To say that the maritime industry has been facing uncertainty over the past few years would be a bit of an understatement. We’ve experienced events never before thought possible in the collapse of a major carrier, and the fallout from this cataclysmic event has led to many of the mergers and acquisitions that we are seeing today. Alongside these mergers, the formation of alliances is becoming common place amongst carriers.
When discussing these changes, much of the spotlight has been focused on the carrier side of the business. These changes look to have an even more amplified effect with ports and terminals, an often underdiscussed but extremely important cog in the industry. As carriers play their game of investing in increasingly larger vessels in a market full of overcapacity, ports and terminals are forced to either call or fold their hand. They are asked to add capacity to their facilities in order to even compete with other ports and terminals for the chance to service these increasingly large vessels, all without the assurance that their increasingly risky investment will even pay out.
While there is an air of uncertainty throughout the industry, there is certainty in the fact that the ports and terminals will be facing an uphill battle in the coming months and years in an ever-changing and challenging business environment. For a detailed look into what’s in store for ports and terminals, we were honored to speak with two experts in the field, Mr. Neil Davidson, Senior Analyst – Ports & Terminals, Drewry; and Lars Jensen CEO & Partner, SeaIntelligence Consulting.
While the writing may have been on the wall for years, many were taken aback by the events that took place last year and it left many scrambling. The mergers and acquisitions we’re seeing today in the carrier market are a direct response to these events. The formation of large alliances amongst carriers is an attempt to increase their scale; not just in terms of the size of the vessels, but more importantly scale in terms of the breadth of their networks.
These moves the carriers are making are having ramifications throughout the industry, and are being especially felt hard on the ports and terminals. Mr. Jensen says, “Firstly, you have to distinguish here between gateway cargo that has to move through a port and transshipment cargo. What’s going to happen in the coming years is a massive battle, especially on transshipment cargo first. The alliance and consolidation structure will drive an increased number of point-to-point services, which will in turn eventually lead to less of a need for transshipment terminals. However, this doesn’t mean that transshipment cargo will collapse overnight, but it could very well mean that over time the transshipment incidence might slowly decline, and the share of cargo being transshipped might slowly decline.”
Mr. Davidson echoed these concerns saying, “Ports and terminals around the world are under immense pressure. The costs of operating terminals are being driven up by bigger ships and bigger alliances. There has always been a strong resistance from terminals to play the pricing game that liners play. Generally, they have been able to avoid that and focus on service levels and on quality of facilities, but the pressure on prices is growing. Transshipment terminals will feel the brunt of this first, as it’s much harder to defend their price, and combined with much narrower margins compared to gateway terminals, they are being placed between a rock and a hard place.”
A High-Stakes Game
Alongside the changing dynamic of cargo flows, the size of vessels that carriers operate are continually increasing. This in turn is putting more strain on ports and terminals where they need to be able to efficiently handle very large vessels, and ideally handle multiples of them at the same time. This has prompted many ports and terminals to upgrade their capacity in response, and looks eerily similar to what has been happening on the carrier side of the business over the past five years. Overcapacity is a burden on the industry, and the game all parties are forced into playing is only making it worse.
Mr. Jensen said, “The major transshipment hubs are going to be stuck in the same game carriers have been forced to play, and some already are. If they do not upgrade their capacity to handle these mega vessels, especially for the main transshipment points, they will risk being out of contention to get the transshipment at all. On the other hand, if they all upgrade to handle these vessels, we will have far too much capacity. We see that most transshipment points clearly want to be in contention, and many are already upgrading their capacity. Compounding onto this, while ports and terminals are being forced to invest large amounts to improve their infrastructure, it does not in itself mean that they are going to get a single container more going through the port. Just because vessels are becoming larger, it does not necessarily change the number of containers a terminal would likely handle.”
He continued, “My view is that over the next 5 years we’ll see a gradual evolution of networks gravitating towards fewer, but larger hubs than what they have today. The game is on for all the main transshipment terminals. There will be winners, but you might also see some of these transshipment hubs who could very well be in a situation where they have invested a large amount of money, but might not have much business to show for it. That is the game the major terminals and ports are heading in to, especially in the main transshipment hub routes.”
