Politics of pricing
Shipping line talk of 'deflationary' terminal handling charges is unrealistic, finds Dave and Iain MacIntyre
Repayments required of port investment to accommodate ever-larger callers, the realities of lease and labour agreements and a limited calling choice for mega-ships are among factors expected to prevent any sudden reduction in terminal handling charges (THCs) globally.
Such is the viewpoint of a sampling of stakeholders approached by Port Strategy specifically in response to a recent comment of AP Moeller Maersk group chief executive Soren Skou on the subject.
“Increasingly, we see more opportunities for procurement from the carrier side, both because the carriers are consolidating, but also because there’s too much excess capacity on the terminal side now. And therefore, we do believe that terminal cost will become deflationary,” he said.
That comment came amid market speculation as to the group’s potential future divestment strategy, with analysts observing that a sale of its terminal operating arm, APM Terminals, was unlikely due to the inherent benefits delivered by the symbiotic relationship.
Drewry Maritime Research ports and terminals senior analyst Neil Davidson believes that Mr Skou was making a “fairly sweeping statement that suited his purposes” and in fact fully appreciates the reality is “much more complex and nuanced”. “It’s certainly true that bigger liner alliances feel they have more bargaining power with terminals and if you add to this the marked softening of demand growth, then terminal operators are facing price pressure,” he says.
“However, when it comes to terminal capacity for the very big ships, choice is quite limited in places. Plus the bigger the alliance, the harder it is to find ports or terminals that can accommodate increasingly ‘lumpy’ customer volumes. For smaller vessel sizes there is more available choice of course.
“We’ve been saying for some time now that all capacity isn’t the same and when doing supply-demand analyses, greater segmentation of terminal capacity by ship size capability is essential. The picture also varies from port market to port market -- for example on the North Continent you have Rotterdam with lots of new capacity and new terminals chasing business in a very flat market but elsewhere in the world, capacity is in shorter supply (and demand a bit healthier).”
Port of New Orleans public affairs vice-president Michelle Ganon sees the two biggest - and relatively inflexible - determinants of THCs as being lease and wage commitments.
“Most leases contain automatic rate increases,” says Ms Ganon. “While these can be ignored when situations dictate, few if any agreements would permit a decrease in rental rates. Labour rates are the same. In the US, union labour will increase about 3% this year.
“In short, I don’t see a deflationary trend in the US. Worldwide, the picture could be different as many more countries build new or expand existing facilities.”
Yilport Holding chief marketing officer Erhan Çiloğlu laments the unavoidable realities of the “go big or go home” strategy of carriers over the past 15 years, which has seen 4,000 teu to 12,000 teu fleets evolve to 8,000 teu to 20,000 teu.
“We think only making a calculation based on vessel costs, including running costs and investments, to shape the shipping market is not reality,” he says. “The change has an impact on all the players of the industry. After 2008, the financial crisis affected the markets and demand could not forecast more than a quarter period. This caused stock level reductions and supply started to look for cheaper solutions with less amount of cargo.
“Between 2000 and 2007 the procurement strategies were just to ask for cheap prices for more amount of cargo. This big change heavily affected supply. Consumers are looking for fast and cost-effective services for less amount of cargo. Compared with 2007 and before, the reaction of shipping lines is to invest in larger vessels with lower prices and costs, due to shipbuilders’ cheaper solutions. However, this leads to another need for investment as ports and terminal operators spend huge money for dredging, building longer berths, installing taller cranes on the quayside, adding and expanding new yards and gate capacities.
“In 2015, we observed empty vessels sailing from Far East to Europe and Far East to America, which paved the way for alliances and mergers. The only positive figure here is the low bunker prices. Bunker were 30% of a vessel’s voyage cost and, due to low bunker and oil prices, this has decreased to 10%.
With investments now complete, the only place where a lines can still make savings is by cutting terminal costs, putting pressure on THCs as ports and terminal operators have already invested to handle these large vessels. "I can say that the pressure has been even higher on transhipment terminals and the cascading effect has started on each terminal,” adds Mr Çiloğlu.
Ports of Auckland head of communications Matt Ball observes that while the world’s largest container line may seek to and achieve lower terminal costs in some regions, “this doesn’t guarantee the reduction will flow down to importers and exporters”.
“What we charge a line and what they charge their customers are two different things,” he says. “That said, no, we do not expect terminal pricing will undergo a deflationary trend in this part of the world, so long as the engagement with lines is handled in a partnership model.
Volume is important in a container terminal with high fixed costs, he added, as if volumes goes down the port may save on some inputs like energy and labour, but it will still have to pay fixed costs, so the cost per unit might actually go up. "It would not be reasonable for lines to expect the port to then take a lower price for its service."
“We think that by working together to streamline processes and by having timely and effective communication and engagement we can create efficiencies that are beneficial to both parties while maintaining our ability to operate and invest for the future.”
With regards to the issue of terminal over-capacity Mr Ball says, in the New Zealand context, the major ports have “by and large matched capacity to demand”.
“We believe this is more relevant to some of the bigger Asian and European ports. We do not believe it is relevant to the local scene but there is a risk of unnecessary/untimely investment in infrastructure such as the ‘big ships’ debate which can force ports to rush off and invest heavily to accommodate certain-sized vessels only to see the profile change (length/width/draft) over a period of time.
