You’ve heard the forecast – sunny intervals and some showers, although some of those showers may join together to form longer periods of rain. Sunhat or umbrella, anyone?
Now consider the forecast for port traffic volumes. GDP heading upwards? Traditionally, the forecast has been that cargo volumes will follow suit, especially containers, given the assumption that more goods will be transported that way. But what if advances in technology mean that the computers previously measuring two square metres are now half the size so that twice as many can be packed into a container? What if there are new regulations regarding the use of certain materials? What if there’s a major shift in energy policy?
“People tend to start off with a simple model; they think that the number of containers is a function of GDP. But the whole thing has been immensely simplified and it’s absurd,” says Graham Cox, director of Maritime Traffic Forecasts. “Take the multiplier – history shows that when GDP goes up by 10%, container traffic goes up by 20%. People take those figures and ignore all the other factors, but you really need to look at these underlying things now.
“The multiplier theory – which worked before – collapsed at the same time as the world financial crisis, so anyone running a simple model had absolute egg on their faces.”
Macro challenges
These are “really interesting and challenging times” in forecasting, says Mr Cox. Whereas in the past operational forecasting at the micro level was the more complicated area – labour relations, pricing, etc. – he says that is now less difficult than measuring the macro picture and sector forecasts.
“It is a very complicated challenge and many forecasters have oversimplified it. Now the search is on to introduce a little bit more complexity, without destroying your capability to produce a forecast.”
Anything connected to oil and energy is full of uncertainty, due to the shifting energy scene. “With global warming, changes in policies, power stations opening and shutting, it is horrendous,” he says. “Even if you produce reasonably good modelling by looking at the past and then the future and make a fairly good prediction of how much plastics are required, how much the petrochemical sector will grow, etc., factors such as regulations and green-related changes can change everything.
“You are trying to invest in a port, with a payback of 20 years – but exactly what will the green regime be in 20 years’ time? You are really reduced to the ‘what if?’ scenario. However, the main problem of forecasting is if you wrote down all the things that might influence how much cargo, the particular types you would get and what might go into containers, it would be a phenomenally long list. Put in too many variables and it actually destroys the estimates and produces nothing useful.”
Two extremes
There are two extremes in terms of forecasting, says Mr Cox. First, the case where investors are considering building a port in a part of the world which simply doesn’t have one. Second, there’s the situation where there are already four ports on the estuary – one is losing business and a management consultancy investigates what needs to be changed to win back business, whether it be prices, labour arrangements or efficiency.
“In the second case, it is all about business decisions; if, for the sake of argument, you were to halve your prices or build an extra quay, can you forecast how much business you would win from the others? On the other hand, there’s no point in building the extra quay if the staff are still striking every other week.
“For a new port, it is a completely different situation, where competition is much less important. It is really about predicting how much the market is going to rise and how much each particular type of cargo is going to increase over the next few decades.”
Maritime Traffic Forecasts takes a ‘multi-factoral’ approach to forecasting – adding to the simple GDP method the relationships between cargo volumes and sectoral/industry developments, and the economies of partner countries. It also undertakes specialised research and analysis of potential changes in infrastructure, technology and the commercial state of the transport sector.
Wide net
Chris Fisher, director of Fisher Associates, agrees that while GDP can increase, structural changes and a wide range of other factors can hugely affect what traffic is going through a port.
“If you are running a container terminal, GDP is probably half the answer. But if you are doing a lot of transhipment, for example, it is all about trading partnerships.”
Growth in containers varies substantially around the world, from China where volumes have historically been growing at more than twice the increase in GDP to more modern developed countries where container growth might be lower than the GDP percentage.
A lot of people think that forecasting is very mechanistic when it is really much more art than science, says Mr Fisher. “Experience comes into this quite a lot. You can do all the forecasting you like but at the end of the day it boils down to commercial decisions. All the forecast does is help to inform the company or investor what commercial decisions to make.”
If a company is considering even a moderately substantial investment in a port development, forecasting has a vital part to play, he adds. “If you are the bank being asked for finance, you are not going to rely on some decision-making material given to you by the person who wants to borrow money – you are doing to do the work for yourself, for due diligence.”
No guarantees
What are the challenges of port traffic forecasting? Chris Fisher lists forecasting economic changes, including growth/structural; understanding the link between economies and port traffic; and being able to apportion port traffic for a country to individual ports based upon their competitive position.
Can forecasting ever provide certainty? The answer, he says, is ‘no’; but despite that, everybody is at it. Port companies for investment planning, banks for risk assessment, governments in order to understand national infrastructure requirements and set policies.
There are factors such as a shift from a manufacture-driven to service-driven economy or changes in energy policies. The trick is trying to spot the big structural changes, he says – and as far as individual ports are concerned, that is very difficult to do.
At the micro level, it’s a case of working out whether an investment will pay off. “Maybe you need deepwater, a new quay, faster cranes, a berth in the river instead of behind the lock. How much does it all add up to and how much more competitive does it make you?
“Shipping lines will say – build this and we will think about it. It’s always in the shipping lines’ interest, broadly speaking, to encourage investment in ports to give them more options, but people have to understand the economic drivers that underline shipping lines. Ships follow cargo, not the other way round. Shippers themselves have a big influence on overall logistics practices.”