When it comes to gateway ports, they have the obvious advantage that cargo has to move through them, but even here there is competition. Many areas have multiple gateway hubs that are vying for the same hinterland cargo. However, it’s here in these gateway ports where we are beginning to see these terminals looking at strategies for how they can gain leverage and bargaining power with carriers.
Mr. Jensen said, “This is of course easier said than done, but many ports are seeing direct relations with cargo owners as a viable way to give them leverage with carriers. If they can get to a point where shippers favor a port first and choose carriers second, that becomes a major competitive aspect. It requires a lot of research into exactly what will drive cargo owners to preferring a given port or another, but if you can pull it off, then shipping lines can be swayed not by how the ports position themselves, but how the cargo owners say they want to route the cargo. This is another one of the games that’s beginning to heat up.”
Mr. Davidson says there’s other avenues that ports and terminals are beginning to take as well. “The customers are getting bigger with these consolidation and alliances, and it’s creating strategic changes in the way the big operators are behaving. We’re beginning to see more joint ventures with shipping lines. One of the first steps is to get close to the shipping lines and lock them in. The volume can come in and go in such big numbers that the risk for operating terminals has increased because of this. You can win big, but you can lose big as well. That’s the certainly one element that’s very clear.”
Mr. Davidson continued, “We can’t get carried away on the assumption that the shipping lines have all the power though. There are a couple things we have to keep in mind that provide a counter balance to that. The bigger the alliances and ships get, the less choice of ports and terminals they have. The other thing that shipping lines must not forget is that ultimately, it’s about the cargo, and the cargo is always king. Everybody exists to serve the cargo. It’s not there for the shipping lines to say I’m going to take all this cargo somewhere else, because the cargo may decide otherwise. It’s only in the transshipment sector where the shipping line has the ultimate and complete power to decide to move volumes overnight somewhere else.”
A Tangled Web
One thing that muddies the waters and will certainly slow development down is carrier ownership of various terminals. This is already something that is problematic with alliances having to work around it when designing their networks.
Mr. Jensen explained, “The problem here is an alliance may agree on the network, but then when you go into a port with multiple terminals, you can easily see the problem. Carriers tend to favor terminals where they obviously already have investments in. This does not make for very optimal networks. Over time, that means we might see a change in the carriers’ ownership structures of the terminals as they try to balance their portfolios between what a good terminal investment is and how does that match with their network set up. I would expect to see a strengthening of some terminals, and a divesting of others. It all rests upon terminal interests where they determine if this actually fit naturally with their network design philosophy, and if it doesn’t, then you might see a few of the terminals divested.”
Another factor to consider is that while most of the world is in a state of caution and reluctance to take risks investing, certain countries are quite the opposite. Namely, we’re seeing Chinese carriers and terminal operators making big moves across the world to invest in ports and terminals to increase their global scope.
Mr. Davidson said, “There’s a very strategic difference between Chinese terminal operators who are expanding internationally and other traditional ones. Many Chinese terminal operators are very aggressive, expansionistic and are keen to acquire new assets. They generally have access to softer loans and can pay a premium for these assets. You have them on the one side being very expansionistic and the traditional players being much more cautious, having scaled back their expansion plans due to the risks. This is an increasingly interesting dichotomy in the behavior of the terminal operators that looks to continue into the foreseeable future.”
Much like the moves seen in the carrier market, we’re seeing those willing to invest are taking advantage of a fragile market. It’s hard to foretell, but it’s within reason that we could see large established terminal operators giving into these willing investors. “Some of the established players are tightly aligned with their government and I don’t see them ever being sold. There are private entities in the market that just might give in, however rather than outright sales it’s more realistic we’ll see partial buyouts or investments. We’re already witnessing this with some of the terminals selling a large minority stake in their business,” said Mr. Davidson.
So, while the outlook for ports and terminals may be in a bit of contention, there is certainty in the fact that inaction is a losing strategy. The game being played is high stakes and there will be winners and losers. Mr. Jensen said, “The challenge for ports and terminals, and why the game is much more dangerous for them compared to carriers, is that they cannot move their assets. At least when a carrier orders too many vessels they can cascade them to other trades. The terminals obviously cannot move, so building up a massive amount of overcapacity in one geographic location can spell game over. Smart investments and moves will have to be made by ports and terminals if they are to see themselves past the difficult times ahead.”