Mr Çiloğlu says excess terminal capacity is a global issue, with new investments and projects “everywhere in the world”. “We believe that whoever takes good care of the customer will handle the cargo with competitive tariffs. We are working hard to minimise the costs for customers by offering supply chain solutions rather than keeping the focus only on the terminal cost.
“At Yilport we have our focus on gateway terminals and excess capacity is a matter of the hinterland. We are working hard to expand our seaside berth capacity including draft, length and equipment together with our one-stop-shop solution packages to our customers in the hinterland.”
New Orleans' Ms Ganon observes that the advent of mega-carriers has forced container terminals to more closely evaluate how best to handle large discharge volumes and large load volumes at the same time, creating a dynamic that resembles cruise terminal challenges, where a large mass of people use the cruise terminal and its infrastructure for one or two days a week and then the facility is under-utilised the rest of the week.
“While the container situation is not that extreme, the effect is the same. This varies by port, but larger ships have put big pressures on the landside capabilities of ports. If idle terminals has led to the determination of ‘excess capacity’, there may be reasons for these terminals not being utilised. Inadequate draught, poor market access, low productivity and government regulations could all be acceptable reasons for the under-utilisation of a terminal.”
Call for caution
As a parting comment, Drewry's Mr Davidson warns that “lines need to be careful”. “If the returns from operating terminals fall, then operators may choose not to invest.”
While noting the positive of removing cost from the supply chain, Auckland's Mr Ball says the shipping industry’s problems “aren’t going to be solved by shaving a few extra dollars off the price per box”. The problems, he says, are more fundamental than that. The top 18 container lines face potential asset write-offs of about $35bn, according to industry analyst, Alphaliner and total debt in the industry stands at around $90bn.”
Yilport's Mr Çiloğlu predicts that with the world of shipping changing at an ever-faster pace, mergers are about to also beset the port industry. “This is going to happen very soon. After five years’ time, we will have a different structure in shipping and related industries.”
FEELING THE PRESSURE
Terminals are under “constant” pressure to reduce their THCs, despite the reality that operating costs are in general on the increase, observes Drewry’s Neil Davidson.
“Bigger ships are resulting in greater peak volumes and this is pushing up operating expenditure, plus the big ships need capital expenditure (deeper water, bigger cranes etc).”
Mr Davidson’s experience is that this pressure comes directly from the lines, as opposed to shippers, given the contractual relationship is between them and terminal operators.
“For laden containers, the lines then pass on the THC to the shippers (usually with some kind of a mark up). So the shippers feel the cost ultimately, but for the lines, if they can cut what they pay the terminals, but maintain (or increase) the margin on what they charge the shippers, they will be happy.
“Note also that for empty boxes and transhipments, the lines bear this cost (they can’t pass it on).”
Contrastingly, Port of New Orleans’ Michelle Ganon notes the pressure for lower THCs coming from carriers and shippers alike. “Like every other business, terminals are always looking for greater efficiencies and ways to cut costs. This is one of the key factors which will make one terminal operator preferable to a nearby competitor.”
Returning to an aspect of Mr Skou’s reported comment, Ports of Auckland’s Matt Ball observes the commercial reality of fewer shipping lines combined with excess port capacity in the global context, which positions carriers to concentrate more volume on a port and so negotiate better pricing.
“A line is more likely to be successful getting reductions on the unit price if they can offer higher volumes which then compensate for the drop in unit price. For a nearby example you only have to look at the competition between Patrick/DPW in Australia when COSCO and China Shipping merged. In that outcome there was a loser of volume between the terminal operators.
“Similarly the same opportunity has been presented to CMA CGM with their acquisition of APL where they have moved volume away from their Malaysia hub in favour now of Singapore.”
PRICE NOT THE ONLY CONSIDERATION
Stakeholders report there is little direct opportunity for terminals to effect a reduction in THCs and consequently the only pragmatic response is to find means of increasing productivity.
Auckland's Matt Ball says, although a factor, it is “too simplistic” to just focus on price: “We now turn ships around faster, which has an economic benefit for both us and the lines.”
Drewry's Neil Davidson concurs: “Contracts are usually a combination of price and service levels -- ie, a price per box but also things like productivity, speed of handling, berth windows etc. So it’s a mix -- plus there are all the wider factors like the quality of hinterland transport links etc.”
New Orleans' Michelle Ganon adds that one of the difficulties in reducing THCs is that much of the cost is labour driven. “Productivity is the key, as is the use of technology and modern equipment.”
Although noting situations will be different at individual terminals, given their specific cost structure, Yilport Holding’s Erhan Çiloğlu notes that high labour costs ultimately drive greater technology adoption and automation: “Less automation and less labour costs force leaner processes, starting with less rollovers and a fluent information exchange between terminal operators and lines.
“Terminal planning is another tool to optimise costs. New terminal layouts with new-generation equipment, lighter and higher-capacity solutions are other key initiatives.”
He adds that ports should seek to position themselves as 'game changers': “The first thing I see at our head office meeting room is a poster that reads: ‘If you don’t take care of your customer, someone else will’. We act accordingly. We are not focusing on one type of service - we are a multi-purpose terminal operator. Our focus is on gateway terminals at both mature and emerging markets.”
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