Turning a corner

09 Oct 2017
Increase: COSCO Shipping Group, owner of COSCO Shipping Ports and Piraeus Container Terminal (pictured) is expected to add the most capacity of any global terminal operator over the next five years

Increase: COSCO Shipping Group, owner of COSCO Shipping Ports and Piraeus Container Terminal (pictured) is expected to add the most capacity of any global terminal operator over the next five years

Recovery seems to be on the horizon for some regions, finds Iain MacIntyre

Cautious optimism is growing within the world’s port sector on the back of acquisition/consolidation and new infrastructure developments being advanced by terminals, increasing freight rates and positive global trade indicators.

Noting that annual global trade is expected to expand from 2.2% growth in 2016 to 3.8% in 2017, with similar predictions for 2018, Indian-based port sector expert Surendra Sharma quips “there is no bad news, which is good news”.

Additionally, citing a recent survey published by analyst Drewry, which he notes concurs with the viewpoint of other researchers, Mr Sharma endorses predictions that global container trade will recover by at least 6% in the first six months of 2017 and average more than 4% over the full year.

“Freight rates from Asia, which is a growth area, have also increased and most of the international shipping lines are expected to post reasonable-to-good profit figures,” he told Port Strategy.

“The market leader, Maersk, has reported 22% higher freight rates compared to the second quarter of 2016 and 7.6% compared to the first quarter of 2017. This increase was led by east-west trade which rose by 36% against 17% on north-south trades. Future guidance issued also confirms this uptrend will continue.”

Asian driver

Mr Sharma sees growing Asian container volumes - particularly to Africa as well as the Mediterranean and US - as predominantly driving the global momentum. However, while acknowledging the powerful contribution of China’s “super economy”, he also sees other South Asian countries such as India in particular playing an increasing role.

“China’s growth has been fast in the last two decades but now there are concerns of over-exposure and rising debts which could affect future trade. Whereas, India is a growing nation with democracy and transparency.

“India is heading for comprehensive development with the Government’s approach of covering the whole logistics chain - including policy changes with new laws like MPA 2016 and infrastructure facilities with new port hubs, coastal shipping and inland waterway development, supported by new designs developed by DST Germany for limited draught conditions.

“Raising finance at low rates against the foreign currency income of ports and development of terminals in neighbouring countries to strengthen trade volumes will support India’s development as a regional hub. India has strong GDP growth and the largest foreign direct investment inflow in the world, which reflects the global confidence in its economy.”

'Increasing optimism'

Drewry ports and terminals senior analyst Neil Davidson has also observed “increasing optimism and stronger growth” globally in the sector and singles out China, North America and South Asia as leading lights, with the Middle East noted as being the least improved.

His firm’s Global Container Terminal Operators Annual Report 2017 forecast increasing year-on-year positivity in container port demand, with a predicted 4% compound annual growth rate (CAGR) adding an additional 152m teu throughput globally by 2021.

However, given the “numerous risk and uncertainties” in the world’s political environment at present, global container port capacity is contrastingly projected to increase by a lesser CAGR of 2.7% over that period, albeit with the consequence of raising average utilisation levels.

“While there are certainly some encouraging signs for the demand growth outlook, the risk profile for terminal operators has increased and most of the traditional global/international players remain cautious,” says Mr Davidson.

“The exceptions to this are the Chinese port companies who are pursuing expansion and investment both at home and overseas in an unprecedentedly-aggressive manner.”

According to the Drewry report, merger and acquisition activity within the sector is at a “high level”, with about $3.1bn worth of deals progressed to date this year. Chinese firms have featured prominently in this activity - even if required to pay a premium price - with the merged China COSCO Shipping Group (which includes COSCO Shipping Ports) expected to add the most capacity of any global terminal operator over the next five years.

“The Chinese players are more comfortable with risk than the established international operators right now and have a geo-political strategy rather than a purely financial one,” continues Mr Davidson.

“They are snapping up assets and opportunities and have the appetite and financial clout to take many more in the coming years.”

Mixed fortunes

Sharing his intimate knowledge of the Latin American container port scene, CK Americas president Michael Kaasner Kristiansen laments a situation of mixed fortunes in that region.

“There has been a general market slowdown but current (first half of 2017) growth is at 5.8%,” he says. “This, however, hides big regional differences. Some markets are seeing a volume decline, others double-digit growth.

“We have seen the completion of several greenfield projects as well as capacity expansions in the past few years. Add in liner industry consolidation and alliance formation, and you get a very mixed picture.

“In general, captive market ports with just one or two terminal choices are in good shape, with good prospects - especially if they have a high income ratio from shippers/consignees as opposed to shipping lines. Three or more terminal choices are often problematic, though not always for all players - at Buenos Aires, as an example, two of five terminals are doing very well."

Besides the quantity of terminal choices within a captive market, another major factor is whether a shipping line has taken an equity position in the terminal. "Those with shipping lines as partners seem to fare better than the ones that do not," says Mr Kristiansen. "Transhipment terminals are a different breed - there is significant overcapacity with more underway.”

As a parting overview thought, Mr Sharma observes that “consolidation is the way forward” and that mega ships are here to stay. "Each mega ship now needs cargo of two/three shipping lines to make a port call viable which gives impetus to mergers and joint working.

“Consolidation will create limited but giant shipping companies with deep pockets. These giants will have calls at limited ports which will handle large volumes. This will lead to a review of port terminals and their ability to attract and retain shipping lines.”



MIXED VIEWS ON CHARGES INCREASING

An automatic increase in global terminal handling charges is not guaranteed even if market conditions do enjoy a sustained upsurge over coming years, according to industry commentators approached by Port Strategy.

Drewry's Neil Davidson describes the situation as being “driven to a large extent by the local supply-demand balance”.

“On a more general level, the larger liner alliances that have emerged certainly have more buying power when it comes to terminals,” he says. “However, the move to ever-larger ships and larger alliances restricts the port and terminal choices that the shipping lines have, so this is a counter-balance.

“We should also keep in mind that another layer of complexity in this respect is that all of the major lines have significant terminal portfolios, so they have to be careful not to ‘rob Peter to pay Paul’.”

From the Latin American perspective, CK Americas' Michael Kaasner Kristiansen equally describes the scene as “very mixed”.

“In general, terminal charges have been going down over the years, sometimes for no other reason than lines applying the pressure,” he says. “Charges to shippers/consignees have, however, been holding up. There are many local markets with significant scope to increase terminal charges.”

On an holistic level, Indian-based port sector expert Surendra Sharma says terminals in his region would likely feel “justified” in increasing charges, given the considerable investment required to handle the logistics challenges of accommodating modern mega containerships.

“With the new trend of 20,000+ teu ships and mergers of shipping lines, there is a need for a new hybrid type of port which can handle both types of cargo - transhipment and gateway - for which both berth storage area and speedy evacuation are required,” he says.

India’s new mega ports are being planned on this hybrid model to cover the emerging needs and therefore, terminals will feel justified in increasing charges, having spent much on upgrades.

“However, volumes will be the key to absorb the cost increase," says Mr Sharma. "Cargo is what makes the ships go around the globe. Ports which have their own local cargo are in a better position to recover the cost of expansion and modernisation versus others who are dependent on shipping lines to give them business. Business models of terminals developed purely on transhipment volumes will face serious challenges as new terminals come up and consolidation takes place.”

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