New frontiers of port expansion

Large transhipment ports might need to rethink their offering Large transhipment ports might need to rethink their offering

The two Cs of China and consolidation will have a profound effect on ports in 2018, explains Ton van den Bosch

Some of the most interesting and impactful changes in the ports world aren’t taking place in the West, but in emerging markets, reflecting the reorientation of global trade towards the east and China’s Belt and Road initiative. This is creating opportunities and challenges for companies up and down the supply chain.

It is difficult to have an informed conversation about global ports without acknowledging the Belt and Road Initiative, which will be transformational for the shipping industry and whose impact is already being felt on east-west trade routes.

The numbers are staggering. The amount of money that has been invested has been measured at around $150bn a year, covering roads, railways, pipelines and more, and it is estimated that China has invested $20bn in ports and terminals alone in the past 12 months.

It would be naïve to think that the Belt and Road is just about transportation infrastructure and trade routes. However, there is also a risk of focusing too much on the geopolitics, at the expense of understanding the very significant economic and commercial impact.

For example, an important trend linked to the Belt and Road is consolidation in port ownership. Drewry Maritime Research figures show that, following the merger between COSCO and China Shipping in 2015, the combined entity is poised to become the biggest global container terminal operator by capacity by 2020, climbing from fourth and eighth, with the current leader, Hutchison Ports, slipping to fourth place.

The likely growth in the market does create significant opportunities for operators, even if individual ports will rise and fall in global rankings and some established ports lose market share, despite their cargo volumes continue to rise.

Rules to success

Succeeding in this market will not happen by accident though. Port operators need to be proactive and forward-thinking in assessing where their fortunes lie. Where will the threats to their business come from? How can they find a competitive edge? What factors will help them to remain attractive to their customers?

A good starting point for many ports will be to consider the sustainability of their model in terms of transhipment and gateway cargo. It seems likely that the more successful ventures will be those that focus on serving as gateway terminals, such as Bolloré’s terminal at Tibar Bay in Timor-Leste, with a captive market for their services - or that invest in developing those gateway capabilities.

By contrast, transhipment hubs are more exposed to the risk that a carrier can switch ports. Large transhipment hubs need to upgrade their facilities or risk losing business if liners have a choice. To them, it may make little difference if it takes place in Singapore, Indonesia or Malaysia.

A further challenge for port operators is securing the required financing for development, expansion or modernisation. This is particularly acute in emerging and frontier markets, where most banks are reluctant to fund a greenfield development on a project finance basis due to the typical uncertainties.

The alternative for a large operator is to utilise a corporate finance facility, which allows banks to spread exposure across a wider portfolio, or to seek funding from a development bank or multilateral institution, such as the Asian Development Bank or the Asian Infrastructure Investment Bank, which take a different attitude to risk.

All these factors create an unprecedented level of complexity in the way that ports are built, financed and operated in the 21st Century. The landscape for global ports has plenty of challenges, but also opportunities. The Belt and Road will support trade in both directions, not least with the growing size of middle-class consumer markets in China and across Asia. Port operators and supply chain partners who best adapt to the new reality of port competition in the 21st Century will be those that seize those opportunities.

Ton van den Bosch is head of the global ports & maritime infrastructure practice at Ince & Co and based in Singapore.

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