Drewry: Shipping Lines Risking Port Investment

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Drewry has warned that container shipping lines are putting future port investment at risk by demanding terminal handling cost reductions.

The global shipping consultancy firm has warned in its newly published Ports and Terminals Insight report that terminal operators face 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.

Drewry’s analysis of port and terminal operators’ financial results has revealed a weakness in organic earnings and escalating debt levels, with stricter cost rationalisation and financial risk reduction will be necessary to retain investment interest. It added that companies with growth plans are commanding a significant market premium amid diminishing profitability.

Drewry’s Senior Analyst for Ports and Terminals Neil Davidson has reinforced the firm’s message by claiming that terminal operators may “simply stop investing” if the risks or returns from investing in and operating terminals fall too far.

Drewry’s Port Index, a market weighted assessment of share price performance of the top listed operators, slumped 10% in the last quarter and supports its analysis that the market valuation of listed operators remains weak, underlining the cautious assessment of growth in the sector.

However, it is possible to resist the downward pressure on terminal handling prices depending on the local market conditions and the extent of choice for ever larger ships and alliances.

According to the new report, terminal operators can improve the situation by focusing on organic growth hotspots such as South Asia and the Middle East and command a larger market share through acquisitions.

Drewry has forecasted that South Asia is set to be a star performer in relative terms, with its manufacturing industry likely to take some of the activity previously carried out in China.

In the Middle East, major infrastructure projects are expected to resume after a hiatus caused by the low oil price. Buying market share through acquisitions in an attempt 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.

But many terminal operators still face a challenging future in the face of rising costs, pricing pressure and increasing risks after years of plenty.

Davidson concluded: “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.”

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