Race to the top à or bottom
Asian ports leverage transshipments in a chase for TEU glory,
but should long-term profitability be the goal instead?
If anything symbolizes the almost manic desire of Asian ports to increase TEU volumes these days, it had to be the arrest in late March of two Taiwanese port officials. The two were charged with manipulating the cargo volume at Taiwan’s busiest port, Kaohsiung, so that the port could reach a government target of 10 million TEUs handled in 2007 (according to original statistics, the port handled 10.3 million TEUs). There was financial reward for reaching the target, as the government presumed that officials would lure cargo that actually existed. And so the men are being charged with embezzlement.
If the men in Kaohsiung are guilty of that crime, it could be said that most ports in Asia are guilty themselves ‘ of focus’ing too narrowly on numbers. The race to become the world’s biggest, baddest port has meant port officials on the Asian side of the world often sacrifice business acu’men and better profitability in the name of expansion, volume and top 10 lists.
A key component of that drive to lure more volume at any price is transshipment. Ports from the Middle East to the Korean Peninsula have decided that the way to take advantage of the current ocean shipping boom is to focus on transshipment.
But transshipment is a beast with ben’efits and drawbacks. It surely bumps up TEU counts, but the cargo also comes with little profitability. Yet the largest ports in the world, and those most often perceived as successful, are built largely on trans’shipment volumes. And those that aren’t overly reliant on transshipment say they are seeking to become more so.
From a shipper point of view, does any of this matter? Transshipment is a proven means of distributing cargo from produc’tion areas to consumption areas large and small, albeit one that shippers would just as well avoid through direct services if they could.
In most cases, it’s hard to avoid these days unless the originating port is a major hub, like Shanghai or Shenzhen. The need for transshipment has been emphasized by the growing size of vessels operating in main’line services. Only a handful of ports can accommodate these larger ships, creating a need for smaller vessels to collect cargo from regional and feeder ports in the area and gather them at the hubs. According to some estimates, the share of international container volume transshipped jumped from 20 percent in 1996 to 30 percent in 2006.
In fact, transshipment has become so ingrained into container flows that Ocean Shipping Consultants, in a September 2007 report on the Middle East and South Asia container markets, projected that transshipment will grow at roughly the same pace through 2015 as overall container volume. They are essentially one and the same.
‘The future development of transshipment will be a compound of underlying economic growth-induced demand and the policies of major operators in converting direct flows into transshipped flows,’ the report said.
Transshipment adds time to supply chains, as shippers would always prefer a direct call. But Asia’s biggest ports have become so efficient at transshipment, shippers hardly think of it as an extra leg anymore.
That efficiency has caused the world’s biggest ports to strive for more volumes to feed their trade and logistics-based local economies. The thirst for transshipment starts right at the top with Singapore and Shanghai, the two busiest ports on the globe.
The two are a study in contrasts. Sin’gapore, a tiny island nation with low consumption and production levels, has maneuvered its way to be the transshipment hub of Southeast Asia. Shanghai, a grow’ing consumption metropolis, has for two decades been a growing production region for world sourcing.
Yet the tie that binds is transshipment, as in both ports want more. More than 90 percent of Singapore’s 28 million TEUs in 2007 came from transshipment. While Shanghai’s transshipment represents about 40 percent of its total volume of 26 million TEUs, that share is growing.
‘We hope Yangshan (Shanghai’s giant deepwater terminal) will tap into the cargo throughput of Northeast Asia,’ said Lu Hai Hu, chairman of the Shanghai International Port Group, at the TOC Asia conference in Shanghai in March. ‘We want to increase our share of transshipment at Yangshan.’
He added that SIPG’s top priority is lur’ing all-water transshipment and launching more feeder lines.
Shanghai, it seems, is a bit obsessed with passing Singapore, and theorizes that it won’t happen without more transshipment volume. It seems a curious move since the Yangtze River Delta produces so much original destination cargo.
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| Johnathan Beard managing director, GHK Consulting (Hong Kong) |
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| ‘Do mega vessels knock some people out of the game? Maersk is looking to fill its E-class vessels on a few as four calls.’ | |
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‘It’s going to be the biggest no matter what,’ said Jonathan Beard, managing director of GHK Consulting(HongKong),which has advised SIPG in the past. ‘The question is, what return on investment do you want to make as you become the biggest?’
Beard said it was smart of SIPG to lobby Beijing to clean up cabotage laws and mini’mize customs barriers on transshipment that would allow transshipment volume to grow because it allows Shanghai to keep its options open down the road.
