Transhipment hubs under pressure

Transhipment hubs under pressure

Direct calls are putting hubs under pressure, according to London based Drewry Maritime Advisors. In one of the company’s recent weekly Container Insight reports, which mainly focused on transhipment hubs in Asia, the analyst concluded: “Throughput at the world’s largest transhipment hubs is stalling and they are exposed to numerous risks, ranging from poor underlying demand to increasing use of direct-call services. While the report alluded to the significant challenges faced by ports/terminals from the new mega alliances, their generally wider port network coverage and better use of tonnage, it said there were also opportunities. “But traffic figures for the first six months of the year would,” said Drewry make uncomfortable reading for officials at a number of the world’s largest transhipment hubs. 

Throughput at Singapore was down by 5% while further North, Hong Kong fared even worse, with a half-year decline of 10%. Drewry said the reasons for the decline were varied and ranged from a general slowdown in global container trade to shifts in carrier strategies and a drift of some cargo to other hubs. In addition, many emerging countries had improved their ports and infrastructure by attracting private investment and this meant facilities could better accommodate bigger ships. 

In the case of Singapore, where transhipment cargo is estimated to account for at least 85% of the port’s total throughput, Port Klang, Port Tanjung Pelepas and Even Colombo have taken market share. Drewry’s research revealed that while Singapore’s Compound Annual Growth Rate (CAGR) in container volumes between 2010 and 2015 was less than 2%, PTP’s and Colombo’s came in at nearly 7% and over 4%, respectively. 

Drewry suggested that the experiences at Singapore and Hong Kong should be lessons for other transhipment hubs around the globe. Ocean carriers are under severe financial pressure to reduce their operational costs and some of their actions have accelerated the shift towards more direct calls, at the expense of transhipment, said Drewry, as reported in WorldCargo.

India to dismantle tariff regulator

India will not corporatise its big 12 ports but it is mulling over substantial reforms, including abolishing the existing tariff authority that regulates port charges, as it set about upgrading the sector. There is no proposal to convert the major ports into corporate companies, Shipping Minister Nitin Gadkari told the Lok Sabha (Parliament). Reform is difficult in India, with powerful public sectors having derailed proposed changes in the past. 

A proposal to replace the Major Port Trusts Act, 1963 is under consideration of the government, with a view to modernise the institutional structure of the major ports and to secure greater operational freedom for the ports, in line with present day requirements, said Godkari. In the proposal under consideration, the interest of labour has been taken care of by providing for a labour nominee in the board of each port authority. Reforms look to be serious, with press reports attributed to the minister, indicating that the Tariff Authority for Major Ports (TAMP) would be dismantled. 

This Act will be simple to understand, transparent and business friendly. We are proposing to abolish TAMP, which will be tabled in the next parliament session, the Indian Express and the Financial Express quoted Gadkari as saying, reports WorldCargo.

Container overcapacity, no escape from doom and gloom

The message from container lines and maritime analysts at TPM Asia was a depressing one, baring a demand resurgence miracle, carriers will be trapped in their oversupplied misery for years. Wan Min, President of China Cosco Shipping Corporation said in his opening address at the Shenzhen conference that there would be no short term recovery for liner shipping, with the industry seeing the longest and ‘most serious stagnancy’ it has ever experienced. 

We are not optimistic about the markets future, Wan told delegates, what the world economy faces is not only a short-term problem of seasonality but also a long-term problem of structure. Wan said despite the sluggish global economy, container capacity was entering what he called a rapid multiplication period. He said vessels were being upgraded and upsized rapidly and continuously because of innovations in ship-building technology, inflows of financial capital and market pressures. 

The launching of a large number of new vessels is leading to an increase in the total global vessel capacity. Many large scale container vessels will be delivered in quick succession in the coming years. These factors will undoubtedly worsen the tense atmosphere in the container shipping market, where supply exceeds demand already, the China Cosco Executive said. This grim capacity situation was highlighted by SeaIntel CEO and partner Alan Murphy whose most optimistic scenario for the shipping industry was also deeply depressing with so much surplus capacity, he said just to maintain the status quo of being massively oversupplied, more than 2 million twenty foot equivalent units would need to be scrapped over the next three years. 

