7 minute read
Terminal transition
Johan-Paul Verschuure of the Rebel consultancy group looks at the new-found wealth of shipping lines and the implications for the terminal operating sector
It’s hard to grasp that an industry off ering very cheap transport across the globe for years – even below the actual costs to the liner – is now making billions in profi t. The favourable position the shipping lines fi nd themselves in seems set to continue in 2022, with more supply chain disruptions. The lines are certainly ‘making hay while the sun shines. Due to very thin margins the industry stretched itself in all direction to make ends meet. All of a sudden – within a time span of 12 months – the world has changed completely. But what to do with the mega profi ts?
WHERE TO INVEST THE PROFITS?
So, what are the options for the shipping lines? So far, the emphasis has been on paying back their large debt burdens and alongside this investment in new vessels is now at an unprecedented level. The first wave of the new ‘Corona Vessels’ is likely setting sail in the course of 2023 and onwards. There are however more investment options available to the shipping lines, not least further vertical integration in the supply chain. This has become an increasingly popular approach with shipping lines such as CMA CGM and Maersk buying into 3PL providers and even air freight operators. Another strong option is to secure strategic container terminal capacity. And this will likely have a significant impact on the industry.
Terminal operators are only now starting to see revenues increase following supply chain problems. Global demand at container terminals has seen a healthy but manageable growth with volumes on average returning to the levels witnessed in 2019. Longer dwell times at the container yards and in warehouses are boosting storage revenues. Terminal operators are seeing their buffers grow, but not to the same extent as shipping lines are experiencing.
What will this mean for the independent terminal operator not linked to shipping lines?
SHIPPING LINE DIRECTIONS
Ordering new vessels in the current situation won’t make much difference. Current supply chain problems stem from short term labour problems as a result of infections – especially with regard to securing terminal capacity and trucks as well as empty containers in the correct locations. Secondly, vessels being ordered now will only set sail after these problems have been alleviated (it is hoped!).
With the problems easing in a couple of years, container turnover rates should return to typical pre-pandemic levels.
8 Increased
shipping line investment in strategic terminal capacity is underway – recently CMA CGM has bought back the Fenix Marine C.T. in LA, MSC has been buying back TIL shares and Hapag Lloyd has declared its interest in the sector
This will surely lead to less favourable supply/demand balances for the shipping industry, with more typical margins for shipping lines once again occurring. The lines are aware of this, so fleet expansion is probably focused on market share considerations that were typical drivers in the last decade or so.
Investments in other parts of the supply chain make much more sense.
Shipping lines flooded with cash can now realise their preCovid ambitions of controlling the entire supply chain doorto-door. The big challenge for the logistics industry has always been managing the numerous interfaces between operators in the supply chain. Consolidation of steps in the supply chain, as well as increased digitisation, will result in more efficient supply chains and hence lower costs. This will make the life of the small logistic player much harder.
But also, the ambition to secure strategic port capacity in various places and reduce the effective handling costs for the lines will be easier to realise. Or at a minimum, shipping lines will not be obliged to sell terminal investments based on weak financial positions as has been undertaken from time to time in the past.
With new dedicated container capacity, container volumes will be moved away from multi-user facilities and consolidated at dedicated facilities for each alliance. Interestingly enough, terminal operators linked to shipping lines have been very quiet over the last two years. Headlines on new port developments and acquisitions were especially focused on independent terminal operators. With CMA CGM buying back their terminal in LA/LB the trend of shipping lines once again directing newfound cash in this direction seems to have started.
REDUNDANCY IN THE SUPPLY CHAINS
In particular the situations in the ports of LA/LB and Savannah are making headlines. Although the situation in many other ports is challenging and delays are frequent, the congestion here is of a different order. When adding port capacity to the system this will be particularly focused on flexibility and capabilities to rapidly respond to uncertain demand development. The call for flexible masterplans has been emphasised repeatedly and the current situation in ports shows why this is a good idea. With vessels and call sizes ever increasing and more pressure to achieve very smooth supply chains, this requirement for flexibility will be here to stay.
The current situation also shows that building in more redundancy into supply chains is a good move. Typically, container terminals aim to operate between 70-80 per cent of capacity to strike a balance between profitability and offering good service levels. With the increasing size and complexity of supply chains, the optimal utilisation levels are likely to drop in the future. Reliability has proven to be a weak point of supply chains, and this may become more of a differentiator in the years to come.
Securing strategic port capacity will increasingly be the focus. In turn this means that to maintain the same profitability, tariffs will need to increase and, as we have seen in the shipping industry for years, the need for large CAPEX (and relatively low OPEX) has seen fierce competition. Acceptable margins will be especially difficult to sustain. So, it remains to be seen who will pay for all this – will transportation costs go up or will margins in the industry decline once again?
OPTIONS FOR COMMON-USER TERMINALS
Operators of multi-user terminals have in principle the same potential as the shipping lines to further invest in vertical integration of the supply chain. Parties like Hutchison, PSA and DP World have been doing so. In order to balance the new financial strength of the shipping lines, these parties can still partner with financial investors who continue to demonstrate high levels of interest in the sector. In addition, strategic partnering with shipping lines in particular markets may actually be the best offensive move.
For smaller parties, realisation is sinking in that the hinterland logistics will be the next area of strong consolidation, and – indeed – this trend is already underway. In order to survive, efficiency will need to be stepped up quite dramatically. Sharing data, working together with other logistic players and digital solutions/interface management in order to improve efficiency are the only options for the smaller players. This has proved to be hard for the industry. However, as large port operators are also looking in the direction of the hinterland, they may be the first candidates for increased cooperation.
As long as independent terminal operators are dealing with the shipping lines only, their negotiating power will reduce further. However, increased transparency and ways for direct engagement with cargo owners (and forwarders) have reduced the costs of dealing with a dispersed client base and is now a real possibility for deep sea terminal operators. In the short sea shipping markets and inland water transport market, more direct interaction between terminal and cargo owner has been a common feature for longer. For the deepsea terminal operators this may be a useful route to diversify their client base away from the few and large shipping lines. This new offering would however need to be tailored in more detail to the needs of each client and more flexible in nature to attract them. This is a clear strategy for terminal operators.
Shipping lines will increasingly focus on controlling more of the supply chain. Multi-user terminals and smaller players in the supply chain will need to focus their attention on the exposure they have in their respective markets in order to counter this. But if they do plan for it, there is a real possibility for a strong position when things return to normal – or to provide a strong position in the ‘new normal’. A real shake-up is beginning.
8 Will the future
