Cabotage: about to take off in LatAm?

Cabotage, defined as the transportation service between two ports in the same national territory, has always been protected by restrictive policies in Latin America. However, the growing need for a more cost-efficient and environmentally friendly transportation —along with the liberalization of the sector— will bring about major changes to this sector, opening up investment opportunities that should be tackled in time.

Transport logistic chains seek maximum competitiveness

World trade is particularly sensitive to logistics costs, to the extent that a 10% increase in the distribution fees can mean up to a 20% reduction in trade volumes. Consequently, global transport logistic chains are not stationary. They constantly evolve and adapt to meet emerging needs, reduce total costs and fulfil customer expectations.

The upgrading of inland transportation networks is part of Latin America’s development programs. However, while inland improvement projects have not been fully implemented, port effectiveness has already become a reality in most of the countries in the region, as many of the top global logistic players are operating in them. As a result, associated costs and waiting times at ports have reduced, and service reliability increased, although this is something yet to occur in the inland networks.

On top of that, maritime industry trends have resulted in an increase of transshipment traffic, with carriers consolidating their vessel calls into fewer port pairs and probably fewer choices routes. This trend is expected to continue, mainly driven by the infrastructure developments in the Panama Canal, and the ongoing effects of scale economies. Larger volumes of cargo will need to be distributed among the consumption nodes from the main transshipment hub. Consequently, maritime intra-national routes (cabotage) will likely become more demanded in the short term.

Environmental awareness

From an international perspective, environmental awareness is becoming more relevant for all the different stakeholders. In fact, short sea shipping has proved to be a greener alternative to conventional inland transportation. According to a European Community of Shipowners’ Association (ECSA) comparison between road transport and maritime transport between Barcelona (Spain) and Livorno (Italy), maritime services mean 53% lower CO2 emissions.

In addition, the effect of short sea shipping is also noticeable in the reduction of congestion in inland networks, resulting in a significant reduction in non-effective transportation time and emission of polluting gases.

Although Latin American countries have not yet implemented environmentally-friendly policies on the same scale as in Europe, awareness is increasing, and there is an considerable interest in reducing the carbon footprint within the transportation sector.

As a result, cabotage could gain momentum in the short midterm given its lesser environmental impact vs inland transportation.

Liberalization of the sector

Despite the ongoing trends and benefits listed above, cabotage has historically experienced restrictive protectionist policies in Latin America, forcing cabotage vessels to be owned by companies from the served country, or to be flagged under the national register. Even China and United States (the stronger countries in the international economic landscape) fully exclude foreign-flag ships from providing cabotage services.

However, there have been several examples in other regions where the reduction of restrictions upon the cabotage services have proved benefits.

The EU implemented the liberalization of the sector between 1999 and 2002, so every EU-flagged vessel (no matter what specific country) could provide short sea shipping services between and within every EU country. The fact that there are not many countries in Europe with a coastline long enough to request important cabotage services has not prevented from yielding positive effects. For example, opening the market led to wider competition, the modernization of national fleets and the improvement of service levels.

Additionally, New Zealand also adopted liberalization policies, with the main objective of intensifying competition to ensure high quality shipping services between the northern and southern islands.  Due to extra competition and the improved carrier utilization rates, freight rates dropped to 25% during the first 5 years, and services frequency increased significantly.

What to expect in Latin America?

Latin America is still far from lifting all the protectionist measures. However, two countries (Brazil and Mexico) have already started to foster cabotage in the region.

80% of Brazil´s population is concentrated along a 7,000 km long coast strip, which also concentrates the main industrial activities. Given the lack of a high-capacity road and rail networks, cabotage and transshipment from large deep-sea ports have always played an important role. According to surveys performed at national level, there are two main reasons for current cabotage clients not having increased their use of the service in Latin America: freight costs and service reliability.

Art 5-fig 01
Container throughput evolution (MTEUs, 2013-2018)

In the last 5 years, container traffic in Brazil has grown at an average rate of 2.3%. Cabotage has grown at a faster pace of 4.0%, but the market is still limited to national players operating and owning national vessels that deploy a total capacity of ca. 66,000 TEU.

Art 5-fig 02new
Main production, population areas and main shipping routes in Brazil

Things are about to change, since the Brazilian government is planning to develop the BR do Mar Program, aiming to promote cabotage and liberalize the market. Opening the market is expected to tackle the problems that are currently limiting the expansion of cabotage.

The initiative expects to increase the cabotage annual throughput from 2.0 MTEU to 2.7 MTEU by 2022, increasing the fleet by 40% and reducing ICMS taxes (a tax applicable to the movement of goods). The promotion of BR do Mar, together with the large cabotage demand, the lack of capacity of inland transportation networks and the reduced number of players may yield ideal circumstances for new market players to emerge within the cabotage market.

In Mexico, container throughput evolution has grown at an average rate of 7.5% over the last 6 years, reaching 7.0 MTEU in 2018. Within the total cargo flow, transshipment represented 23% whereas cabotage remained as a residual traffic, with only 3,985 TEU. Mexico’s domestic transport is carried out mainly via inland transportation, despite the country’s 11,000km of coastline, resulting in highly congested areas. Furthermore, it is well known that one of the main concerns for Mexican logistic companies is the lack of safety in inland transportation, a problem that has haunted the government for years.

Within this context, the Government of Mexico is looking forward to promoting feeder services for cabotage to serve Mexican hubs in both facades, which could also serve the existing transshipment traffic. Currently, the provision of cabotage services is highly restricted to international players, something that has prevented its development.

Art 5-fig 003
Potential cabotage dynamics in Mexico

The Government is aware of the importance of the inland transportation industry; hence, the development of cabotage services is to be promoted through PPP entities. The first maritime cabotage “road” between Veracruz and Progreso will be operative in March 2020, managed by the Mexican shipping line “Baja Ferries”. It is expected that other shipping lines will follow in the short term, benefitting from the lack of competition and providing intermodal alternatives to the congested and unsafe road and rail networks.

Overall, the cabotage market is expected to gain momentum in Latin America, driven by the slow but progressive liberalization of the market. The sector’s competitiveness will improve thanks to the reduction of freight rates and improvement in reliability, and the delay in the development of an efficient inland transportation network.

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About the authors
Ibai Erdozain holds a MSc. in Industrial Engineering and is a Port and Maritime Senior Manager at ALG.
Ignacio Rodriguez de la Rua holds a MSc. in Civil Engineering and is a Port and Maritime Manager at ALG.
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