Global Container Terminal Operators

Fuente: Webinar Global Container Terminal Operators

During the course of webinar broadcasts Drewry received a number of questions. Here a question & answer summary.

Question & Answer

1. We say that terminal operators are facing a perfect storm. What is the most likely outcome from this?

Ans: Taking the four elements of the storm in turn:

• muted demand growth is what it is, there isn’t anything that terminal operators can do to influence the overall market growth (all they can do is try and win market share from each other);
• higher capex and opex from bigger ships is again what it is – all operators can do is try and optimise as much as possible and deal with it as efficiently as possible but the underlying fact is that costs are being driven up;
• the increased risk from larger alliances can and is being addressed by operators making JV deals with carriers for terminal stakes but even then, a single carrier cannot guarantee that an alliance’s volumes will use a particular port or terminal. There is a huge amount of horse-trading that has to take place between alliance members;
• and as for carriers trying to push down terminal handling prices, terminal operators have to try and stand firm and resist.

The influence of all of these factors will vary from region to region, country to country, port market to port market of course. Overall it seems clear that terminal operator margins will be squeezed but the business should still remain a profitable one.

2. Given the ongoing industry consolidation what role do we see for mid-sized or local terminal operators?

Ans: Mid-sized and local operators can still compete very effectively with the global players, and there are still many of them around the world. There is no reason why a well-run locally owned terminal next door to a global operator run terminal in the same port shouldn’t continue to be successful with its local knowledge, connections and expertise. The competitive environment in the container terminal industry operates primarily on a local basis, and so it is all about your terminal’s qualities versus neighbouring ones. Of course the global operators do have an advantage in terms of being able to share knowledge, best practices, expertise, purchasing power for equipment etc, and have a more global relationship with customers. They also have an advantage when it comes to major changes like automation. Global players will likely have implemented it at least once whereas local players likely never have.

3. What regional variations do we anticipate with regard to M&A activity and ownership structure?

Ans: There will be regional variations depending on the market conditions – for example if a region (or port market) has highly fragmented terminal ownership there may be more pressure to consolidate. Elsewhere, for example in N Europe, terminal ownership is already consolidated, and dominated by global/international terminal operators. Other regions such as Africa and S America have a much lower presence by the global/international operators.

4. How significant do we expect Chinese government supported organisations to be in the future international ports sector?

Ans: Chinese players such as China Cosco Shipping and China Merchants are among the aggressive expansionists referred to in the webinar and we can expect them to continue to be very active players. Their motivation is financial and commercial but also geo-political. For this reason they may be prepared to pay higher prices for terminal assets than other players will.

5. When we say that the ports sector is changing to “value” (from “growth”), does this relate only to earnings performance or is this also cyclical?

Ans: The change is a fundamental one. From its inception back in the 1960s, the container port industry has shown exceptional growth, for decades outperforming general growth, and so the stock markets have rightly viewed the port industry as a growth sector investment. The port industry has had an amazingly successful run, but sooner or later it had to mature and it appears to have done so. Growth rates have moderated and the stock markets seem to have recognised this, increasingly viewed the sector as a value one (i.e. they are looking for companies that are under-valued by the market). For the next 3-5 years at least, this view looks likely to continue.

6. Greenfield expansion plans are being cut back markedly in the face of weakening demand. Is there a danger that in the medium term we could be facing a lack of terminal capacity?

Ans: Terminal operators have quite rightly taken their foot off the gas with greenfield expansion, putting them on ice, scaling them back, delaying or even cancelling them. We know from experience though that demand can be very dynamic (it can change quickly) but terminal capacity is very slow to respond (it takes years). So there is a danger in the medium term that there could be a lack of capacity (but again, this would vary from region to region, port market to port market).

This is also where the question of terminal handling prices is relevant. If carriers succeed in pushing down prices, there is a danger that terminal operators will simply not invest because the returns aren’t sufficient on projects.

7. What is meant by terminal operator caution with regard to new greenfield projects?

Ans: Operators are very aware that demand growth has softened, and that the risks and returns from port projects are changing adversely. For these reasons they are being extra cautious about making greenfield investments (and transhipment greenfields are of course more risky than gateway ones). The preference is to instead acquire existing businesses through M&A activity.

8. Are ship size growth and liner alliances still a worry for terminal operators, or is the worst over?

Ans: As far as the very largest ships are concerned, it looks like carriers are reluctant to go beyond the 20,000 teu level already in service, and so we may have reached a ceiling. However, the cascade effect is still very much in evidence, pushing up ship sizes on secondary routes, and reducing service frequency. The opening of the expanded Panama Canal has added to this.

Meanwhile the three big liner alliances are still taking shape – we aren’t 100% sure how they will look – and they haven’t established their product offerings yet. Not only this, but alliances aren’t forever. When the current four alliances were established, it seemed like we would at last have some stability, but then Cosco and China Shipping merged, CMA CGM bought APL etc. and it all changed again. Who is to say how long the three alliances due to be established in 2017 will last?

9. Do you see pricing power shifting to shipping lines as a consequence of the consolidation among shipping lines?

Ans: Certainly there is more buying power on the side of the lines/allances, albeit that in most places, the alliances can’t negotiate contracts with ports as alliances, they still have to do it as individual lines. However, bigger ships and alliances reduce the choice of ports and terminals that can accommodate them and so this is a counter balancing effect.

10. What impact did the last round of carrier alliance formations have on contracts between carriers and terminal operators?

Ans: The formation of the four big alliances naturally resulted in another round of contract discussions, and also in some significant port market share shifts, for example in Northern Europe and South East Asia. The emergence of the three alliance structure from 2017 onwards means more discussions and negotiations – terminal management is having to spend a lot of time in such discussions – but at this stage the alliances are still taking shape and have not settled on their product and service offerings, so things are still very much up in the air.