‘What we said to the Shanghai authorities is it’s smart to get the right to handle more transshipment, but if you start displacing (original destination, or OD) cargo with transshipment, that doesn’t make sense,’ he said. ‘There seems to be a lot of inter’est in beating Singapore, but the (ports in the Yangtze River Delta have) to be more concerned with profit and not volume.’
From those comments, it will come as little surprise that Beard doesn’t care much for container port rankings that use TEU volume as the measuring stick.
In an April conversation with American Shipper at his Wan Chai office in Hong Kong, Beard said rankings based on ef’ficiency and profitability would be much more useful, not to mention valid. The idea that Singapore is the biggest container port in the world only exists because of the way numbers are counted, or rather how they’re counted differently at every port.
For instance, the vast majority of Singapore’s cargo is double-counted trans’shipment, while at the Port of Hong Kong, containers that move to the port by barge from river piers in the Pearl River Delta and then are transshipped are counted twice. Containers moving from the same PRD location by truck to Hong Kong’s port are counted only once. In Shanghai, where about half of the containers handled at Yangshan are barged and the other half trucked, each move is counted only once, according to authorities there ‘ though some operators question this.
‘River transport is purely an inbound leg and shouldn’t be included in final counts, even though it is in some ports,’ Beard said.
Singapore’s throughput could essentially be cut in half because nine out of every 10 of its TEUs is transshipment and so is double counted. By a more accurate measure,
Shanghai has already surpassed Singapore as the world’s biggest. Or is it Shenzhen, which sees almost no transshipment and yet handled 21 million TEUs last year? Or should Shenzhen not count as one port because its terminals are spread over a huge geographic area ‘ while the ports of Los Angeles and Long Beach are counted separately even though they sit side by side?
The questions go on and on, which is why Beard chooses to ignore biggest and busiest titles and instead spends his time analyzing things like terminal density, intensity and, most importantly, profitability.
In Asia, these analyses inexorably lead him to one factor: how much does a terminal or port rely on transshipment cargo? Ironically, the question of which are the biggest ports and which ones are the most profitable gets at the same issue. It’s just that it’s looking at the issue all wrong, Beard said.
Transshipment in many ways is the poisoned chalice of terminal operations. It’s not as profitable as export/import cargo. It can pack up and leave much more quickly and effortlessly than does domestic cargo.
But it makes year-end volumes look good. It creates momentum and, for some ports, it serves as the very reason for their being. In some cases, it can also provide connectivity for local shippers who, on their own, wouldn’t be able to lure major direct calls.
‘Our experience is that handling trans’shipment traffic usually isn’t as profit able as handling gateway traffic because competition is tougher in the transshipment market because volumes are more footloose, so tariffs tend to be more competitive,’ said Neil Davidson, director of the ports group for Drewry Shipping Consultants. ‘Plus, transshipment represents a real cost for shipping lines, whereas for gateway cargo, there is often a (terminal handling charge) arrangement that can allow the cost to be passed onto shippers. Many port authorities like to chase transshipment cargo because it does raise their profile (and league table position), but also because it helps cement the port’s role as a hub and as a point of connection, so it helps secure the overall role of the port in the marketplace.’
There’s a simple reason why ports turn to transshipment.
‘Because they don’t have any OD cargo,’ Beard said.
Singapore is the most notable example. With a population of only 4.5 million people, the island nation has little import/ export cargo, so it relies on the fact that it’s right on the Far East/Asia trade lane and uses productivity to entice lines to use it as a transshipment hub.
It’s worked. The port has steadily built its volume to the point that it will have capacity for nearly 50 million TEUs by 2013.
‘We don’t set out to handle transshipment,’ said Kuah Boon Wee, chief executive officer of Southeast Asia and Singapore terminals for PSA International. ‘We do it by default. The transshipment portion of world trade is a factor and there are op’portunities for transshipment to grow.’
Busan, Korea’s largest port, and Kaoh’siung turned to transshipment after their export numbers started to fall off. Dubai rose in prominence as Far East/Europe trade blossomed and cities in the Middle East grew. Colombo emerged as a transshipment link to India as India’s ocean trade grew but had no ports that could serve large ships.
The unifying thread for all these ports is strong government backing.
‘Transshipment ports are often state-supported because, rightly or wrongly, they are seen as engines of economic develop’ment,’ Beard said.
That means jobs tied to trade can of’ten mean more than profitability on the docks.
In recent years, Hong Kong has seen transshipments rise as a percentage of its volume as South China original destination cargo increasingly chose to use competing ports on the mainland.
