Excess transhipment port capacity and ghost ports

Excess transhipment port capacity and ghost ports

Excess port capacity, over and above national demand requirements, is created for three reasons. First is the economy of scale, as well as the infamous economic law of Jean-Baptiste Say according to which supply creates its own demand. In other words, once the port is there, the customer is bound to arrive. Unfortunately, this is not always so. The second reason is the footloose nature of the container and its carrier, which may switch ports at the whim of a moment, whenever capacity is scarce and as a result the ship may have to wait. 

Finally, excess capacity is developed in order to capture transhipment traffic; i.e. somebody else’s cargo. As a matter of fact, most of the competition taking place among ports today is for this type of cargo: to capture it, ports often under-price concession fees agreed with terminal operators and terminal operators in their turn under-price terminal handling charges (THC) they charge to carriers (often through hidden or opaque discounts), under-pricing is referred to port dues and concession fees below the opportunity cost of port land. 

Moreover, especially in ports where the management is responsible for its bottom line, more often than not the management tends to cross-subsidise footloose transhipment traffic with captive domestic traffic. In other words, domestic (national) cargoes are penalised through relatively higher prices compared to transhipment cargo, in the management’s anxiety to capture more of the latter. If sufficient domestic demand for port services does not exist, developing port capacity for transhipment purposes is risky business just because of the footloose nature of the container. 

Before you know it, you could find yourself with a ghost port in your hands, as it happened recently, for instance at the Italian port of Taranto, when Evergreen decided to move to Piraeus, in spite of a 60 year long concession at the Italian port. Years back, an example was the great port of Singapore, when Maersk decided to move just around the corner, to the Malaysian port of Tanjung Pelepas. Development of container terminal capacity, including its transhipment potential, will continue unabated; this is normal and in the long run port capacity follows international trade growth. 

But with one caveat: this infrastructure should be priced (through the appropriate concession fees) in such a way so that investment costs are eventually recovered, irrespective of whether the proceeds from the concession remain with the port or are returned to its financiers, the latter including also the government. These are some of the views expressed by Professor Hercules E. Haralambides.

FMC decisions could impact industry for years

Global changes in container shipping are confronting the US Federal Maritime Commission with some of the most difficult decisions in its 55 year history. How FMC Chairman Mario Cordero and his four fellow commissioners respond this year and next could determine how the industry deals with carrier consolidation, the increasing influence of vessel sharing alliances and US port congestion. Although shippers are urging the FMC to address grievances and provide direction in tackling overall port congestion in the absence of any other leadership coming from Washington, the agency’s responses are limited not only by its legal mandate but also differences in opinion among commissioners on how to exercise the power. 

Triggering more action from the FMC requires formal petitions from the private sector, most notably shippers. Some beneficial cargo owners, for example, complain that marine terminal operators have used congestion surcharges as revenue generators, but the agency has received no formal complaint. The onslaught of ever larger container ships capable of carrying more than 18,000 20 foot equivalent units, as well as the strain they can put on supply chains, has thrust FMC into the spotlight. 

These issues came to the fore during the West Coast port congestion crisis of 2014-15, which was precipitated by a showdown during contract negotiations between long-shore workers and employers. Port delays added weeks to some end-to-end transit times, underscoring the importance container shipping has on the economy and played a part in shaving 0.2% off of US GDP in the first quarter of 2015, according to the Federal Reserve. Port users’ complaints have prompted the Obama administration and Congress to take a closer look at the FMC, an agency little known outside the maritime industry. 

The role of big ships in port congestion took on additional meaning with the late December arrival in Los Angeles of the 18,000 TEU CMA CGM Benjamin Franklin. Vessels of that size are expected to call regularly at Los Angeles-Long Beach, the nation’s largest port complex.

All time high liner reliability

Shippers and forwarders that place a premium on punctual container shipping services should continue to choose their carriers with care, according to Drewry’s latest analysis of liner reliability. Overall container service reliability saw substantial improvement in 2015, but large performance differentials between lines were still apparent, said the analyst. Despite a mild deterioration in the final three months of the year, the year-long reliability average for all trades covered represented a marked improvement on 2014 – the on time reliability for the 12 month period for all trades reached 73%, against an average of just 59% in 2014, said Drewry. 

The 2015 on time average represented a new high water mark for the container shipping industry, up from the previous best of 72% recorded in 2012. Drewry, which has been monitoring container service reliability for over 10 years, considers ship to be on time if the arrival of the ship is within plus or minus 24 hours of the scheduled ETA at the discharge port. 

The analyst said explaining the dramatic improvement in service levels in 2015 was difficult, but surmised that it was a reflection of the operational improvements brought about by the new, enlarged carrier alliances and that carriers in general are belatedly recognising the importance of reliability in terms of marketing and customer retention. 

However, the analyst warned that the gap between the best and worst performing lines remained large and further improvements during 2016 were unlikely to be as striking as in 2015. In 2015, the carrier with the highest overall on time performance was Danish carrier Maersk Line, which topped the rankings with a 12 month average of 81.0%. In second place was Evergreen with 78.1%, while K Line took third position with 77.6%. The gap between the best and the worst performing lines has narrowed with the variation now being around 20 percentage points, when it had been much wider in previous years, said Drewry.

Forwarders gloomy over Chinese economy

Forwarders serving China are gloomy about prospects for 2016 after a series of economic forecasts painted a bleak picture. Earlier this week the International Monetary Fund (IMF) predicted a further slowing of China’s economy in the next two years, with growth of 6.3% predicted for this year and 6% in 2017. This followed confirmation that China’s economy grew by 6.9% in 2015, a 25-year low, news that helped spur a stock market slump amid fears that the country could suffer a major downturn. 

Forwarders in Hong Kong and China were already concerned about demand on key trade lanes as PMI readings weakened. According to Peter Orange, Regional Manager for Freight Sales at logistics group GAC, those concerns have now hardened. He said the general feeling among traders and forwarders in China was ‘not optimistic’ with ocean freight rates bearish and lines seemingly more concerned about market share than pricing. This is the result of falling consumer demand in China, falling demand for resources and energy as well as generally poor market sentiment caused by the China stock market downfall. 

There is continued downward pressure on freight rates with carriers trying to restore prices, but these efforts remain unsuccessful. Orange said GAC had not seen a peak season for air cargo towards the end of 2015 when the market was ‘very weak’, while local and international demand for forwarding services had been bearish. In general, we see no signs of a pickup in freight demand this year, he said. The expected pickup in demand before the Chinese New Year (CNY) will probably not happen and normally after the CNY, it is low season. 

We foresee the situation will be worse after the CNY and this will mainly be driven by the local market in China, which has been experiencing one of its most panicky moments as the economy is restructured. The US and Europe will likely be affected by the slowdown of the Chinese economy. He said the upshot of weak ocean rates was lower profit margins on FCL products. Hence we need to keep a strong focus on cost savings by keeping our operating costs as low as possible in order to remain competitive and profitable, he added.

(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).)