A new container insight reported released by Drewry Maritime Advisors asks whether ports and terminals are making less money than they were in the past.
Investing in and operating container terminals has long been a highly profitable and resilient business sector.
Underpinned by strong historic growth in demand, the nature of the industry, with its high barriers to entry and limited local competition in each port market has consistently translated into healthy profit margins and returns on investment.
Drewry highlight 4 ways in which ports and terminals can boost income, which are:
Terminal operators and shipping lines cooperate much more closely together to mitigate the negative impact of larger ships and alliances. This will undoubtedly help, but is unlikely to solve the problem entirely.
2. Price Hikes
Significant price hikes are to be obtained from shipping lines in order to balance higher costs and maintain margins. Shipping lines, already feeling severe financial pain from overcapacity and weak demand, will resist strongly.
3. Accept “new era”
Terminal operators accept a new era of lower margins and returns. Some operators and investors may choose to leave the market.
4. Invesment acumen
Terminal operators choose not to invest in new capacity because the returns are insufficient for their shareholders. This is an extreme option that will in effect leave shipping lines with nowhere to berth their large ships.
Ports are not immune to the volatility of the market and the world economy, but have proven their ability to weather storms – even in 2009, a year where global port volumes fell by nearly 9% and the worst year the industry had ever seen, all of the main global container terminal operators maintained their earnings margins, at least in percentage terms.
However, the global container port industry may be entering a new phase of its development, where several of the key variables are looking increasingly challenging.
In the period running up to the global financial crash in 2008/09, container port throughputs raced ahead averaging double digit growth each year (~11%).
Since then, Drewry has found that the new normal has been much lower growth (~5% p.a.). This in itself is not surprising, but more worrying is the recent hard slowdown in growth triggered mainly by economic and political changes in China.
In 2015, global container port growth was only around 1% and in 2016 it is not likely to exceed 2.5%. These are the lowest growth rates ever seen by the industry (apart from in 2009). The industry has adjusted to a new normal of ~5% growth p.a. but Drewry asks: what if the new ‘new normal’ is less than half of this?
The industry is seeing average and largest ship sizes increase in leaps and bounds – something that was largely absent in the period up to 2009. Cascading of vessels from one trade lane to another means that all ports are seeing substantial increases in vessel sizes.
In a low growth demand environment, the deployment of bigger ships results in lower frequency services and greater volume peaks.
For terminal operators, capital expenditure costs and operating expenditure costs are increasing while demand is relatively static.
The formation (and re-formation) of larger carrier alliances means that for ports and terminals, the size and complexity of each customer (alliance) is increasing, along with their bargaining power.
Drewry believes this is a double-edged sword, because as ships and alliances get bigger, the choice of ports and terminals that can accommodate them reduces. The creation of alliances has resulted in market share volatility for many ports – and the makeup of the alliances is going to change again soon due to merger and acquisition activity in the liner sector.
The new nature of demand is for less fragmented terminal capacity (fewer, bigger terminals needed in each port) which requires consolidation of terminals, both physically and in terms of ownership.
However, such consolidation is complex and expensive, and may not be possible, or may take a long time to achieve.
For reasons beyond terminal operators’ control, costs are rising markedly while revenue is increasing much more slowly.
Drewry View: The global container port and terminal industry is on the cusp of a critical turning point. To safeguard the provision of suitable capacity and productivity for the long term, changes will have to take place to ensure sufficient returns on investment for port operators. Something has to give.