The new reality

Without doubt, many will be thankful to see the back of 2009. Container terminal operators in particular will look back upon the year as its Annus Horribilis, its worst ever since 1956, when Malcom McLean put 58 containers aboard a refitted tank ship to give birth to the container industry.

Analysis suggests the year saw global container throughput volumes plummet by between 10 and 15% on the previous year’s figure, and with quarter four showing the sharpest drop, there is scant hope for a quick recovery. This is despite recent economic indicators suggesting a slight up swing, and despite the fact that the International Monetary Fund and the World Bank have projected a return to modest expansion of global trade in some areas.

The problem is that any perceived recovery is not reflected in container throughput and shipping consultant Drewry, for one, forecasts stagnant demand until at least 2012/2013.

The industry had, until July 2008, been quite accustomed to an annual growth rate in container volume of about 10% and, as a consequence, heavily invested in capacity expansion projects. Now, the game has changed. Profitability is the buzz word, which is invariably a euphemism for port executives to develop a completely different mindset; one geared towards reducing operating costs. This, apparently, is the “new reality”.

One strategy APM Terminals has adopted to reduce costs is to move cranes to the ports and terminals where they are most needed, rather than investing in new equipment. This and other initiatives have helped the company to reduce operating expenditure considerably, by about $200m or 5%-7% of its total operating costs.

“It is possible to reset the industry and operate at lower levels and we are building our portfolio based on that assumption,” APM Terminals vice-president, communications Pieter Schaffels says. It is no longer about speed and berth productivity – factors that hitherto drove capacity expansion and terminal investment strategies – but about geography.

While operators of European and US-ports and terminals might be considered foolish to facilitate facility expansion, those in Asia, the Middle East and, to a lesser extent, Africa – where the dog’s bark has overall been worse than its bite, and where China’s economic growth continues to drive seaborne trade – there does remain a semblance of investment opportunity.

Admittedly, Southeast Asian ports have battled to attain the kind of throughput experienced in 2008 but, again, there are geographical differences. Singapore’s PSA International figures for 2009, for instance, showed a 9.9% decline in volume compared with the previous year and other operators report similar figures.

Yet conversely Malaysia’s Port of Tanjung Pelepas (PTP) recorded year of growth in 2009. The terminal closed 2009 with a container throughput of 6m teu, a 7.5% increase on 2008 figures. However, 2010 will clearly be a challenging year and PTP expects lower operational costs for shipping lines to be a key focus area. The operator sees this as an opportunity, however, since shipping lines are bound to look for more efficient and cost-effective alternatives.

Additionally, rising consumer demand among the economies of developing nations in the region and the increasing demand for containerised trade in new markets, including intra-Asia could continue to drive terminal capacity demand, but at a much more measured pace. Again, operators have to balance expansion with productivity and reduce operating costs considerably if they are going to deal successfully with the challenging year ahead.

All the operators contacted in for this feature are clearly exercising caution and adopting more rational expectations, selling non-core assets and lowering their operating costs. But, as Jonathan Beard, managing director of GHK HK Ltd, a Hong Kong-based independent investment consultant, explains, they are also considering private finance, the stock market, and pension and infrastructure funds as the best means of raising capital for any future development plans – indeed for those commitments made prior to the downturn.

Managed funds are beginning to come into the terminal market, with many investors seeking minority or 50/50 stakes. But with less access to cheap credit and the need to allocate more investment risk to the private sector, operators do need to focus more on productivity and performance metrics rather than growth and expansion.

The AP Moller-Maersk group for instance, has already indicated that, for the first time in its history, it will explore alternative, external ways to raise finance, such as the issuance of Euro bonds. Hitherto, projects were always self-financed.

The kind of investments Maersk will make, irrespective of where the money comes from, will also change: for the foreseeable future at least, no investments will be made in shipbuilding. APM Terminals vice-president, communications Pieter Schaffels tells Port Strategy that the Maresk group’s chief executive Nils Smedegaard Andersen has already announced that he no longer plans to invest in new ships preferring instead to spend on terminal development (at strategic locations largely unaffected by the crisis) and the offshore oil and gas sector.

Indeed, last year the group made a large investment in the Gulf of Mexico, acquiring assets worth over a billion dollars, while the port expansion at Rotterdam, Italy, Ecuador, and Japan, and other projects APM committed to pre-July 2008, are to continue.

During the 2007/2008 period, APM spent around $750m on the expansion of existing terminals and other commitments and “we are still running a limited expansion plan as it is not that bad all over the place,” Mr Schaffels explains.

“Asia has held up relatively well and the same can be said of the Middle East. But we are only investing where the local trade is okay. Port operators do need to have a good look at their portfolios, and look at which terminals are doing well and which ones are not.”

Like Malaysia, APM’s Aqaba Container Terminal in the Kingdom of Jordan has somehow managed to maintain a healthy throughput volume. Container traffic grew by 25% during the first three quarters of 2009, having surged in 2008 with a throughput of 600,000 teu, and as a result, operator APM remains committed to is the expansion of the terminal. The plan is to lengthen the quay by 460m in order to increase annual container throughout capacity to 2m teu. Wharf length will also be doubled to 1000m and two super post-panamax cranes, each capable of 18 teu reach, are scheduled for delivery in the first quarter of 2010, with additional units added as container volumes increase. The investment will eventually result in a capital expenditure of about $235m, bringing APM’s total investment in the Jordan port to $335m since 2006.

As Charles Menkhorst, chief executive of APM Terminals Africa, Middle East and India Subcontinent region stated, it is APM’s strategy to ensure that port infrastructure keeps pace with market growth.

Mr Menkhorst’s comments echo that of APM Terminals’ vice president and chief financial officer Christian Moller Laursen, the man behind the “New Reality” hyperbole. Speaking at a conference late last year, he said: “Despite the slower growth in the coming period, the port industry remains fundamentally attractive. The world will continue to grow in the longer run, and globalisation and the containerisation of goods will continue, particularly in emerging markets.”