Mexico driving the Transatlantic

Mexico has risen to become the seventh largest car manufacturer in the world and a large proportion of the additional container traffic to the country is made up of raw materials and components consigned to the growing number of car assembly plants and suppliers. New investments from Kia, Toyota, BMW and Daimler Benz will see Mexican car manufacturing capacity reach five million vehicles by 2022, up from 3.4 million in 2015 and by the end of this decade the country’s output is expected to account for one in four cars made in North America, up from one in five today.

This story should continue to be a positive one for Transatlantic container flows, especially now that the Trump administration appears to have abandoned any concept of a border tax – four fifths of Mexico’s car production is ultimately destined for the US market.

Less encouraging is the fact that the movement of car parts from North European ports to the US appears to have declined slightly this year, as vehicle sales in America have plateaued. Despite improving consumer confidence it would seem that the catch-up phase post-recession – during which many Americans simply made do with their ageing vehicle – has run its course.

At the time of writing we were still awaiting data for US exports for August. What we do have for the first seven months shows that the eastbound trade is flickering into life, with year-to-date shipments out of North America up by 2.9%. The last year with any meaningful growth was 2013 when volumes rose by 3%.

The backhaul trade’s solid performance between April and June brought a halt to four consecutive quarters of losses, slight though some of those losses were. American export growth was registering overall 1.8% with loadings at the USEC terminals increasing by 2.2%, while USGC and USWC saw uplifts of 0.8% and 1.6% respectively. Canadian traffic added 1.6%. Again Mexico was the star performer with a 9.7% advance, and now accounts for 15% of the total backhaul trade.

Looking forwards, we do not expect any sudden spike in eastbound traffic, despite the fact the value of the dollar to the euro has dropped by almost 14% since the start of the year. Normally, such a shift in exchange rates could be expected to have some impact on trade. Many of the commodities moving out of North America are of low value – timber, paper, wood pulp, resins and agricultural produce – and are generally sensitive to currency swings.

However, the eastbound Transatlantic trade appears to be a rather stubborn market. In the seven years between 2010 and 2016, exports out of the United States to North Europe have not broken out of a band ranging from 1.30 million teu to 1.37 million teu – a variance of below 5%. At a full trade level – including Canada and Mexico – the deviation only rises to 5.2%. Even in 2015, when the dollar rose and sanctions were imposed on Russia, the backhaul leg dropped no more than 4.1%.

Drewry believes that the dollar will have to take more of a battering before the annual volume of eastbound traffic breaks out of its current narrow band, and our growth forecasts for both this year and for the short term reflect this belief. Even if a weaker dollar does spark a surge in American exports, the carriers’ surplus equipment stocks in areas such as New York will legislate against any attempts to raise what are still pitifully low backhaul freight rates.

Capacity changes in the Transatlantic tend to be more evolution that revolution. The charts below exemplify the serene monthly transitions, but also how additional capacity is being slowly added. Based on forward schedules Drewry expects approximately 6% westbound and 13% eastbound increases to year-on-year capacity for October and November.

The extra capacity has come from upgrading of existing services, rather than any new loops. MSC has carried out two upgrades in the third quarter to the 2M TA2 service by replacing two 6,700 teu ships with 8,000+ teu ships. It is also possible that the carrier will upgrade remaining ships in this loop to the 8,000 teu level. Meanwhile, ACL has also taken delivery of its final 3,800 teu containership to replace the much smaller and older ro-ro ships on its North Atlantic service and this loop is now at full strength. More changes or upgrades to existing services throughout 2018 are feasible as the cascade intensifies.

In such a stable environment in terms of supply and demand it is unsurprising that spot rates in this contract-dominated market tend not to deviate much in either direction. Westbound spot rates stayed at around $1,750 per 40ft container in the first half of the year, before losing about $50 in July when average ship utilisation briefly dipped under 90%. Rates have since risen again to a year’s peak of $1,800/40ft in September, according to Drewry’s Container Freight Rate Insight.