Is Singapore’s new megaport a strategic masterstroke?

Is Singapore’s new megaport a strategic masterstroke?

Singapore has successfully built itself into a maritime powerhouse through exploiting its strategic location within the old trade routes. Innovation and sound strategic planning by the city-state’s founding fathers helped entrench this position and made the maritime sector an important economic participant in world trade by connecting trade markets. The Tuas Mega Port currently under construction is a natural extension to entrench Singapore’s regional dominance as a transhipment port.

The strategic importance of the decision by terminal operator PSA to embark on such a project that essentially consolidates the five existing container terminals into one precinct is worth closer scrutiny. Essentially one must put some context around the stated intention of PSA. In the development documents it is quite clear that Tuas Megaport is positioning itself to be the leading transhipment port. In summary, a transhipment port is one that connects and feeds containers to smaller regional ports. The scale of vessel size reduces costs as essentially large ships arrive and unload containers to be loaded onto smaller vessels for onward delivery to smaller regional ports. The competitive advantage of this model is that volume handling / receiving large container vessels brings down the cargo’s unit cost.

However, transhipment ports need to add value in terms of efficiency and productivity, and this will be a strategic advantage of the Tuas megaport as it adopts automation and new technology to discharge vessels. Another advantage that it offers is the ability to handle 20,000 plus teu container ships due to its water depth and automated operations that will reduce congestion at the port. By embarking on ‘smart port’ design allows Tuas to add value in terms of cost savings. Whilst it still faces challenges from the likes of the emerging ports in Indonesia, Vietnam, Korea, Laos and Malaysia, the water depths and size of the development will make it hard for these ports to compete on the basis of transhipment ports.

Whilst this affirms the decision of being a transhipment port, there has been much debate around the emergence of the gateway port. This style of port focuses on connecting the ocean with the hinterland through rail / road and the development of hub (inland dry ports) and spoke freight corridors. This is partly being driven by China’s Belt Road Initiative (BRI) that focuses on better connectivity through improved infrastructure and technology. Key influences driving this is the changed focus from port-to-port logistics platforms to that of first- and last-mile considerations particularly as production methods and systems change.

The Singapore government has used the development of Changi 5, a new airport terminal, to offset some of the disadvantages by creating a link with Tuas, thereby building an ocean-air freight corridor. This makes sense as we have seen the explosion of e-commerce in which delivery speed becomes paramount. However, the model was conceived at a time when rail was inefficient, and customers were prepared to pay a premium for speedy delivery of high value product. China to Europe rail freight services are no longer carrying volumes that can be ignored, and the air cargo sector must start taking the threat to its traffic seriously. Rail into Europe takes around 14-17 days, which is a cheaper alternative compared with air freight that takes around five or six days.

Evidence of this transformation is the declining airfreight movements in Europe at the fastest pace in six years, joining a host of indicators that have raised concern about the economic outlook for the sector. Recent figures show that in February air cargo demand across the world in terms of chargeable weight decreased by 5.8% year-on-year, while cargo load factors were down by three percentage points on a year ago and yield dropped by 6.2% to $1.79 per kg.

On the other hand, data shows that rail freight volumes increased at a compound annual growth rate of 65% between 2013 and 2016, reaching 511 000 tonnes last year. The largest commodities carried by rail were raw materials with a 33% share, machinery parts at 16%, automotive at 15%, high tech at 12%, consumer goods at 10% and fashion at 6%.

The current debate within the maritime sector in Asia is on what type of port will best service the region. And this is where the discussion becomes interesting. Whilst both port models add value, the question of cost savings associated with mega transhipment ports are being questioned. The International Transport Forum warns that the overall transport costs associated with the use of mega-ships could be substantial due to the need for heavy investment in port and terminal infrastructure to handle them – this could be a problem for Tuas as it competes in a cost-based sector and region . The ITF report, entitled ‘Megaships: Trends and Rationale’, goes on to argue that the cost savings are decreasing as ships get larger. The savings of the latest generation vessels are four to six times smaller than the savings from the previous round of upsizing. Interestingly the report states that about 60% of the savings come from more efficient engines and not to the size of the ships. The report goes onto conclude that any further increase in the maximum size of containerships would raise transport costs due to the costs associated with infrastructure upsizing.

Debate has also changed to what is the optimum size of vessels and ports, to service the intra–Asian markets. A KPMG study in 2015 argued that the optimal size vessel for the Asian market is 4,700 teu which is very different to the capacity of Tuas handling vessels that are four and five times the size. However, with the development of the port / rail pairings under the BRI strategy, I would argue that optimal vessel size would be in the 10,000 to 14,000 teu range.

Complicating the issue is that ports with high sea freight transhipment are more vulnerable than gateway ports that have access to hinterland cargo. However, it is less clear whether this leads to more container throughput volatility or ports that have a mixed cargo base that utilises both transhipment and gateway strategies.

Furthermore, the recent MOUs and collaboration agreements between Singapore and China with regards the Chongqing initiative has been seen as a means to place Tuas within the gateway framework, it must be remembered that Chongqing already has freight rail connections with seven Chinese maritime port facilities. This makes Tuas vulnerable as it is part of the ‘pack’ to compete.

Singapore is isolated in terms of rail connections, highlighted by the recent articulation of the blue economic passages (BEP) that shows the alignment of ports / rail and road. China controls 77 ports in the region with financial interest in 105. These form three broad trade routes: China – India Ocean/Africa, China-Australia/ South Pacific, China – Russia / Northern Europe via the Arctic circle.

Whilst shipping will still be an important component of international trade, debate around the strategic importance of Tuas megaport as a transhipment port will escalate. This becomes a more vexed question when one considers the development of gateway ports along the Malacca Straits and the East Coast high speed rail BRI development that has now been agreed.

Andre Wheeler

CEO of Asia Pacific Connex with more than 20 years’ experience in international business, with a diverse network throughout the USA, Asia, SE Asia , Africa and the United Kingdom. Holding a B. Science (Hons) degree and an MBA, he is currently working towards his Doctorate on the Impact of the China One Belt One Road initiative. Andre has expertise in oil/gas, construction, marine services and mining.

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2 Comments

  1. Avatar
    Patrick Murphy
    May 9, 2019 at 7:25 pm

    “On the other hand, data shows that rail freight volumes increased at a compound annual growth rate of 65% between 2013 and 2016, reaching 511 000 tonnes last year.” – also interestingly enough , Singapore is still not served by any rail connection with mainland Asia since they scrapped the old Keppel- JB line about 8 years ago. There is talk of a high speed passenger line back up the causeway but a rail freight service is needed too as any road freight is hopelessly delayed at Woodlands.

  2. Avatar
    David
    May 13, 2019 at 5:25 pm

    “emerging ports in Indonesia, Vietnam, Korea, Laos and Malaysia.” Last time I checked Laos is a landlocked nation. Where is Laos going to be build a port to compete with Singapore?