Contract or expand?

As Port Strategy goes to press there are tentative signs that the world economy is moving out of recession. But at this stage, ‘tentative’ is the key word for international port operators.

The mixed signals on trade were all too apparent when US Treasury Secretary Timothy Geithner claimed in early June that the “global storm” was now receding – a few days later figures from the Bureau of Economic Analysis revealed that both US exports and imports were lower in April than March.

Mr Geithner’s word’s ring far truer when applied to China, India and the Middle East which all look likely to emerge from the global downturn relatively unscathed, at least when compared with leading western economies. And, although exports to the US and Europe remain in the doldrums, there is some evidence that trade via the Asian hubs of Singapore and Hong Kong is reviving – at least in the sense that things are not getting any worse – while Japanese factory output is moving up through the gears.

If the ‘green shoots’ are genuine and the ‘bottom’ has now been struck, what will this mean in terms of the strategies of the leading international port operators?

Given the unprecedented downturn and the fact that port operators had based investment plans on predictions that world trade growth would continue to aggressively expand, readers will not be surprised to hear that, by and large, they remain in retrenchment mode.

AP Moller-Maersk Group says its ports division, APM Terminals, saw crane lifts fall by 16% across its global terminal business in the first quarter compared with a year earlier, with operations in North and South America most affected. Profits and revenue both contracted in the period. APM reiterated its intention to push on with investment projects in Luanda (Angola), Apapa (Nigeria) and Cai Mep (Vietnam) but says “other investments have been postponed in view of APM Terminals’ focus on cost reductions and operational improvements on existing terminals”.

International Container Terminal Services saw throughput in its ports network slow by 10% to 744,958 teu in the first quarter, with facilities in Europe, Africa and the Middle East suffering a 37% contraction in box volumes. Net profits fell 44% year-on-year in the period to $11m. The company says operating cost gains enabled it to put a break on falling profits as revenues declined 12% to $92.8m.

DP World says that “unpredictable trends” in global trade have continued into 2009 resulting in a volume decline across its ports network of some 10% in the first four months of the year.

“In response to the current market, we are deferring about 50% of our global capacity expansion plans until such time as market demand returns,” says a spokesperson. “The UAE region continues to be less impacted than other regions. We successfully completed the expansion of Terminal 2 in Jebel Ali as scheduled in the first quarter of this year, taking capacity there to around 11m teu.”

Most analysts predict container volumes will not recover for at least two years. Some believe it will take longer. Neil Davidson, director of Drewry Shipping Consultants’ ports division, says that global container port volumes will not climb back to the 2008 level of 525m teu until 2012, for example.

Paul Slater, chairman of First International Corp, says “dramatic” reductions in cargo movements particularly in the container sector mean a long, drawn-out recovery period. “It is going to take three to five years before we see ocean trade bounce back and many maritime infrastructure projects are on hold,” he adds.

The downturn has been harshest for those that ventured into port investment post-2005 at the height of the market. The plight of Babcock & Brown Infrastructure Group which is now trying to sell its expensively acquired assets in a buyers’ market aptly illustrates the point, but they are not believed to be the only company looking to offload terminal assets.

Much attention is also focussed on the struggling container shipping industry. Will the prolonged downturn in shipping prompt the sell-off of non-core port assets and, if so, who are the potential buyers?

“I think that some consolidation of terminal ownership may happen, most likely the terminals owned by carriers as they seek to, or are forced to, raise cash,” says Drewry’s Mr Davidson.

Whether the select number of international port operators without loss-making liner businesses to support will be among the buyers or sellers of terminals in the next year is hard to predict given the limited financial details available from most.

DP World insists it has sufficient financing in place to meet operation and capital needs for the foreseeable future and could be tempted to take advantage of lower investment prices. A spokesperson says: “That’s possible, but, again, it is too early to say anything about what may emerge as the recession eases.”

PSA International says it is well positioned to weather even the most severe of downturns but declined to comment on its investment plans.

ICTSI successfully secured a $150m three-year amortising loan facility with seven foreign banks earlier this year leaving the Manila-based company with no substantial debt repayments due until the second half of 2011, but is taking a cautious approach to new opportunities.

Most independent analysts believe established port investor/operators will be cautious. Manju Chandrasekhar, vice president of port consultancy Halcrow, says potential investors in ports remain jittery but believes that serious interest in public concessions or private terminals is most likely to come from the banking and infrastructure fund sectors rather than the maritime industry.

Mr Davidson is doubtful that existing major terminal operators have the finance or cash-flow at present to start making large purchases. “The Chinese are the most obvious source of buyers with cash but I haven’t really seen evidence of moves on this front,” he says.

Mr Slater adds: “I would think that the major port players are looking at very troubled investments made in 2005/07 and are unlikely to make any more until the markets recover.”