribbean Shipping Association, “They put a lot of effort into this product and when they suspended it after just a few sailings, it tells you two things: one, that these guys are open to admitting mistakes. They put too much capacity into the market and rates dropped way down as other lines defended their market turf. And two, Maersk looks to be more conscious of its money-losing services. Before, when they had their oil division and other divisions to compensate, they might have maintained that service. Now, it’s a different ball game.” A market source speaking on condition of anonymity claimed that the AC5 plan was “a massive change” for Maersk and Hamburg Süd and “the concept is still very much alive” and may be resurrected in the future, possibly in 2019. IHS Markit asked Maersk Line regional communications manager Tom Boyd for an official statement on whether low rates drove the decision to suspend the original AC5 service, how long PEX2 can be used as a replacement, whether there are competition-authority issues with doing so, and whether the original service would be relaunched next year. Boyd declined to provide a comment. The rise and abrupt fall of the AC5 is just one facet of a broader dynamic facing the Caribbean region and its hub ports. In general, services here continue to evolve, creating extreme uncertainty about future transhipment volumes. And given the combined market share of the three Maersk brands in the region – Maersk Line, Hamburg Süd, and SeaLand – a lot will hinge on how the group’s services are ultimately reconfigured, which could in turn lead to service changes by other lines. “The big elephant in the room is Maersk and Hamburg Süd. Everybody, including their competitors, is evaluating what their next move will be,” Croston said. Maersk service reconfigurations were expected this year, but the timetable is believed to have been pushed back to mid-2019 due to the experience with the AC5 and other issues. When asked about this timing, Maersk declined to comment.

Yet another significant unknown for the region – also linked to the post-merger integration of Hamburg Süd and Maersk – involves the Eurosal service. This is a major nine-ship service run by CMA CGM, Hapag-Lloyd, and COSCO (the same partners as PEX2), connecting northern Europe with the west coast of South America (WCSA), with calls in the Caribbean hubs of Caucedo, Cartagena, and MIT. Hamburg Süd had been a partner in Eurosal with two vessels, Cap San Tainaro and San Clamente, but EU competition authorities required Hamburg Süd to leave the service as part of its merger with Maersk. To comply, Hamburg Süd sub-chartered the two ships to Hapag-Lloyd and COSCO, respectively, and took Eurosal slots in return. Market watchers believe Hamburg Süd’s continued involvement in Eurosal through this arrangement is temporary and that Hamburg Süd and Maersk will eventually develop their own WCSA-North Europe service to compete with Eurosal. According to a source who declined to be identified, “They [Maersk and Hamburg Süd] want their own service, but they’re waiting to concentrate their volumes better. Maersk does not have a lot of Europe market share from Chile and Peru, but it does from Ecuador and Colombia, so they would want to combine their northern [WCSA] market share with their southern share, and to do that, they will need a deeper draught in Guayaquil, Ecuador.” The source believes the draught could be dredged to the necessary depth as soon as a year from now, which will allow for the creation of a Maersk-Hamburg Süd service that competes with Eurosal using high-reefer-plug, 8,000-teu vessels. When asked by IHS Markit, Maersk declined to comment on whether this was its plan.

If such a competing service was launched, it would necessarily lead to changes in Eurosal, noted the source, who pointed out, “Eurosal would have to find a different solution because Hamburg Süd accounts for so much of its volume, and if they pull it, that service wouldn’t have sufficient volume concentration left to deploy 10,000 teu ships.” According to Giovanni Benedetti, vice-president of SPRC, which operates the Contecar and Manga terminals in Cartagena, “Right now, the region is trying to understand how the Maersk Line acquisition of Hamburg Süd will work out in terms of network and connectivity. Hamburg Süd is one of our largest customers and, so far, it has been pretty stable. However, liner shipping is very dynamic, so in the year to come, we expect changes most probably in services related to Asia-Caribbean-Latin America, North Europe-WCSA, and maybe changes in some VSAs [vessel-sharing agreements], as well as in their feeder network.” Carlos Urriola, president of SSA International, which operates MIT, told IHS Markit, “I would say that this year is very unstable, by which I mean we don’t know exactly which way the cargo flows are going to move because we’re still waiting for the consolidation of the Maersk and Hamburg Süd networks. At the end of the day, that is going to have major implications in the Caribbean and Latin America, and we feel it is still a work in progress.” Looking at the bigger picture, Michael Kristiansen, president of consultancy CK Americas, put the evolution of the Caribbean market over recent years into the perspective of three phases. “After the Panama Canal opened up, Panama basically recouped the services that had been going through the Suez Canal. The ones left in the Suez now are probably going to stay in the Suez. So the first phase, the battle between the Panama and Suez canals, is basically complete,” he said. The second phase involves vessel size, he said. “In terms of ship [size] upgrades, they have already done most of it, with very few ‘old Panamax’ services left. We’ll probably see a gradual change upwards from 10,000 teu now to a full 14,000 teu neo-Panamax. But the majority of this change has taken place. Going from 10,000 to 14,000 teu is less material than going from an old [4,000 teu] Panamax to a 10,000 teu ship,” he explained. The third stage of evolution, which has largely yet to occur, involves obtaining synergies by transhipping between mainliners on east-west and north-south services, according to Kristiansen. “This next phase will obviously be more complicated because not everyone [in the east-west alliances] will benefit in the same way,” he said, citing the example of an Asian carrier that is a member of an east-west alliance but has little or no tonnage in America’s north-south trades.

“This third stage should lead to growth in transhipment in the Caribbean over the next few years as the carriers take these decisions,” he said, predicting that these decisions will prove crucial to regional hubs. “You’re going to see certain carriers settle into transhipment hubs for the long haul. So if you lose their business in 2019, you’re not going to recover it in 2020 or even in 2025. I think the decisions on transhipment hubs that will be made next year will settle the patterns for most of the major players for the next decade.”