Serious rethink urged for port investors

10 Nov 2017
The report forecast more consolidation of what the authors called “the patchwork of partnerships between carriers and terminals” – with this consolidation especially occurring in the New York, Southern California and SeaTac gateways

The report forecast more consolidation of what the authors called “the patchwork of partnerships between carriers and terminals” – with this consolidation especially occurring in the New York, Southern California and SeaTac gateways

Sitting tight and hoping for the best is not a serious option with regards to the uncertainty surrounding the world’s container shipping market, consulting firm AlixPartners has said.

In a November report entitled Braving container terminal headwinds: a playbook for investors, authors Jim Blaeser, Esben Christensen and Henry Pringle also said that the current North American container terminal business is very different to what many current investors thought they were buying into a few years ago.

Powerful trends, beginning with a global recession of historic proportions, have turned the idea that it is a steadily growing business with consistently healthy returns for investors and management upside down, they commented.

Warnings for the future

The report forecast more consolidation of what the authors called “the patchwork of partnerships between carriers and terminals” as carriers continue to clean up their portfolios – with this consolidation especially occurring in the New York, Southern California and SeaTac gateways.

“Overall, terminal operators with exposure to major hubs and gateways are experiencing falling margins, and their peers with operations in secondary and developing markets are seeing their margins improve,” it said.

“We believe this trend will take root in the US market as competition in major gateways becomes fierce and as savvy operators in secondary ports seek opportunities to provide niche services.”

The report also identified “chronic underinvestment in US infrastructure, which critically limits the ability of ports and terminals to efficiently unload, store, and distribute containers.”

It noted that the American Society of Civil Engineers predicts a $1.1tr shortfall in estimated spending on both surface transportation and rail in the next decade.

“Today, it’s not uncommon at terminals in major population centres such as New York and Seattle to see trucks backed up into local neighbourhoods—and even onto interstate highways—because congestion and inadequate infrastructure strangle the unloading process during peak periods,” the report claimed.

“That congestion will grow only worse as the volume of larger vessels increases to require the unloading of even more containers in a short period of time.”

The writers added that some combination of these macrotrends and microtrends, if it hasn’t already done so, could impact upon every terminal in the US.

“For investors who got into the terminal business during a different time and who assumed—based on the best information available at the time—that their investments would have paid off handsomely long before now, the situation calls for some hard choices,” they said.

“It requires an understanding of what investors can change, and what they can’t.”

Mitigating the damage

The report identified two key strategies for terminal investors and owners: building volume - by merging with other terminals, securing long-term commitments or serving specialised niche markets – and making margins bigger by lowering cost bases and improving the efficiency of operations.

It added that the two strategies are not mutually exclusive and that terminal investors and owners need to know their position “on the matrix of gateway potential and terminal competitive strength”.

They must also work out whether their challenge is to start making initial investments or double down on earlier moves so they can completely exploit the chance for market leadership.

“For most investors, the bottom line is that there’s still opportunity to create value in this market despite the changes that have reshaped the industry. But it won’t be easy,” the report concluded.

“It will require sharp analysis, difficult choices, and a commitment to rigorous, disciplined execution.”