Risk is the new black

For ports and other large corporations, this trend will re-emphasise the value of the company risk manager as well as of the insurer.

Risk will surge higher up the agenda at board meetings, assuming that it is on the agenda in the first place. New problems for operators are lurking on the quayside as a result of the recession.

While focusing on UK companies outside the ports sector, a study by insurance research consultancy Mactavish, which is chaired by a former chief executive of reinsurer Swiss Re, found that many manufacturers felt their supply-chain vulnerability had grown.

Supplier failures, enforced single sourcing, reduced stock levels and cutting of excess production capacity were cited as reducing resilience.

The lesson for the ports is that while they cannot insure against falling or erratic trade, they can put into place procedures to deal with cargoes that produce nasty surprises, and with badly-built or badly-run ships on which stowage and discharge systems may be of less than best quality.

Risk exposures are changing all the time, and non-disclosure of material circumstances can scupper a claim. Paring of costs in personnel training and equipment maintenance could do more harm than ever.

Mactavish chief executive Bruce Hepburn contends that nobody has really focused yet on the great uncertainty around commercial risks caused by the recession, and “this means that some companies are not properly insured, and insurers are carrying greater risks than they realise”.

Of course, there are serious issues of this nature, which will lead to more than usually detailed consultations involving brokers and insurance buyers.

While no-one would counsel complacency, the ports sector can, it seems, take comfort from its positive record over the last few years. It benefits from being much closer in understanding to its underwriters than is often the case in other sectors, and from the vast knowledge bank that its own executives, its brokers and its underwriters possess.

Marine insurance as a whole is notoriously volatile, but that is largely the fault of the hard-to-control hull and machinery segment. Ports are generally the strong link in the chain, but of course third party liability hits at random, and a small knock can result in a massive claim.

This means that port organisations must keep their insurers in the picture throughout the year about any changes in risk profile, and the person to do that is the man or woman on the spot, the dedicated and pro-active risk manager.

The Economist

Growth marred by confusion

The last two months have been interesting for economic analysts; data has been contradictory and has led to the lengthy debate on whether we are about to return into recession or are poised for solid growth.

We focused on this in the last issue; now we have reached the stage of confusion.

Articles and letters in the press suggest that consolidation of services and more vessel sharing agreements in the container sector is tantamount to a declining market, rather than an attempt by carriers to find ways to reduce their operating costs in the face of the large financial losses that they face.

Since the end of the conference era in Europe we have seen more vessel capacity management than ever before, followed by a steady stream of rate restorations. Some carriers are talking of breaking even in the last months of 2009 and expect 2010 to be the dawn of recovery. The severe pessimism that we heard in mid 2009 has evaporated. Capacity utilisation is well above 90% out of Asia on all trades as European and American importers re-stock in the face of a tentative return to the stores by the consumers.

The capacity management has worked. We see it with full ships, cargo roll over and sharp increases in rates on most trade routes. Chinese ports are seeing strong growth and the North American ports are beginning to experience double digit growth from the trough of 12 months ago. European ports, once they finally announce their December-January figures will likely report good results.

But will the industry continue to benefit from their current strategies or is it in danger of reverting back to old ways? We see some of the carriers that pulled out of the Asia-Europe trade announcing their return and companies that had one foot in the grave expanding services.

Can the big carriers continue to manage their capacity in order to ensure their financial recovery, or will they be spooked into bringing ships back from lay up sooner than required? Let us hope that lessons have been learnt this time around.

The Strategist

Too much, too soon

I’d like to share with you some wise words that appeared in the latest Container Intelligence Quarterly from Clarksons.

“While the outlook for the market balance in 2010 looks marginally brighter, the legacy of contracting trade growth in 2009 means that global box trade volumes are unlikely to get back to pre-recession levels until at least 2011.

