Scaling up - new ports and larger vessels enter trade markets to muted demand

Feature | 29 November 2016
Shipping_commodities

Despite the slump in global trade growth rates, and ongoing pain in
the container shipping market, investor appetite for port infrastructure
is undimmed as they cater for larger vessels. Jon Masters reports

Four of the world's largest port operators were invited to submit formal proposals in October 2016, to develop a new multi-billion dollar container terminal near Corozal in Panama. This project is a big deal for global ports. Back in 2015, the Panama Port Authority happily announced that no fewer than 11 different multinationals had expressed interest in the bidding.

The four shortlisted are APM Terminals, PSA International, Terminal Link and Terminal Investment Ltd (TIL), which will compete to design, build, finance and operate the new port. Competition will be fierce, as the development has the potential to boost one of the world's largest ports and shipping conglomerates - or more as alliances form - just as market conditions are getting particularly tough.

APM Terminals is owned by the world's largest shipping line, Maersk (part of the Danish conglomerate AP Møller-Maersk, which has just reported its second quarterly loss in a row. The number three shipper, France's CMA CGM, is the majority owner of Terminal Link, while TIL is the terminal investment and operation arm of the second largest, MSC (Mediterranean Shipping Company) Group.

The Panama Port Authority's plans for Corozal are typical of one or two emerging trends in port developments worldwide, in what is a very complex industry; one of many different players and patterns of change.

Trade remains in the slow lane but capacity keeps on growing

Some relatively simple observations include the fact that world trade is no longer at double digit growth driven by inexorable output from China. The slow-down in trade has brought on big problems of over-supply in the shipping industry - rocked last year by the collapse of South Korea's shipping line Hanjin1.

Growth rates in global port traffic for the year are predicted at around 3%, according to the shipping and maritime analyst, Drewry2. This is a remarkably low rate for the industry historically, but the key takeaway is that the sector is expanding.

A rate of 3%, for an industry currently estimated to move around 700 million containers annually, still represents growth equivalent to adding a port equal in size to that of Hong Kong - one of the world's biggest - every year. Hong Kong is at number four in the world list of ports, moving 24 million TEU (twenty foot equivalent units) in 2014 according to the World Shipping Council. The largest is Shanghai at roughly 35 million TEU.

By comparison, the new Corozal terminal will have a quoted capacity of 5.3 million TEU once its two phases of development are complete. This would currently put it down at number 28 in the world list, but still equivalent to Japan's Hanshin Ports superhub and close in size to one of the United States' biggest, Port of New York-New Jersey.

The intention is to create a transshipment hub at Corozal, taking advantage of the expansion of the Panama Canal locks - opened this year - by catering for post-panamax ships of over 15,000 TEU capacity. This will be right alongside the existing Bilbao terminal operated by the Panama Port Company - a subsidiary of Hutchison-Whampoa - which is itself reported to be investing to enhance efficiency and capacity.

Corozal is not alone as a greenfield transshipment port development. APM Terminals, backed by AP Møller-Maersk, is developing the off-shore Moin Terminal in Costa Rica. The circa US$1bn investment will cater for the big ships, for Costa Rica's lucrative trade in fruit and other agricultural products, and act as a hub for the region. APM Terminals is also involved in a three-way joint venture with the French investment group Bolloré and the Ghana Ports Authority, in the US$1.5bn development of Ghana's Tema Port. Four deep-water berths and handling infrastructure will give capacity up to 3.5 million TEUs a year, including a six-lane modern highway and connecting roads to ensure the containers can be moved in and out of Tema's hinterland.

 

Plans for the Corozal terminal in Panama

Investor appetite

Investment in port upgrades appears alive and well, albeit in a much toughened market. "Investors are now a lot more cautious and softer in approach than they were five to ten years ago when shipping lines and port operators were playing catch-up with soaring demand," says Drewry's senior analyst for ports and terminals, Neil Davidson.

