The prospects for growth in the logistics industry in Latin America are brighter in 2018 as the Brazilian and Argentine economies recover from deep recessions, the middle class battles back across the region, and local currencies regain more than three-fourths of their lost ground after the collapse of oil prices in late 2014. However, freight forwarders in Latin America continue to struggle with tight margins as rising carrier costs prove very difficult to pass onto customers.
Airfreight volumes in Latin America are expected to grow 5% in 2017 after two consecutive years of contraction. Perishable exports leaving Latin America (mostly to U.S., Asian and European markets) have led growth since 2015. China to LatAm volumes of finished goods took a hit in 2015 and 2016 but began growing again in 2017. Growth may have turned the corner. However, freight forwarders know that bottom line growth over the next couple of years can only be achieved with significant cost-cutting.
To combat tough margins, freight forwarders in LatAm are employing three key strategies:
Carriers and forwarders going through tough financial times may have little choice but to embrace downsizing, but cutting to the bone can yield quick rewards. LATAM Airlines Group SA, once the world’s most valuable carrier by market capitalization, chose to downsize its dedicated cargo fleet and expand passenger unit belly soon after acquiring Brazil’s TAM. In 2017, the company is on track to post its strongest revenue growth since Q1 2015 in spite of a continued weakened demand in Brazil. With non-performing costs taken out of the business model, LATAM Airlines has been able to invest in improving customer service so it wins more share as the market returns.
Overcapacity has eroded pricing in LatAm cargo across all modes since 2014. Ocean carriers suffered dramatic downturns in 2015/16 with per-container rates from Europe to Brazil dropping to as little as $20. Large ocean carriers are mostly run by family dynasties whose egos trip over themselves as they strive to buy the latest and greatest ships, further amplifying cargo capacity. The last three years have seen price wars lead to rapid consolidation as the 20th largest carriers became the world’s 10th-largest. Consolidation has begun to work, with the same Europe to Brazil rates rising to more than $600. A less dramatic turn-around is underway in international air cargo rates for most LatAm markets.
On the revenue side, forwarding players strive to raise their prices they can charge by specializing on certain product verticals: pharmaceuticals, perishables and/or high-tech, all of which require special handling and temperature-controlled infrastructure. Desperate to maintain these higher margin customers, generalist freight forwarders are willing to subcontract transport specialists because clients want full visibility of all touch points of cargo.
Customer demand for specialized handling skills stems from both a need to improve the cost of logistics but also the need to comply with standards being adopted and enforced in medical and food logistics. For instance, LSH Manufacturers based on Mexico and Brazil are leading the trend in working only with specialized logistics vendors since they are looking for new ways to optimize their supply chain, reduce warehousing costs, and comply with stricter regulations to avoid being exposed to costly liability claims. Finally, specialized logistics vendors help exporters and shippers to navigate cumbersome customs regulations in Latin America.
Guidance to Gain from the Growth
2018 may well mark the strongest year of growth in LatAm since 2013 with e-commerce and international trade fueling the LatAm logistics sector. Overall e-commerce growth in Latin America will exceed 15% CAGR in 2018, with cross-border e-commerce traffic possibly outgrowing that figure.