Trade war and regionalisation are hard hitting

panel discussion Speakers at TOC 2019's 'The Business, Trade & Container Shipping Outlook 2019' session. Image: Rebecca Jeffrey

The US-China trade war, Brexit and Russian sanctions have all impacted the maritime industry, said the International School of Management’s Rolf Neise at TOC Europe.

Speaking during 'The Business, Trade & Container Shipping Outlook 2019' session, he said for the first quarter of this year the percentage of containers shipped grew by 0.5%, but in 2018 there was a growth of 3.6% and in 2017, a growth of 6.6%.

“That is clearly stating where the industry is,” he stated. “Freight rates have also not recovered.”

Consequently, the growth prediction for throughput has gone down from 3.6% to 2.5% for 2019.

Challenges facing the industry include ship pending longer at ports and the IMO's sulphur cap, while there are also a lot of opportunities relating to the digitalised world that need to be harnessed.

BIMCO verdict

Peter Sand, chief shipping analyst at BIMCO, discussed the trade war but pointed out container shipping is still feeling the effects of the 2008 global recession. Demand growth has been halved and this is expected to continue.

Referring to the transpacific trade line, he stated: "When the Chinese talk about the trade war, they mean it."

But this is not just restricted to container shipping, he warned, "this is global".

On a more short-term basis the industry should expect a return of negative margins. "Global demand is still terribly low. IMF forecast shows an erratic and volatile history but the trendline is absolutely certain, it's going down."

Tariff trouble

The US-China trade war means the US cannot plan ahead, said Mr Sand. The country is suffering from erratic politics and an environment that prohibits it ability to forecast and plan in advance.

He said there is not expected to be a boost in the transpacific trade line prior to the next increase in tariffs.

However, he added: "The longer a trade war like this goes on, the more new ways are found to do business."

Looking at frontloading statistics, Mr Sand said in the first quarter of 2019, US west coast inbound containers are up 0.1%. Outbound containers are down 18%.

“US exporters are really finding it difficult to sell goods. The industry is working in an environment of overcapacity and the whole string of assets are underutilised.”

He said: “From 1 January it looked as if container shipping were to improve its fundamental balance between supply and demand. but it's unlikely right now that the global container industry will see an improvement in 2019."

He also talked about what the IMO 2020 sulphur cap will mean for the industry. March 1 is an even more important date than 1 Jan as the IMO has also set up a carriage ban for fuel oil, said Mr Sand. This means that unless there is scrubber technology on a ship, it cannot have any fuel oil onboard. The alternative is a clean ship with compliant fuel. "Ports are likely to police this pretty harshly,” he warned.

He emphasised that costs need to be shared down the supply chain where possible, like in the case of tariffs.

Drewry: market requirements

Neil Davidson, senior analyst, ports & terminals at Drewry, looked at what kind of ports and terminals the market wants and needs.

He said the market doesn't necessarily want every modern well-run terminal and some have closed. Zebrugge, Oakland and Antwerp are examples.

“Just because you have a very nice modern terminal, doesn't mean the market wants it. I think the assumption is that every port in the world must adapt to handle the biggest ships, but do they all really need to do that,” he asked.

There are different ways to meet the needs of the market other than spending huge amounts of money, he said, providing an example of a port in Chile which uses a finger pier and mobile harbour cranes. Ports don’t always need to undertake dredging activities, he stressed.

More regionalisation

The industry is seeing a trend for greater regionalisation of trade and shipping in general has to start gearing up for this, said Mr Davidson.

“We are starting to see evidence of not only a slowdown of globalisation but may be a stopping or reversing of it and much more regionalisation of trade.”

He explained regionalisation is being driven by issues including protectionism, automation, the ability to carry out manufacturing closer to the point of consumption, changing labour costs (labour is getting more expensive in places like China) and emissions regulation.

On the question of why should ports adapt to accommodate big ships when regionalisation is trending, he said for transhipment large ports are important. “Scale and critical mass really do matter more than ever in the transhipment market. We've seen clear evidence that small hubs are struggling."

Examples of this struggle can be seen in the Mediterranean, he said. Small hubs are struggling and going out of business in some cases.

However, he said that “in the gateway market, small to medium ports are much more successful and will continue to be so because its more about your proximity to the carbon generator areas. And those things count more than being a huge port”.

Regionalisation might even lead to a decline in transhipment, he stated. “The focus on small and medium ports is important in determining what the market needs in the future." It is also very significant in terms of digitalisation and automation. Automation needs to be able to work in all sized terminals.”

Consolidation pressure

The market does want to see is fewer large terminals in each port. There is more pressure to consolidate terminals together, Mr Davidson said. The Port of Buenos Aires is a good example of this. "This process will be one that the market needs to see." However, this is not easy to do because of the cost, he acknowledged.

An alternative approach is terminal alliances. An interesting test case is the Hong Kong terminal alliance, which has resulted in the alliance operating 23 out of 24 berths. Their intention is to create a unified terminal operating system.

"It's not enough to have a casual alliance. I think if you're going to do it you need to go all the way and have a unified terminal operating system,” Mr Davidson stressed.

He added: “It’s potentially a way forward for a number of ports that need to see this consolidation of capacity. It's interesting to note when does that alliance become a joint venture. You start to encounter potential regulatory issues and so on.

Ongoing questions

The market said it wanted 6,000 container moves in 24 hours a few years back. But does it need it, Mr Davidson asked.

“3000-4000 in 24 hours is perceived as good. The question is an open one, does the industry still need to see this kind of extreme performance,” he said.

The market has also seen demand for greenfield terminals. Return on investment (ROI) has dropped. In the mid-2000s, terminals were getting over 10% ROI a week. However, ROI is still around 5% now, which is a lot more than liner shipping generates, Mr Davidson pointed out.

There is an increase in politically motivated port projects. These are not necessarily driven by the market but by politics and geo-politics. “This is a worry that we need to be aware of.”

Going back five years the talk was about terminal automation within the footprint of the terminal. Now discussion has become much wider and it's about the blockchain story. The market is embracing this, but it's far more involved than it ever was before, he said.

In summary

The market does want modern well-run terminals. Bigger terminals, but relative to the size of port markets, summarised Mr Davidson.

Big ports are wanted for transhipment, but not necessarily for gateway, especially with regionalisation.

The market doesn't necessarily want big ship capacity everywhere, ports can do well with equipment to help it.

It does want new greenfield terminals but likely with different kinds of investors. because returns are lower than they were with geopolitics as an influence.

The market also wants higher environmental standards and more digital solutions, “but that extends way beyond the terminal gates and is a much bigger story than it ever was before”.

By Rebecca Jeffrey

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