"Terminals are also saying they are facing rising costs from the handling of bigger ships, while new shipping alliances are driving down prices, so returns are tighter. Investors are now playing their cards carefully, but it remains a game of risk and high profit. Typical EBITDA margins have remained in the 20-45% range. The willingness to invest is still there, just more modestly," he explains.

Asked where the investment is coming from, the picture is one of a mixture of activity from shipping companies, port operators and port authorities, Davidson says. Pension funds and equity investors have also been showing large appetites for the sizeable returns on offer.

In September this year, a deal was struck that sees a 50-year lease at the Port of Melbourne privatised at a cost of US$9.7bn - to a consortium backed by the Chinese sovereign wealth fund CIC, Global Investment Partners and Canada's Ontario Municipal Employees pension fund.

The ports sector is not just about containers of course. According to the United Nations 2015 Review of Maritime Transport3, seaborne movements of oil, gas and other bulk commodities accounted for approximately 60% of all global shipping by tonnage carried in 2014.

Market volatility

Some big strategic investments have been made by commodity traders, in product handling facilities at ports and inland logistics centres. While the aim has been to facilitate trade routes, they've done so at considerable risk, given the vagaries and volatility of global market conditions.

Trafigura's infrastructure arm Impala Terminals, for example, has started operations from its new Porto Sudeste iron ore export facility south of Rio de Janeiro in Brazil, "albeit slowly due to depressed market conditions", Trafigura reports. China is traditionally the biggest consumer of Brazil's iron ore, but now at much reduced demand. Compounding the problem for Impala, steel consumption and prices have weakened globally due to China's over-supply.

Porto Sudeste is a long term strategic investment, however, as is the US$1bn that Impala has pumped into development of a multi-modal network of oil, dry bulk and container terminals in Colombia.

The short-term risks involved in such long term investments are evident in Germany. Terminal operator Eurogate opened its JadeWeserPort (JWP) at Wilhelmshaven on the North Sea coast north of Bremen in 2012, at a cost of around €1bn. Eurogate has reported container traffic at JWP up six-fold in 2015, but mostly because it handled extremely low volumes the previous year. JWP's reported throughput of 426,751 TEUs means the facility was still operating at only 16% of its 2.7 million TEU capacity last year.

Eurogate puts this down to the maturity of a market "now characterised by highly intense competition". JWP has been developed to cater for the next generation of 'ultra-large container vessels' (ULCV) and is claimed to be Germany's only port with the capability to handle them.

The trouble is, there's not that many of them around as yet and meanwhile JWP is competing for business against other big ports nearby, such as Eurogate's Bremerhaven and Hamburg terminals (which handle about eight million TEUs between them) and others including Rotterdam and Antwerp serving a hinterland of northern Europe.

Ever larger ships

Nonetheless, as Eurogate chairman Thomas Eckelmann points out in the company's 2015 annual report4, the trend is towards ever larger ships. "In 2015, the world's shipyards had 60 ULCVs with a capacity of 18,000 to 22,000 [TEUs] on their books. Mega container carriers make high demands on seaport infrastructure and terminal operators' handling processes. Against this background, we are convinced that the investment in Wilhelmshaven was both foresighted and worthwhile," he declares.

The trend of expansion to cater for the big ships appears the same the world over and it's offering up good opportunities for the supply chain. Consultant CH2M acted as programme manager for the US$5.4bn Panama Canal expansion project and the firm is carrying out design and engineering roles for the Moin Terminal scheme and a number of others.

CH2M's global director for ports and maritime, Patrick King, says: "Terminal operators and port authorities are fighting for market share so they have to keep up; investing in expansion, better cranes and automated handling technology to enhance efficiency."

Container handling, storage capacity and ship dwell times are important factors, as well as the depths and lengths of berths, in the sizing up of ports' ability to handle the big ships. For instance, as contract engineer, CH2M is working for the operator DCT Gdansk, to double the capacity of the Polish port to three million TEU, with a new 700m long and 17m deep quay wall.

