Drewry: Lines playing poker with terminals

Rising costs due to bigger ships, greater business risks from larger liner alliances, softening global demand growth and pressure on terminal handling prices from cash-strapped carriers are creating the ‘perfect storm’ for terminal operators.

Neil Davidson, Drewry’s senior analyst for ports and terminals, said: “Shipping lines need to be careful how they play the situation. If the returns from investing in and operating terminals fall too far, or the risks become too high (or both), then terminal operators may simply stop investing.”

The financial results of listed port and terminal operators reveal a weakness in organic earnings amid escalating debt levels.

This means that stricter cost rationalisation and financial risk reduction will be necessary to retain investment interest, and therefore companies with growth plans are commanding a significant market premium amid diminishing profitability.

The market valuation of listed operators remains weak, underlining the cautious assessment of growth in the sector.

Mr Davidson added: “Our modelling shows that terminal operators will have to live with between 10% and 20% higher opex and capex costs due to bigger ships.”

“Risk is also increasing due to larger alliances, but also because horse trading on port choices between alliance members means that decision making is not necessarily logical.”

Many terminal operators still face a challenging future with rising costs, pricing pressure and increasing risks. But, there are some active steps that operators can take.

According to the report, operators can focus on organic growth hotspots such as South Asia and the Middle East or they can buy market share through acquisitions.

Buying market share through acquisitions to outperform market growth is a strategy already being pursued by several port groups including Cosco Shipping Ports, China Merchants Port Holdings and Yildirim Group (Yilport Holdings), all of which have made recent high-profile acquisitions.