Chile’s box lines frozen out as markets cool down Feature

Size is not everything, says Beltran Urenda, chairman of Chilean container specialist CCNI. After a punishing drop in freight rates at the end of last year, he talks to Rainbow Nelson on keeping the circling sharks at bay.

After the vintage years of 2004 and 2005, Chile’s container lines are facing up to the harsh reality of trying to make their mark on the world stage.

As a result of the punishing combination of a sharp drop in freight rates at the end of 2005 and mounting costs throughout 2006, the country’s two container lines, CSAV and CCNI, are beginning to feel the squeeze from their larger global rivals.

CSAV recorded a net loss of $111m in the first nine months compared with a profit of $148.6m in the first half of 2005.

CCNI, meanwhile, plunged $6.7m into the red in the first half of the year, compared with a profit of $25.7m in the same period a year earlier.

The results reflect the general downturn in the market with rivals Maersk Line, NOL, NYK Line and K Line all witnessing a sharp decline in profits year-on-year.

But while larger operators have so far been able to weather the storm and have remained profitable, the market has punished smaller operators such as CCNI and CSAV.

“We are going through a difficult moment, it is true,” CCNI chairman Beltran Urenda told Lloyd’s List.

“But we believe that an efficient and well organised company can survive.”

Losses are a product of over-supply in the market, more than the scale of the company, he says. It is a line shared by CSAV chairman Ricardo Claro.

“The losses clearly have to do with an over-reaction of the shipowners,” says Mr Urenda.

“The shipowners have given money away. [At the end of last year] they began to compete mercilessly, assuming that a very strong collapse of the rates was coming, and the truth is that the drop in cargo has not come about.”

Rates unfortunately fell more on perception than the market fundamentals, says Mr Urenda.

“This is a very imbalanced traffic,” he says. “Talking principally about the trade to Asia – the cargo leaving is much less than the cargo entering Chile.

“From Asia to the west coast of South America the ships are all coming full and nonetheless the tariffs fell, fell, fell,” he says.

“Even though a couple of recent increases have improved things a little, the rates still have not returned to where they were and Asia dropped a lot,” he says.

Freight rate reductions of up to a third on important trade lanes, such as CCNI’s core Asia Express Service, at the end of last year, and severe imbalances in some of the north-south trades to and from Chile have hit operating revenues.

While capacity has increased for both CSAV and CCNI, revenues have fallen by up to 5%.

It is not clear whether 2006 will see a repeat of the record $600m of revenues posted by CCNI in 2005.

Furthermore, the double-whammy of record oil prices and rising operating costs has hit the bottom line, bringing to the fore the advantages of economies of scale and lower unit costs in a weak market.

While CCNI has invested in new ships, adding three 3,100 teu vessels to its fleet last year, it remains one of the smallest long-haul operators in the market.

The new vessels are the largest in its fleet and have taken its total to 23 containerships with a total slot capacity of 47,858 teu, according to online statistics.

Addressing the issue of scale Mr Urenda says that size, as the saying goes, “is not everything”.

He continues: “We also believe that with size, while being very important, it is less important in the north-south trades than in the east-west.

“For us the geographical position, when it comes to size, helps us because you might say we are a little bit niche,” he continues.

“Unlike the big guys with the ‘round-the-world’ services, the ones that carry out a lot of transhipment, we have direct services and, although we have tried to diversify ourselves, we still depend a lot on the South American market and the Pacific coast.

“It is more than just the Chilean market, it is the whole coast. We have a very strong presence from Mexico to Chile.”

But Chile’s lines remain caught between being a niche operator fighting off intense competition from global operators at home and looking to become more global in their approach.

While previously strong in certain niches especially with Chile’s top exporters, their competitive advantage at home is being eaten away by aggressive competitors.

Traditionally, CSAV and CCNI have both managed to maintain strong ties to Chilean shippers, including the world’s largest copper producer, Codelco and commodity producers involved in fruit, meat, seafood and forest product exporters.

Maersk Line, Mediterranean Shipping Co and Hamburg Süd, however, have been more aggressive in recent years, capturing important contracts from Chile’s biggest commodity exporters at bargain rates as they try to address a strong imbalance in exports and imports by moving commodities into boxes.