"This will allow Gdansk to accommodate larger ships of 18,000 TEU. The need to serve the biggest vessels is driving and will continue to drive ports developments for the next five years at the very least. It's a trend that will create winners and losers. The smaller ports will have to diversify or become more niche to survive," adds King.

There is also a cascade effect at work. As the mega ULCVs become more prevalent, the big ships of today will become the smaller ones of tomorrow, pushing them down to secondary trade and transshipment routes. "Investments are primarily being driven by this cascade effect," says Drewry's Davidson. "All ports are gearing up for it. In Africa and Asia and elsewhere, everyone is having to invest more capital, to handle similar volumes as today's, but in bigger ships."

The same can be seen in the Middle East. Abu Dhabi Ports has announced plans to expand its Khalifa Port, to be operated by China's COSCO Shipping, while the Port of Damietta in Egypt is reportedly looking for investment partners for a major expansion project in the eastern Mediterranean - likely to include Singapore's PSA International, which has signed an agreement to help the Egyptian government to develop its ports.

Developments in South East Asia put all this into context. The big-ship economies of scale that are driving developments in the rest of the world are principally coming out of China and Singapore. Seven of the top ten ports are in China - the others are Singapore (at number two), Busan in South Korea and the UAE's Jebel Ali in Dubai.

PSA, backed by the Singapore government, is currently expanding the Pasir Panjang Terminal with a US$3.5bn investment that will bump Singapore back up to number one in the world list, at 50 million TEU, when it opens in 2017. Following on from that, the first of four planned phases of development of Singapore's Tuas Terminal started this year. Completion of the fourth phase, if it all goes ahead, will give the mega-terminal a capacity of over 65 million TEU.

However, UNCTAD's secretary general Mukhisa Kituyi said, ahead of the Review of Maritime Transport 2016 published on 7 November 20165 that reported world seaborne trade had surpassed ten billion tons for the first time, "The push for ever larger ships is at the root of the industry's problems. There's just not enough cargo right now to fill the newly acquired, bigger vessels."

Suez v Panama

For world trade routes, the question of Suez versus Panamanian routes between east and west markets has been crucial in recent years as both canals raced to upgrade first6. Security of the Suez Canal is seemingly assured and its expansion programme crossed the finishing line first, opening in 2015, a year ahead of Panama. Suez is now deeper and with a parallel channel in parts, allowing bigger ships, quicker transit and shorter waiting times - but the promised reduction of 18 to 11 hours is not a lot in the context of voyages measured in weeks.

"The Suez expansion was a bit of a case of smoke and mirrors, to allow more capacity, but as much to appear to remain competitive. The Panama expansion is more significant by allowing much bigger ships," Davidson explains. Suez has its captive markets, but as reported by Lloyd's List, the trebling of ship size navigable through the Panama route has enabled it to retake its traditional lead for eastbound versus westbound trade between Asia and the US east coast.

"Panama's expansion was a game changer, an historic step forward that is driving a lot of investment," says CH2M's King. "The US east coast ports of Georgia, New York, Virginia and Miami are all increasing capacity. The second phase expansion of the Virginia International Gateway, worth about US$300m, will go out to tender during the next few months."

Emerging market drivers

Over the longer term, emerging economies are expected to deliver a lot more investment, King says: "Trade numbers may be down now, but over the long term I see the drive from emerging markets as irreversible. They will have a lot of goods to get in and out and there will be lots of opportunities. In the next five to ten years, the focus will be on India and Mexico. Both have strong growth projections and governments recognising the need for public sector support to attract private sector funding for ports investments."

DP World, ranked by Lloyd's List as the fourth largest terminal operator (behind PSA International, Hutchison Port Holdings and APM Terminals), is also one of the biggest investors. The DP World Group's chairman and CEO, Sultan Ahmed Bin Sulayem, is typically bullish, saying the company is seeking opportunities in India worth US$1bn, and others elsewhere, over the next few years as DP World targets reaching a capacity of 100 million TEUs by 2020.