“Although much reduced fleet growth expectations, coupled with a gradual recovery in trade, means that there is potential for the balance between supply and demand growth to steady in 2010, this is unlikely to be enough to make up for the huge trade deficit left over from the global crisis, and it may take a number of years for trade volumes to get back to pre-recession levels.

“Additionally,” Clarksons warns, “if volumes do return, and freight rate restorations continue to be successful, this positive impetus to the market comes with the added threat of reactivating too soon the significant proportion of the fleet still idle. It is likely that market players will continue to feel the negative effects of the downturn for quite some time.”

Sobering words, and ones that have an added significance when considered against a background of the recent spate of announcements regarding the start-up of new or re-start of old Asia-Europe liner services in two short weeks last month. We saw the new container line, The Container Company (TCC) unveil its intention to enter the Asia/North Europe trade in late April; CSAV Norasia announce that it will enter the Asia-West Med trade in mid-March, Evergreen, Hyundai Merchant Marine and UASC declare that the first westbound sailing on its new Asia/East Mediterranean service will start on May 17 from Qingdao; and Wan Hai and PIL confirm the re-launch of their Asia/Europe service – the FES service – with the first westbound sailing from Shanghai scheduled for March 13.

Too much too soon? Quite possibly, and particularly with other similar plans in the pipeline.

Clarksons estimates that global container trade dropped by an unprecedented 9.7% in 2009 to 123m teu, the first decline on record. It considers a slow recovery is now underway and forecasts 5.2% growth this year to 129.4m teu. This, however, is a figure that is still significantly below the 136.2m teu volume carried in the liner trades in the peak year of 2008.

The New Yorker

Finance fund details to be hammered out

Some observers have likened the US Congress to a sporting venue, as both sides seem to be engaged in a continual sparring match.

It’s the season for sniping about the budget (and the huge annual deficit), against the backdrop of measures that will nudge unemployment away from the psychologically demoralising 10% number.

As the politicians search for solutions, a mini-debate has ensued, even among Barack Obama’s Democratic party, where short term measures (such as temporary holidays on certain taxes) are pitted against solutions of the longer term kind – where the government spearheads continued demand through spending on projects, through its own spending, or through encouragement of the private sector.

A detail of importance to port interests is the request for $4bn to fund a new Transportation Infrastructure Bank, actually “The National Infrastructure Innovation and Finance Fund” (NIIFF), included in the 2011 Federal budget proposals.

With the NIIFF, the Federal government could issue loans and grants for projects against a demonstrated economic justification- on both large and small scales. At the same time, the old mechanism for financing many surface projects – the Highway Trust Fund (with a mini deficit in its own right), tied to gasoline taxes, gets a one year pass.

Besides the much needed job creation, one important plus in analyses of costs and benefits of transportation related projects is “mobility” (usually for people, but increasingly for freight), which means relief of costly congestion. Port-related projects like access roads and railway connectors are potential projects that could be supported by NIIFF. But, in true Washington, D.C. style, the cat fighting has already started about where the new bank, and the NIIFF, would be placed on the organisation charts.

It’s important to move the new entity far away from the US Department of Transportation, out of the Executive Branch, towards the private sector. Infrastructure finance, though championed by firms like Goldman Sachs and Deutsche Bank, is far removed from the distaste reserved for most Wall Street bankers. It would be a shame to create an entity like the NIIFF and then ensconce it within an often non-functional (dare I say “broken”?) political process.

Viewpoint

Plant food

I suppose I shouldn’t be surprised at the events taking place in the liner industry today; once that solitary green shoot had been spied the woes of the past year suddenly seemed a distant memory. Recession? What recession?

In just a few short weeks, news reaches us of the beleaguered Asia-Europe trades having a renaissance with a number of lines announcing resumption and creation of routes; freight rates are being restored at a rate of knots; and talk of laid up ships coming back into service is rife.

