Shipping and Terminal Industry Trend (2/3)
Last time we looked into the trend of shipping and terminal industry. We now are going to have a deeper look into the industry trend for sequel. In the last posting of Shipping and Terminal Industry Trend we shared the size enlargement of vessels and terminals. What comes next this time?
1. Proliferation of carrier alliances
Ever larger ships also intensify the pressure for more alliances and cooperation between carriers in order to fill them, and so ports and terminals face the challenge of greater concentration of volume. The Asia-Europe trade route, for example, did have just five main players (in operational terms): Maersk Line, MSC the operating alliance of and CMA CGM, the G6 Alliance, the CKYH Alliance and the China Shipping/Evergreen/UASC/Zim grouping. While there are a number of individual carriers within this total, each competing for business, in terms of ship operations they are joined together. In the case of the UK ports, for example, this means that the estimated 3.5 million TEU of annual Asia volumes is split across just five groups, each with roughly 700,000 TEU p.a.
While it is important to note that not all of this volume has to be accommodated in one port or terminal (and vessel sharing and slot chartering inevitably complicate matters), the increasing concentration of alliances clearly has an impact. Traffic can be won or lost in larger lumps.
The cascading of larger vessels onto other East-West and North-South routes will inevitably increase the pressure for more alliances, and in turn concentrate volumes for ports and terminals. For example, the G6 alliance has extended its cooperation to include the Asia-East Coast North America route was announced in June 2013. This will see the top three liner companies, Maersk Line, MSC and CMA-CGM are cooperating operationally on all three East-West routes – Asia-Europe, Transpacific and Transatlantic.
More complicated still are ports where there is a mix of gateway and transshipment volumes. There is a whole host of other issues here – available terminal capacity, ship size, contractual commitments, terminal shareholdings and so on. Then there is the attitude of each liner towards its related terminal company – Maersk Line tends to be at arm’s length to APMT, MSC is perhaps closer to TIL and CMA CGM closer still to Terminal Link. These are complex issues that will take time to work through – and the immediate challenge for the three lines will be coordinating vessel operations.
More collaboration between shipping lines will surely follow and with it some degree of rationalization of port and terminal choices.
2. Shipping lines having to raise cash
Liner shipping remains challenged by poor profitability. Drewry’s estimate of operating profit for the liner shipping industry in 2012 was $280 million – clearly a very poor return for moving nearly 170 million TEU of loaded containers, although any sort of profit seemed highly unlikely after the heavy losses sustained in the first quarter. It also represents a significant improvement on the estimated $7.7 billion industry loss endured in 2011.
The relentless pursuit of economies of scale through deploying ever larger ships is fine, provided that trade volumes grow sufficiently to fill the additional capacity. However, over-ordering, combined with continued sluggish economic performance by developed countries in particular, has resulted in continued pressure on freight rates and continued poor profitability for the carrier sector. Carriers therefore remain under pressure to raise cash, and selling terminal assets is one of the few ways of achieving this. Hence at least in part, the disposals of stakes in terminal assets made by the likes of Yang Ming, Hanjin, CMA CGM and MSC can be seen as a consequence of this need. This trend looks set to continue.
3. Highly active Asian and infrastructure investors
The moves by carriers to raise cash have neatly coincided with the presence of cash-rich, mainly Asian investors (and particularly Chinese investors) keen to gain a greater foothold in the port and terminal industry. Hence companies such as China Merchants and Mitsui have made significant acquisitions. Others, such as COSCO Pacific and SIPG, also have a strong appetite for expanding their portfolios, in particular to spread risk away from a reliance on Chinese ports. At the same time, the infrastructure investor community also remains active and interested in ports and terminals, as shown by moves made by the likes of GIP to take stakes in TIL, and also in the Port of Brisbane.
4. Portfolio management by GTOs and ITOs
GTOs and ITOs started to emerge in the 1980s and for perhaps the first 20 years of their existence their primary strategic aim was to build portfolios, taking advantage of the numerous acquisition, privatization and concession opportunities in all parts of the world. Divestment of assets was a rare occurrence and usually only happened when forced on an operator by financial pressures (such as the sale of ICTSI’s international assets to Hutchison in 2001).
Over more recent years, however, a number of the stevedore and hybrid operators have started to take more of a portfolio management view, disposing of selected assets either to re-balance their portfolios or simply take advantage of attractive valuations. In part this is because the industry has reached a certain level of maturity, and so assets have become ripe for disposal. It is also a consequence of an increasing focus on emerging markets by GTOs and ITOs. That is another reason terminal automation system takes center stage lately.