Boxport model of relentless expansion is over

Boxport model of relentless expansion is over

Jason Jiang argues container terminal returns have peaked and are unlikely to grow quickly again.

Cast your mind back 10 to 15 years ago and if you’d opened a shipping magazine back then it would have been littered with ads from port companies. The first years of the 21st century were still a wonderful time to be a global boxport operator, but this has now changed: double digit growth is a thing of the past.

International container terminal operators are facing challenges these days, including the slowdown of demand growth and rising operating costs amid the doldrums in the container shipping sector.

Shipping research and advisory firm Drewry has forecast that global container port demand will grow by less than 3% per annum over the next five years with projections softening in particular due to the sharp slowdown in China’s exports.

“I believe the good times were over about 10 years ago. But it took some time for people to figure it out,” says Charles de Trenck, a veteran shipping analyst based in Hong Kong. Nonetheless there will always be individual standout investment opportunities at relatively attractive price points, he argues.

“Ports are classic DCF-based investments,” De Trenck explains. “But it was hard for most investors five and 10 years ago to input decreasing price increases per teu/feu or per ton as well as flat volume growth assumptions into their models. The only item that was helping out the valuation models was lower cost of funds. And now that game is mostly over, with a few odd exceptions.”

Andy Lane, partner at CTI Consultancy, agrees with de Trenck’s opinion, “Container terminals would rank as some of the least efficient plants globally, well, compared to manufacturing at least – so opportunities are plenty,” he says, suggesting they need to increase asset utilisation, embrace technology and achieve more (greater and faster throughput) with less (resources).

“These are relatively untapped levers which can balance the disruptive trends,” Lane says.

According to a recent container terminal report by Drewry, container terminal operators are switching their focus from greenfield developments to mergers and acquisition activity, with a number of major deals already in the pipeline and more likely to come.

According to Drewry, positives are the resilience of the Middle East and South Asia and a potential recovery of Russia. In response, terminal operators and investors have been urgently reviewing capacity expansion plans. Many projects within the five-year forecast horizon are already too far advanced to change significantly, but those scheduled to appear later in the period are subject to reconsideration in terms of timing and scale.

There are still areas where container terminal operators have high margins, says Mark Young, a business development director at BMT Asia Pacific. He cites some niche ports operating in emerging markets where general infrastructure is lacking.

“There is an example of an international port operator which just started operating recently in a country in Central Africa and is looking to recoup all the investment in a short period of time,”Young says.

Neil Davidson, senior analyst for ports and terminals at Drewry, reckons that the key challenge for terminal operators over the next 10 years is that in the regions where there is good quality existing hard and soft infrastructure to support a successful container terminal (a solid legal framework, efficient customs, good hinterland connections) there is also overcapacity.

“It is clear that global and international terminal operators are fundamentally reviewing their strategies, becoming cooler on greenfield projects and more interested in M&A opportunities. A natural response to the increasing size of liner alliances is for terminal operators to look to consolidate terminal ownership in parallel,” Davidson says.

“However, a dichotomy in approaches is evident. On the one hand many of the established international players have become more cautious because they are concerned that returns may be less than what they are used to. But on the other hand there are several expansion minded players like the Chinese operators and Yilport Holdings whose top strategic priority is to acquire more assets.”

James Frew, a senior analyst from shipping consultants Maritime Strategies International, believes that there will be some new regions opening up for investment (for example, Indonesia), but basically the model of relentless expansion and a reasonable expectation that cargo demand will be there seems to be defunct.

“Instead the focus for profitability will have to shift to consolidation and seeking operational efficiencies, but in many ways that is a harder model to get right than just creating the infrastructure in the first place,” Frew says

Nadine Vos, a spokeswoman for Rotterdam Port, the largest container port in Europe, says that the port still has room for growth, however, the port is facing the same challenges other container ports are facing too. Especially in recent years there is a huge competition among shipping companies. This competition encourages the building of large ships that necessitates back to alliance formation and these new alliances have repercussions on the sailing schedules of companies and the ports and terminals.

For the long term, our ad sales team won’t be expecting to fill this site and our magazines with lots of commercials from ports anymore.

Jason Jiang

Jason worked for a number of logistics firms following his English degree, then switched this hands-on experience to writing and has since become one the most prolific writers on the diverse China logistics industry writing for a host of titles including Supply Chain Asia, Cargo Facts and Air Cargo Week. Jason’s access to the biggest shippers with business in China has proved an invaluable source of exclusives.

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1 Comment

  1. Ed Enos
    September 9, 2016 at 6:54 pm

    Great comments. Once again, these ideas appear ‘new’, but are they really? Perhaps these people just had the professional strength to say it out loud. Good on them.

    I believe Nadine Vos was correct, that competition and pursuit of growth and expansion encouraged the building of “mega ships”. Given all the choices and freedom to pick the easiest route to profit, building a big ship is considerably easy. The shoreside component to growth and expansion are far more difficult to deal with, given land use laws, space allocation, environmental regulations, public outcry about pollution and impacts, government involvement at nearly every level, and of course, the financial investment. Terminals that incorporate new technology additionally have to deal with old organized labor issues to maximize efficient throughput. Or lose money trying.

    Building a new generation of mega container ships, the likes we have never seen, simply required the marriage of an excited shipowner willing to take the plunge and a shipyard/designer pushing the envelope of developing beyond what we thought was ‘reasonable’ in the past. They creation forced ports all over the world to play “catch up.”

    The cruise industry model of mega-passenger ships with capacities of 5000+plus passengers and an additional 2000+ crew certainly found the right formula for maximizing profit and economies of scale. But their market is clearly in demand. Cash is falling out of the clouds on top of Carnival and RCI.

    Sadly, the same cannot be said for the likes of mega box ship owners. The concept of BIGNESS is relatively the same. But the inclusion of complicated port infrastructure to match and work as efficiently alongside these ultra large containerships is still a struggle for many.

    Another great article by Splash team. Really appreciate your considerable efforts to go out and cultivate relationships with industry insiders and get the ‘real story’ on the ground from deep inside, dealing with these issues on a daily basis.