Investments in new projects are slowing, and Neil Davidson, senior analyst in Drewry’s ports and terminals practice, warned that a sudden rebound in demand could be a problem.
Growth in the container terminal industry is slowing, a change investors in the industry are recognizing, said Neil Davidson, senior analyst in Drewry’s ports and terminals practice.
Drewry is forecasting annual growth of 3 percent in the container
terminal industry, much more modest growth than in prior years. Margins
will be lower, but Davidson believes the business will still be
profitable.
“The container port industry has been an extraordinary industry since its inception. It has seen growth that has outperformed the growth of most industries for a long and sustained period of time – 20-30 years of exceptional growth, sometimes extraordinary strong growth in the early 2000s, for example,” he said.
“It’s had a great run and it has performed remarkably well as a growth sector, but inevitably there had to come a time when it started to mature and growth started to move into a mature phase,” Davidson said. He also said the stock market has recognized the change by starting to look at the container terminal business in a “value way.”
Instead of looking at terminal companies as a fast growth business, investors are more likely to look for terminals that are undervalued by the market.
That view will probably persist for some time, he added, noting that Drewry is forecasting only moderate growth in the next three to five years, and “possibly forever.” Among the reasons? The changing nature of the Chinese economy, which in the past, has been a driver of much of the growth in the container shipping industry.
Davidson made his remarks in a webinar linked to Drewry’s Global Container Terminal Operators Annual Review and Forecast.
He noted how the terminal industry is an increasingly complex one, with some terminal operators having stakes in other operators; while in some instances, companies are operators, but not owners of terminals; and in other cases, terminals handle river and barge cargo as well as deep-sea containers.
Drewry ranks terminals in two different ways: by “total TEU,” which includes the total throughput of terminals in which a company has a stake of more than 10 percent, but excluding stakes in other operators; and “equity TEU,” where the throughput of each terminal is calculated pro rata based on the stake it holds, including the stake held by other operators.
Based on the total TEU method, the top five operators are Hutchison Ports, handling 81 million TEUs, followed by APM Terminals (APMT) at 69.3 million TEUs, PSA International at 63.8 million TEUs, COSCO Group at 62.8 million TEUs and DP World at 60.5 million TEUs.
Meanwhile, the equity method ranks the top five operators as PSA International at 53.1 million TEUs, Hutchinson Ports at 47 million TEUs, DP World at 37 million TEUs, APMT at 35.9 million TEUs and China Merchant Port Holdings at 26.3 million TEUs.
Davidson said Turkey’s Yilport Holding Inc. has joined the fraternity of global port authorities. He also pointed to Jersey City, N.J.-based Ports America, United Arab Emirates-based Gulftainer, and Shanghai International Port Group as growth-minded companies.
Davidson said local and regional terminal companies do compete successfully against big global firms if they are well run. That is because the economies that a global company achieves at its head office are relatively small compared to all the costs of running its business. Also, big multinationals may insist that their terminals meet a return on investment not possible in a particular market, but which a local or regional firm might find acceptable.
Big companies, however, can share knowledge and expertise among their various terminals. If a company has done an automation project at one terminal, that may help it do something similar at a different location.
He said the terminal industry is being challenged by a perfect storm of slowing demand, higher capital, and operating costs resulting from a need to service larger ships, which are more expensive to work. While it does not appear that there will be any immediate need to service ships beyond 20,000 TEUs, he said terminals are having to deal with bigger ships cascading into new trades. This is evident in the services taking advantage of the expanded Panama Canal.
Carriers are forming larger alliances and driving hard bargains in negotiations, but Davidson said terminals need to resist pressure on prices because costs are increasing.
Greenfield terminal expansion is rare these days. Davidson said there are only about half as many projects planned by terminals today when compared to 2006. Carriers, especially, have nearly halted any new projects.
The slowdown in addition of new capacity could be a problem if there was a sudden recovery in demand, since it takes some time to add capacity to a terminal.
“This is where shipping lines have to be very careful on this question of pricing,” Davidson said. If they push down prices too far, terminal operators will not invest and a lack of capacity could develop in the medium to long term.
Mergers and acquisitions are “hotting up,” he said. These include consolidations, some of which are related to the terminal arms of combining container carriers such as the mergers of CMA CGM and APL; and COSCO and China Shipping.
APMT acquired Grup Maritim TCB in March, and Yilport acquired Tertir Terminals de Portugal last fall. Yilport has also said it is interested in investing in Ports America, and its parent company Yildirim Group has invested in CMA CGM, which operates terminals directly as well as through the Terminal Link joint venture with China Merchants Holdings (International) Co.
There have also been “strategic alliance” deals such as Hutchison’s sale of a portion of the Euromax terminal to COSCO, and PSA’s joint venture in Singapore with CMA CGM and China Shipping.
This week, COSCO Shipping Ports Ltd. acquired a 40 percent stake in Vado Holding B.V. from APMT.
Davidson noted that some terminals are entering into joint ventures with shipping lines in an attempt to secure business, but he said this can be tricky since other members of an alliance may want to direct business elsewhere.
The four major container shipping alliances are being consolidated into three, and the exact make-up is somewhat uncertain because of the collapse of Hanjin Shipping.
“The amount of time and effort that terminal operators must be spending on negotiations with carriers that then have to be renegotiated or torn up and start again is quite extraordinary at the moment and takes a great deal of management time and effort,” said Davidson. He also noted how alliances are not forever and how their composition could be altered again in a few years.
Terminal deals are generally negotiated by individual steamship lines, not alliances. While the negotiating power of alliances is increasing, he said the fact that carriers are employing larger ships means carriers have a smaller range of ports and terminals that can handle those big ships.
Growth at container terminals is slowing, says Drewry analyst