But take heed, that lone green shoot needs nurturing, not overlooking. It needs tender care and a concentrated care plan. Being fed by too many people too often will kill it with love; allowing it to fend for itself will lead to the same end. And if all involved in the industry rush for the same goals without paying heed to the actions of others, that green shoot will be well and truly snuffed out for good.

Has all that talk of the alphabet recession been in vain? The warnings on the very real prospect of double dip recession should now be at the forefront of shipping lines’ minds. We are undoubtedly surfacing from the trough that has suppressed container trades for the past 18 months, but the elation of the ‘recovery’ could be short-lived if shipping lines do not act responsibly, and, just an importantly, inclusively.

And ports and terminals have a part to play here too. One eye need to stay firmly focused on the financial measures put in place to aid suffering container clients – lower tariffs, berthing discounts, delayed payments and the like. The line between assisting and supporting is very blurred and there will come a time, in the short term, when those financial aids may actually start to damage the tentative recovery by allowing lines the financial flexibility to boost business too fast and too soon.

Communication with customers will continue to be important, and it will take a brave terminal to reduce or remove financial aids when those around them are maintaining theirs. But sometimes a dose of tough love is exactly what’s needed.

Keeping the green shoot alive is one thing; helping it to blossom into something less fragile and more long term will take collective effort. Do we really want to return to last year’s slump so quickly?

Dumb and dumber

There are still some very strange things that go on in the ports sector – things that unless you have a vested interest don’t seem to add up at all. Looking back over 2009 we thought it might be ‘enlightening’ to share some of these with you. Well, what we really mean is please learn from these ‘anomalies’.

Picture, if you will, the port authority that is also a direct provider of cargo handling services and in a cargo handling context has a major competitor. How does the authority gain competitive edge – it requires its competitor to publish its tariffs for cargo handling services but does not publish its own.

Next, a fairly low level port offers for concession its general cargo/container units. First, it requires an inflated price to be paid for the bid documentation, a big number compared with the usual requirement. Second, it has nothing really in shape when potential investors begin to investigate the opportunity. The unit has significant debts that have to be taken on – and debts that look as though they have just been poured into this vehicle rather than belong to it. But how would you ever know, well it would probably be difficult to find out because the larger part of the top echelons of port management are in prison!

There is a huge labour force that has to be taken on including a maintenance company whose activities extend well beyond the port dimension – now let us think where in the Port Reform Tool Kit does it say it is recommended that government deals with such issues (and particularly the downsizing of the workforce) before offering such opportunities to investors?

It gets even better – the proposed concession agreement requires the incoming investor to build out a quay at some cost. Why? Well no logical reason that can be determined; it is not required from a trade point of view.

Next, a structural survey of the quay reveals it is in a dreadful state – to the point that the outreach of a panamax container crane cannot be fully utilised to service a containership, the quay cannot accept the loadings imposed and generally is in some danger of collapsing. Actually, what is required is over €100m of works to put the quay right, just a small thing not to mention to an incoming investor.

Oh and by the way in the meantime you can fully service a panamax containership but only by getting the vessel to turn round. And all this from a port that is really only achieving single digit cargo growth per annum.

And finally, a real cerebral scenario to finish on. A terminal is built with very little in the way of a market study. It stands empty for over a year and then wins a leading customer of another established terminal in the same country. But to do so it has to offer a discount on the terminal charges to the line of over 50%. It also has to sign up to the imposition of all kinds of penalty charges imposed by the line if the terminal doesn’t do this or that or possibly even if someone in the line’s head office sneezes at the wrong time.

The capture of this customer leads the terminal to trumpet its success far and wide – the majority of the maritime press not being that canny buy into it. The terminal cites tremendous year on year growth and the realisation of a hub concept that can only mature. Wonderful stuff, everybody involved must be happy. Or are they – well actually not? There is one simple inescapable reality that has to be acknowledged – volume does not always equate to profit and still this is miles and miles away. In fact, looking at the accounts you can see several million reasons, in a large double digit format, why the investors will not be happy at all.