The formation and re-formation of larger carrier alliances along with the increase in average and largest ship sizes are turning up the heat on ports and terminals which might result in diminishing returns, according to UK-based consultancy Drewry.
Ports are not immune to the volatility of the market and the world economy, but have proven their ability to weather storms – even in 2009, a year where global port volumes fell by nearly 9% and the worst year the industry had ever seen, all of the main global container terminal operators maintained their EBITDA margins, at least in percentage terms.
Nevertheless, cascading of vessels from one trade lane to another means that all ports are seeing substantial increases in vessel sizes. In a low growth demand environment, the deployment of bigger ships results in lower frequency services and greater volume peaks. For terminal operators, capex and opex costs are increasing while demand is relatively static.
What is more, as ships and alliances get bigger, the choice of ports and terminals that can accommodate them reduces. The creation of alliances has resulted in market share volatility for many ports – and the makeup of the alliances is going to change again soon due to M&A activity in the liner sector.
The new nature of demand is for less fragmented terminal capacity (fewer, bigger terminals needed in each port) which requires consolidation of terminals, both physically and in terms of ownership. However, such consolidation is complex and expensive, and may not be possible, or may take a long time to achieve.
Drewry believes that the combination of the above factors indicates that it is becoming increasingly challenging for terminal operators to maintain their typical historical levels of financial returns.
Costs are rising markedly while revenue is increasing much more slowly
There are several possible scenarios, which might see terminal operators and shipping lines cooperate much more closely to mitigate the negative impact of larger ships and alliances, however this is unlikely to solve the problem entirely.
Another scenario might see significant price hikes to be obtained from shipping lines in order to balance higher costs and maintain margins. Nevertheless, as shipping lines are already feeling severe financial pain from overcapacity and weak demand, they will resist this strongly.
According to Drewry, the remaining two options include terminal operators accepting a new era of lower margins and returns, pushing some operators and investors from the market or a decision not to invest in new capacity because the returns are insufficient for their shareholders.
This is an extreme option that will in effect leave shipping lines with nowhere to berth their large ships.
“The global container port and terminal industry is on the cusp of a critical turning point. To safeguard the provision of suitable capacity and productivity for the long term, changes will have to take place to ensure sufficient returns on investment for port operators. Something has to give,” Drewry says.