One of transshipment’s plus points is that it helps attract services from lines who want to do both original destination and transshipment at one port, Beard said. And ports that handle OD cargo efficiently are likely to handle transshipments well.
‘If you turn vessels around quickly and have good connectivity, competitive charges and are in the right location, you’ll be sought after for transshipment,’ he said.
The last point is key, as lines won’t trans’ship at ports where they have to divert off major trunk lines.
Busan is one such port, as it sits on a direct line between Japan and North China. It has thus tried to take advantage of becoming the transshipment hub for Northeast Asia. It’s had some success on the Japanese side, but is fighting a losing battle for Chinese transshipment.
‘In Busan, the authorities argue trans’shipment is good because it increases con’nectivity,’ Beard said. ‘It gives access to mainline services to imports and exports. The Chinese ports have developed rapidly and lines increasingly put mainline services into these ports, sidestepping the need for transshipment at Busan. This is why Busan could be in trouble. Investing in additional capacity to handle Korea’s OD cargo makes sense, but investment has gone way beyond this. They’re investing substantial amounts to chase after foot loose transshipment that is increasingly being handled direct at Chinese ports. I mean, in the1990s, Hong Kong used to handle transshipment for Shanghai, but there’s no point in that anymore.’
There’s another issue, and that’s cost.
Charges like terminal handling fees and port dues have to be lower in order to lure transshipment cargo long-term, he said.
For instance, while Hong Kong has long had some of the heftiest terminal handling charges in Asia, it also has low port dues for things like tugs and harbor maintenance. Singapore charges similarly low port dues. On the flip side, Indian ports have high dues, giving lines another reason to use Singapore or Colombo for transshipment of Indian cargo.
Beard said another problem that plagues transshipment is customs.
‘You shouldn’t have customs involved in transshipment at all,’ Beard said.’It should be box in and box off.’
But customs regulations continue to pester transshipment ports in the region. For instance, in India, there’s a requirement to put a bond on transshipped boxes to ensure to the government that it won’t be an import container. Mainland Chinese ports face customs complexities as well, though those seem to be lessening. However, restrictions on foreign lines running feeder services remain.
All these issues aside, transshipment is no doubt less profitable for terminals than ex-im cargo. For instance, it’s about $120 to $130 for a transshipment move in Singapore’ which means $60 to $65 per move since the container is moved twice ‘ compared to $100 for an import box. In Colombo, a double move costs $70, or $35 per move.
‘But the flip side of transshipment is that you get to count everything double if you want to,’ Beard said. ‘Or you could go the Hong Kong route and even count barges.’
That said, Beard pointed to Hong Kong as one of the most profitable transshipment ports for a couple key reasons.
‘Hong Kong operators will use their own measures of throughput because they are less concerned about headline volume and more concerned about efficiently delivering quality services at healthy levels of profit,’ he said. ‘Much of the risk is allocated to the private sector operators, but in return there are no minimum thresholds, no vol’ume incentives, no controls on pricing and, perhaps controversially, no competition policy. Hong Kong has been phenomenally profitable. Returns have come down over the years as competition from mainland ports has emerged, but it’s still good.’
Compare that to Busan, which had a profit sharing mechanism after minimum container volumes were met, and where terminal operators are now complaining of low rates due to the issues of migrating cargo to the Busan Newport. Or Kaohsiung, where government incentives have evidently led port officials to fabricate cargo. Even Singapore would have to do something pretty ‘heroic’ to get profit out of what they’re doing, Beard said.
‘It is not clear that an adequate return on investment is being achieved,’ he said.
But Davidson said that, on the whole, transshipment ports in Asia are efficient and profitable.
‘Most Asian transshipment hubs have high performance and this would include Singapore, Tanjung Pelepas, Busan, Port Klang and Kaohsiung,’ he said. ‘Profit’ability is less clear as there is limited transparency. Singapore though, is still highly profitable. Elsewhere it’s harder to say as the terminal operation and port authority functions are separate, plus in a number of cases, shipping lines have their own terminals so they are more cost centers than profit centers.’
One factor that’s heavily influenced transshipment in recent years is Maersk, the world’s biggest shipping line.
Using Singapore and Busan as examples again, in 2000 Maerskook all its Singapore calls and shifted them to the Port of Tanjung Pelepas, just a few miles to the north at the southern tip of Malaysia. And then at the end of 2007, Maersk migrated all its calls at Busan’s decades-old Northport to the New’port terminal several miles to the west.