MSC has tied up a 500,000 tonnes annual contract with cellulose producer Celco, and Hamburg Süd clinched a similar deal with Codelco to move copper from Chile to Asia at the end of last year.

Both have historically moved in breakbulk vessels. The copper has traditionally been handled by CCNI or CSAV.

“There is more space than cargo,” says Mr Urenda.

“Clearly there is a lot of supply compared to the quantity of cargo being transported, and in our case we were very dependent on copper.

“However, copper did not go very well for us last year with respect to the previous year in breakbulk,” says Mr Urenda.

He explains: “[Copper] was a breakbulk cargo traditionally and it has started to transform itself into a container cargo.

“We did not push this process because we believed that this would open the possibilities to other competitors, but that is what happened.

“Hamburg Süd, our partner in various services, was very aggressive, CSAV was very aggressive and we were a little bit more conservative and we did not come out of it well.

“But what is for sure is that the rates were driven down in an incredible way, too much.

“Copper producers are receiving the best prices in the history of copper and they are paying the lowest ever freight prices,” Mr Urenda continues.

“They are paying $32 a tonne; the price was cut in half, less than half.”

But the company has still not hit the copper-bottom and the Urenda family has not pressed the panic button yet.

The family-owned Empresas Navieras, which controls almost 70% of CCNI, is in no mood to sell, especially after the Chilean stock market wiped 42% off the value of CCNI’s value this year.

CCNI’s market capitalisation reached more than $300m in 2004, but has slipped back to $108m in recent weeks. It is still a far cry from the $13m valuation of the company in 2003.

Importantly Mr Urenda feels that CCNI is in good financial shape to deal with the current downturn and shrugs off perennial speculation that it will become a takeover target if things deteriorate further.

A reduction in debt, investment in vessels and containers, a new computer system and the widening of its network of offices in the Far East has placed the company on a better footing than during the last downturn.

“Financially [the company] is very solid and healthy,” says Mr Urenda. “It does not have big debts.

“We have invested in containers lately and we have enough cash reserves.

“I would say that we are OK. Obviously if we have losses for ten years we will be bad but nobody is thinking about losses for ten years,” he says.

The company now has a “light structure” and the “ability to make quick decisions”, he says. The company’s debt to equity ratio has been cut to less than one in the last two years.

“The Chilean companies that are in regular liner services are losing money, effectively,” says Mr Urenda.

“But each one has made its gamble, each one has its strategy: CSAV has one, we have another and everyone hopes that it will go well.

“We have invested in equipment, in reefer containers. We have invested in a system denominated COMPASS: a computer system that is going to allow us to offer a series of services and bring us closer to our clients and allow them to reserve space via the internet, 24 hours a day, seven days a week, every month of the year,” he says.

To get even closer to international customers the company has also opened offices in Hong Kong, Shanghai, Ningbo and Qingdao in China, Pusan and Seoul in South Korea, Tokyo, Japan and Hamburg, Germany in the last two years.

Clearly betting on growing trade between China and South America, the company and its partner, Hamburg Süd, are the only lines offering two weekly services to China from Chile.

A free trade agreement that will eliminate tariffs on 92% of Chilean exports to China, signed this year, is a promising development in addressing the imbalance in the company’s most important trade.

“The experience with all the free trade agreements that have been signed has been tremendously positive with increases on both sides,” says Mr Urenda.

Historically, with Chilean tariffs of 6% on Chinese goods, it means that the latest agreement is likely to have less of an impact on imports than exports.

“For imports it will not affect us much because we have been competing with low trade tariffs and with the lower costs of China, but our producers are going to have the opportunity to enter another market with lower import tariffs,” says Mr Urenda.

CCNI’s own desire to compete globally is merely a reflection of a broader philosophy within Chile.

Mr Urenda says: “This has been Chile’s gamble for a long time.

“Chile bet on opening up the barriers, bringing trade barriers down practically to zero. We did that before a lot of others.

“Chile said ‘I have a small market and I aspire to sell to the rest of the world’.”

Chile’s success in establishing itself as the most stable economy in Latin America just shows that small really is beautiful.

Source: Lloyd's List