Rough Seas Ahead.

Takeovers are roiling the waters between North and South America. Watch for fewer shipping lines and higher rates.

NINETEEN NINETY-NINE WAS PROBABLY THE LAST YEAR THAT importers and exporters in the maritime trade lane between the United States and Brazil were able to enjoy a wide range of shipping lines and cheap rates.

Starting in 2000, two carrier groups control about half of the boxed cargo in the trade, thanks to a series of mergers and acquisitions that have consolidated the industry. Fewer lines will likely mean fewer ships, and that could lead to higher rates. "With all of these mergers and acquisitions, there's less competition," says Peter Gatti, an officer at the U.S. National Industrial Transportation League, an industry-lobbying group in Washington, D.C. "It's a perfect scenario for increasing rates."

There could be other fallout as well, such as fewer port calls and more transferring of cargo from one ship to another, which could mean overall transit delays and potential logistical nightmares.

To top it off, the bilateral "Equal Access" maritime trade pact signed several months ago between the United States and Brazil takes away some financial incentives for shipping in either country--which could wind up jacking up rates in the long run. It's time for importers and exporters to pay more attention to the trade lane linking the United States and the eastern seaboard of South America. "No one's pushing the panic button just yet," Gatti says. "But we are concerned."

Just a few years ago, Gatti and his organization would have had little reason to even care about the trade lane, which was pretty much closed off to many foreigners. Until the middle of the nineties, cargo in the lane was mostly raw materials going south and agricultural products coming back north.

Flattened cargo. That all changed when Brazil opened up to more imports and changed its currency There are now 2,000 importers and exporters registered to do business in Brazil. Suddenly, Brazilians had access to foreign goods and money to buy them.

And did they ever. Boxed U.S. exports to the region increased by 70% between 1995 and 1997, according to the Port Export/Import Reporting Service in New York. In 1998, growth slowed, and in 1999, it flat lined because of the regional recession. But with 400,000 boxes of U.S. cargo arriving on Brazilian shores, the country ranked just behind northern Europe as a leading destination for U.S. goods.

In terms of dollars, maritime trade has doubled to US$15 billion in the past six years, according to U.S. Transportation Secretary Rodney Slater. "We expect that number to grow, but to grow at a more rapid rate," he said shortly after signing the new maritime pact in Rio de Janeiro.

While that prediction may be a bit optimistic, the pact does make it easier to carry goods on each other's ships. "We are very pleased to see this deal," the U.S. National Industrial Transportation League's Gatti says. "This eliminates that second registry," the Brazilian law that gave tax breaks for cargo on Brazilian-controlled ships.

This has been a big deal for U.S. shipping lines--most notably Crowley American Transport, the leading carrier in the trade--because their shippers would be penalized for using their ships instead of the few Brazilian liners in the trade lane. Importers and exporters wound up paying the extra freight rate.

Now that the tax break's been eliminated, however, everyone's paying the same-higher--rates. But that would have happened anyway, because just about all of the Brazilian ships have left the trade--and the American ones will be gone soon, too.

Over the past couple of years, Grupo Libra sold its liner service to the Chilean company CSAV. Shipping line Ivaran went to Canada's CP Ships and Alianca to Hamburg-Sud of Germany. At the same time, Crowley decided to get out of the South American trade lane, selling those services to Hamburg-Sud. The only other U.S. liner company with a strong presence in the market is Sea Land Service--which will be folded into the Danish company Maersk Line. Both were among the top five carriers in the trade.

Sailing half empty. Since Crowley and Sea-Land officially ceased to be U.S.-run operations at the end of 1999, about half of the entire boxed liner cargo has been in the hands of two European run lines--the newly created Maersk-SeaLand and the Hamburg-Sud fleet.

Rates are the product of supply and demand, of course. And right now, especially in the southbound lanes, there's much more supply, or ship space, than is needed. Indeed, most ships in the trade from the United States to Brazil and the rest of eastern coast of South America are sailing half empty. Shipping lines worldwide have already cut their costs to the bone and the only way they can make any more money is by raising rates.

Right now, ocean shipping rates are at an all-time low in real dollar terms. Shipping lines have been willing to offer almost any discount to get more cargo--on average it costs about $2,500 to ship a box from New York to the major Brazilian port of Santos, about the same price to truck that same box across Brazil.

But lines can control the amount of space they offer in the trade lane, and it's a good bet that there's going to be less space. There's just too much tonnage in the trade," says Russell J. Bruner, the head of Maersk's South American operations in Sao Paulo.

Bruner and others are waiting to see if Hamburg-Sud cuts down on the number of ships or the number of runs for Alianca, Crowley or its other line in the trade, Columbus Line. Hamburg-Sud has remained mum on the issue. "The only thing we know is that they say they plan to run the same ships with the same names and the same service for now," Crowley spokesman Mark Miller says.

Shippers aren't so sure. Last November, David Movsky, head of international maritime transportation for Eastman Kodak, one of biggest shippers in the trade, was reviewing contracts for 2000, and it looked like the same services were being offered. But he's watching it very closely "Frankly, we're waiting to see what happens," he says. What happens may be fewer lines--and higher rates.