In both cases, the volume left a vacuum’ similar to the short-term effect Maersk’s move from Long Beach to Los Angeles had earlier this decade. In PTP’s case, Maersk’s sheer volume through such a key transshipment point legitimized the then-fledging Malaysian port. It seems to have done the same for Busan’s Newport.
PTP’s model is based on pure transshipment. The port handled 5.5 million TEUs in 2007, a nearly 15 percent climb over 2006, but 95 percent was transshipment boxes. In a visit to the port last fall, officials told American Shipper they’re seeking to reduce the transshipment share to about 85 percent, making it one of the few major ports in Asia looking to rely less on transshipment.
PTP officials also said they no longer offer cut-rate transshipment tariffs in a bid to lure transshipment cargo away from Singapore, instead relying on uncongested terminals and a growing free trade zone that abuts the terminal. The port found the low-cost game to be unviable in the long term.
‘Singapore has PTP to contend with, but it’s not like Hong Kong and Yantian, ‘Beard said. ‘Maersk moved to PTP because the costs were lower, but also because it didn’t get the best treatment from PSA. PSA has subsequently responded by offering more flexibility and control to shipping lines over terminal operations.’
It’s also been reported that PSA has provided incentives to feeder lines to call at Singapore but not PTP.
Singapore faces a few challenges besides pure competition. Once Vietnam’s ports develop to the point that they can handle large direct calls, that may minimize the need for transshipment from Singapore. Ditto for India.
‘If India got around to liberalizing import restrictions, you’ll likely see trade surging between China and India,’ Beard said. ‘That could perhaps put Singapore at a little risk.’
The Singapore-PTP fight for transship’ment cargo ‘ which also includes Port Klang in western Malaysia ‘ is but one of many existing or developing rivalries. Hong Kong and Taipei will fight for transshipment from smaller Chinese ports. Busan will have to duke it out with Yangshan. Colombo will potentially face fresh competition from two transshipment ports in southern India’not to mention Singapore and the Malaysian ports. And Jebel Ali in Dubai will tussle with Jeddah in Saudi Arabia.
But more than these local skirmishes, the larger vessels coming online might very well create regional or continental competi’tion between transshipment ports. In other words, there might be a scenario where Jebel Ali could be in competition with, say, Singapore for the same transshipment cargo. Or do the transshipment ports benefit collectively and bump less efficient direct calls off rotations?
‘Do mega vessels knock some people out of the game?’ Beard said. ‘Maersk is looking to fill its E-class vessels on as few as four calls.’
So that may well mean that, aside from the likes of Shenzhen and Shanghai, carriers will increasingly look to mega-transshipment hubs to fill their newest, biggest ships.
The thing about transshipment, though, is that it keeps popping up somewhere. If one port loses volume, it moves elsewhere.
‘It’s interesting to see how resilient transshipment cargo has been,’ Beard said. ‘But the guys doing OD cargo will be in the best position. In 10 years, those will be the successful ports, especially those in China.’
An interesting comparison would be PTP and the Chinese port of Qingdao. In 2001, PTP finished one spot ahead of Qingdao as the 19th biggest port in the world, with 2 million TEUs. In 2007, Qingdao handled 9.4 million TEUs, 71 percent more than PTP, and the grand majority of it was OD cargo. Who’s in a better position?
The comparison between a mainland Chinese port and a predominantly trans-shipment-oriented port might not seem apt, but according to Davidson, Chinese ports will increasingly play a role in the trans’shipment of Chinese cargo. Another trend he sees is relay transshipment, where boxes move from main line vessel to main line vessel in key ports where strings overlap.
Now back to the shippers. Again, does terminal profitability really matter to shippers, or are ports instruments rather than partners in supply chains?
‘Ultimately shippers pay for the profit’ability of ports, so in one sense it does make a difference, but for shippers, port related costs per item of goods (for example, per DVD player) are a very small element,’ said Davidson of Drewry.
Beard said the costs pale in comparison to efficiency expectations.’Shippers will care about connectivity, reliability and cost. For them, excess capacity and intense competition between ports is a good thing. They want port choices and high service quality.’
Unfortunately, those things don’t always mesh with profitable ports. Capacity and port choices create competition among terminals, driving rates down and increasing pressure for terminal operators. Such a situation may not have existed before in some places, like Singapore or Dubai, where one operator controls operations for the whole port. But in the new world of transshipment, it does now. And that means terminal operators, like shipping lines, need to know better than ever what cargo actually brings them profits.
‘Volume is good, but it’s a means to an end,’ Beard said. ‘If handling a lot of volume increases profit, great. But if it’s about moving up the container rankings tables, then what’s the point?’