Clearer skies

If there’s one thing that we have learnt from this economic mire it is surely that in the brave new globalised world collapse comes harder and faster than we ever thought possible. But could the upside be that the speed and strength of the recovery will be just as surprising?

And perhaps now is the time to remind port operators that globalisation is not over – it’s just on pause. Trade flows will inevitably pick up again and cargo will move again.

Speaking at TOC Europe in Bremen last month, Ben Hackett, senior advisor, IHS Global Insight and Port Strategy columnist, told delegates that the great recession is “most likely near the trough” and the huge financial stimulus packages being pumped into economies around the world will certainly help the recovery.

Mr Hackett went further to predict a modest recovery in gross domestic product in 2010.

“Every economic cycle has a trough and a peak; there’s no reason to believe this recession will not follow a cyclical pattern. It will take some time to get back to the peak of world trade, but that doesn’t mean that growth will be muted; we’re just starting from a lower point.” To support his case, he points out that a number of regional trades are still in positive territory, such as the intra-Asia trades.

Speaking at the International Ports and Harbours Association conference, another well-respected economist Walter Kemmsies, with Moffatt & Nichol, USA, confirms Mr Hackett’s prognosis, with the caveat being that recovery will be a drawn-out process.

“For ports, we have pretty much hit the bottom but the climb out of here, particularly for the US, will be pretty slow.”

While Mr Kemmsies warns of the possibility of a second recession in the US if the upturn is not properly managed, he continues, “once we are past the 2010/2011 period it is smoother sailing. In the near term, the really good news is that we’ve stopped digging a hole, but it is a very deep hole.”

However, among all this relative positivity there are two elephants in the room. Credit problems undoubtedly remain and the glut of container carriers due to be delivered in the coming years will keep that trade, and consequently those ports, under pressure.

“Carriers will be in survival mode for at least 18 months to two years,” Mr Hackett says. “This should be no surprise; overcapacity was pointed out as early as 2007.”

Mark Page, director liner shipping, Drewry Shipping Consultants, agrees that the situation for carriers is going to get worse before it gets better.

“Carriers are going to have to adopt radical strategies to get through. Deliveries for container ships will not fall below 1m teu a year before 2012 and any trade equilibrium will be destroyed by supply/demand imbalance. To get back to a balance in supply and demand, we need another 3m teu to disappear.

This, he believes, will lead the container shipping sector to “haemorrhage money” in 2009, with “very serious” consequences for the global supply chain.

Those consequences have already manifested themselves in the plummeting Ebitda for port valuations. Neil Davidson, director ports, Drewry Shipping Consultants, says the days of 20x Ebitda port valuations are over and the general feeling is that 8-12 times Ebitda (earnings before interest, taxes, depreciation, and amortisation) is now the new ballpark.

Perhaps unsurprisingly, Mr Davidson concludes that this year will be the “worst year ever” in terms of growth for the global container port industry, with many expansion projects under review because of the slowdown and the difficulty in obtaining finance. An evident lack of profitability means that investment in terminals by shipping lines will definitely be “seriously curtailed”, he says.

“This has major implications for the customer bases of ports and terminals and there could be a significant domino effect.”

The flipside of this is that port assets are ripe for the picking for those looking to invest.

Also speaking at TOC Europe, Port Fund principal Ghislain Lorthiois advises would-be ports’ investors to “revise their ways of asset valuations” if they want to secure future profitability.

“If you look at the returns of someone who invested two years ago his returns will be bad forever, but for someone who invests today, the returns look very promising. This period of crisis will be short and provides an opportunity for purchases, but it won’t last forever.”