Container terminal operators are having to grapple with increased market volatility after being buffeted by several other forces that amount to a “perfect storm,” says Drewry.
About 18 months ago, the London-based consultants identified four related trends impacting terminals: softening demand, higher operating and capital costs due to bigger ships, increased business risk from the reduction in the number of liner alliances and carriers demanding lower prices
Speaking during a webinar this week, Neil Davidson, Drewry’s senior analyst of ports and terminals, said the industry has been able to maintain earnings before interest, taxes, depreciation and amortization (EBITDA) for several reasons, including a recovery in global demand, from stagnation in 2016 to growth of more than 6 percent in 2017. That growth is continuing, but he said possible trade wars and sanctions are “creating clouds on the horizon.”
He said terminals have implemented cost-savings initiatives to mitigate operating costs and been able to resist carrier pressure for lower prices because large ships have less choice in which terminals they can call. As ships have grown in size, berths at some terminals can no longer accommodate them and in some cases are becoming obsolete.
That can particularly be a problem at some older ports and terminals, though Davidson said “what is always surprising is how big ships are still being handled in ports by hook or by crook, by stowage, through the port rotation.” For example, he said carriers are working around draft restrictions on the Elbe River leading to the Port of Hamburg.
He also noted terminal capacity is being effectively shrunk by the volume peaks when large ships discharge huge numbers of containers into a terminal. He also said higher- paying “gateway traffic” is growing faster than lower-paying transshipment cargo.
Davidson highlighted the growing size of ships in the Asia-to-East Coast North America trade following the expansion of the Panama Canal. (The Port of New York and New Jersey also just marked the one-year anniversary of the raising of the Bayonne Bridge, which allows larger ships to access container terminals in Newark and Elizabeth, N.J., and on Staten Island.)
“Most of the East Coast North American ports have put a lot of effort into being able to accommodate the bigger ships so the neo-Panamax vessels of 14,500 TEUs can call in New York and Norfolk, Savannah, etc. In most places the ports are ready. In many cases there are often work-arounds depending on where in the rotation the call is,” he said, explaining the ship usually is at maximum draft at the first port of call in or last port of call out and not drawing as much water in the middle of a rotation.
He said, however, “risk is clearly on the up” with the largest carriers organizing themselves into just three global liner alliances and mergers and acquisitions.
That has led to market share volatility. As an example he pointed to Southeast Asian transshipment ports where he said business shifted away from Singapore to Port Klang and Tanjung Pelepas in 2015, but then swung back from Port Klang to Singapore last year.
He said returns on invested capital have trended downward in the terminal business since 2012, which he said may be the result of the maturing of the industry. He said that maturity is reflected in lower stock prices for some publicly traded terminal operators. The lower valuation for terminal operators is shown by a narrowing gap between the price/earnings ratio of an index Drewry has constructed from 11 publicly traded terminal companies and the broader MCSI Emerging Markets Index.
Davidson said “hybrid” terminal operators — that is operators owned by carriers — are becoming more prominent. But he noted individual carriers are not in complete control of what ports and
terminals they use because they are members of alliances, he noted.
There also is an increase in the number of joint-venture agreements between shipping lines and terminal operators that are not affiliated with shipping lines.
That potentially could lead to conflict. He noted carriers want to pay as little as possible for terminal services while a stevedoring company may seek to generate as much revenue as possible. As an example, he pointed to Hyundai’s recent investment in a Busan terminal. He said Hyundai publicly stated that it hoped to pay less for terminal handling, but that its partner is PSA, “who is primarily a profit maximizer. It makes for some interesting discussions in the boardroom, I should think.”
Terminal operators also are focusing less on building new terminals and more on filling up existing facilities, mergers and acquisitions, and forming alliances within ports.
They also are diversifying into areas such as intermodal transportation, inland terminals and free trade zones, though Davidson says this is more common in Europe and the Middle East than in North America. China Merchants Holding has invested in industrial zones in cities. This is a way for terminal companies to spread risk and find new sources of revenue and develop closer relationships with shippers.