Murphy said scrapping of container ships this year would pass 600,000 TEU, but next year if would have to reach 800,000TEU in capacity and get close to 600,000 TEU again in 2018. Even then, that would only maintain the current status quo of severe overcapacity because demand was expected to linger in the low single digits. Too many ships and not enough cargo to put on them has translated into falling freight rates across all trades, rate volatility going through the roof and collapsing revenue per TEU. 

Profitability has fallen to such a level that only one carrier remained in the black after the first half, Wan Hai Lines. As carriers struggled to be profitable, Wan said the pursuit of greater berth utilisation by the lines would cause problems. In market conditions where the supply-demand relationship becomes seriously unbalanced, the excessive pursuit of berth utilisation ratio will certainly result in the appearance of international business behaviours and intensify market panic and therefore, distort the relationship between container freights and cost, resulting in the failure of market price mechanisms. 

Also painting a gloomy picture of the container shipping industry in the next couple of years was Michael Beer, an Asia Pacific Transportation, Logistics and Infrastructure Analyst at Citi Research. Beer told TPM Asia that by the end of 2017 there would be a 4% gap between supply and demand as demand reached 2% and supply hit 6.1%. Maersk Line’s Global Head of SalesMichael Hansen was also predicting container supply would outgrow demand by the fourth quarter of 2017. He put the demand at 3% with supply at 5%. (JOC).

Shipping lines record red ink

The first half of 2016 was torrid period for liner shipping companies, as slower than expected cargo flows and increasing levels of over capacity on most lanes including previously relatively bullish markets, such as within Asia, depressed freight rates. Of the listed carriers that have published their interim results thus far, in all cases turnovers have fallen significantly, with heavy losses also reported. At Maersk Line, the world’s largest liner company revenue plummeted by 20%, while profits of $ 1.2 billion in H1 2015 collapsed into losses of $ 107 million. Elsewhere, China Cosco Shipping Corporation, Hapag-Lloyd, OOIL, which controls OOCL and the South Korean operators, Hanjin Shipping (now in receivership) and Hyundai Merchant Marine also reported similarly poor results and figures that were well adrift of the corresponding period a year earlier. The red ink was not confined to mainline operators, as intra-regional operators suffered too, with RCL reporting losses of $ 12 million in H1 2016, compared with $ 31 million in H1 2015. (Reports WorldCargo)

Container shipping in survival mode

Drewry had earlier argued that the current Mergers & Acquisitions (M&A) in the container shipping industry is about Survival and not Growth. Japan, Kawasaki Kisen Kaisha Ltd, Mitsui O.S.K Lines Ltd. and Nippon Yusen Kabushiki Kaisha have agreed after the resolution by the board of directors of each company and subject to regulatory approval from the authorities to establish a new joint-venture company to integrate the container shipping business (including worldwide terminal operating business excluding Japan) of all three companies and to sign a business integration contract and a shareholder’s agreement. 

The consolidation that took place in container shipping pre-2008 was driven by a desire for growth. Now M&A activity is all about survival, to address such factors as balance sheet restructuring, poor investor returns and adaptation to a low growth environment. At the time of these acquisitions pre-2008, growth or scale was the primary objective to undertake M&A. 

The industry was still in growth phase, globalisation was still evolving and manufacturers shifting sourcing to Asia. However, recent acquisitions have been driven by the potential for synergies from cost saving, economies of scale, competitive position and protection against weak industry fundamentals. (Drewry Financial Research Services Ltd.)

(The writer a Maritime Economist is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK), Chartered Marketer (UK) and a University of Oxford Business Alumni. He is also a Fellow of NORAD/JICA and Harvard Business School (EEP)).