"We are looking at specific areas such as expansion in brownfield container terminals, long term greenfield container concessions, inland container depots and expansion of existing inter-modal rail services for rolling stock," he says.

"We also start operations at the Port of St John in New Brunswick, Canada, on 1 January 2017 and have reached an agreement for a 50-year concession for the development of a greenfield multi-purpose port project at Posorja in Ecuador. We have signed a memorandum of understanding with Taiwan International Ports to potentially develop Kaohsiung Port's Terminal 7 in Taiwan, and we are proud to expand our footprint in Africa with an inland container and warehousing facility in Kigali, Rwanda and the development of the multi-purpose Port of Berbera in Somaliland."

Mature value sector

Despite these plans and those of other operators, the ports industry is entering a new phase as a result of pressures on demand and cost, Davidson says. According to Drewry's 2016 Container Terminal Operators report, ports are now increasingly seen by stock markets as a mature value sector, rather than a growth sector.

With demand projections low, terminal operators and investors have been urgently reviewing capacity expansion plans, the Drewry report says. Projects within a five-year horizon will not change significantly, but those scheduled to appear later are subject to reconsideration of timing and scale.

"It is clear that global and international terminal operators are fundamentally reviewing their strategies, becoming cooler on greenfield projects and more interested in M&A opportunities," Davidson says.

"A natural response to the increasing size of shipping alliances is for terminal operators to look to consolidate terminal ownership in parallel, although a dichotomy in approaches is evident. On the one hand many of the established international players have become more cautious, but on the other, the top strategic priority of expansion-minded players like the Chinese operators and Yilport Holdings (a new entrant in Drewry's league tables of global terminal operators) is to acquire more assets."

Jon Masters is a freelance infrastructure journalist and associate editor of Infrastructure Intelligence

Box-out 1

Real estate by-products of port development

Trends in port developments worldwide are creating a further potentially lucrative knock-on effect for real-estate investors. As the major owners and operators push ever further outwards and off-shore to attract bigger ships, disused waterfront land gets left behind - ripe for redevelopment.

"The big ports need a lot of land. They push outwards, leaving the more constrained areas behind, so creating big opportunities for regeneration projects," says Paul Grover, an associate director in consultant Arup's Cities team. Grover has been instrumental in setting up the International Waterfront Forum, which brings together representatives from cities to discuss regeneration projects, including those of Copenhagen, New York, Shanghai and Liverpool.

"The ports industry is constantly moving. Hong Kong, for instance, is building outwards in search of more value, raising questions of how to develop what's left behind. Many cities have set up public sector urban regeneration organisations, which need private sector funding for development programmes," Grover says.

"A delicate balance is needed. People want to live and work by waterfronts, but they don't usually want to be near heavy industry. It can be done, as witnessed in London's Docklands and in Sydney where the city's central business district is migrating down to the waterfront. The developer Lendlease is making a good job in Sydney's Barangaroo district, of giving the area a sense of 'space' and identity for premium value."

Liverpool also has been looking at similar developments elsewhere in the world including Barcelona, Grover says. Peel Ports' new Liverpool2 terminal opened in November this year just as the city is looking to regenerate other areas on the banks of the Mersey.

"Liverpool looked at how cities promote themselves," he says. "It's nearly always images looking inwards from the water. Everyone is considering how they engage with the waterfront for regeneration."

References: 

 

  1. See www.tfreview.com/node/14183

  2. See October 2016 forecast at https://www.drewry.co.uk

  3. See http://bit.ly/1YwtssP at www.unctad.org

  4. Published April 2016. See www.eurokai.de

  5. See http://bit.ly/2fP8TJd

  6. A point developed in former TFR editor's feature on port pinchpoints, Route of acceptance in February 2015. See www.tfreview.com/node/10064

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