If there’s any safe harbor from the container shipping’s financial hurricane, it’s marine terminals.
Their cargo volume is down, expansion projects have slowed and the mania to invest in terminal operators has cooled amid falling profits. But terminal operators are posting hefty profit margins, and industry observers expect them to continue to do so in 2010.
“Most of them are still managing to maintain the same percent of margin, although overall profits are down. That’s quite remarkable, considering the severity of the downturn,” said Neil Davidson, who analyzes the port industry for Drewry Shipping Consultants.
|Major global terminal operators posted margins of 30 to 40 percent last year. In the first quarter of 2009, as bleak a time as container carriers have ever seen, DP World posted earnings before interest, taxes, depreciation and amortization of 38.7 percent. Manila-based International Container Terminal Services did even better, with an operating margin of 43.2 percent.
“It’s a huge contrast to carriers, who are losing extremely large sums of money,” Davidson said. “By and large, the terminal operators are able to rely on the fact that they have better economics than the container shipping operators.”
Barriers to entry are high, terminals have controlled their fixed costs, and when cargo volume drops, so do terminals’ variable costs for labor.
Terminals’ profit margins are lower in U.S. ports, largely because of labor and operating costs. But many terminals elsewhere in the world have modern facilities, high productivity and little or no local or regional competition — a recipe for steady profitability.
When the global economy was booming, investors were willing to pay multiples of more than 20 times EBITDA, even in U.S. ports where labor and operating costs generally produce lower profit margins.
Mergers, acquisitions and long-term lease-and-operate deals were slowed by the recession’s impact on trade, by high prices that make deals harder to justify, and by the fact that many of the most lucrative franchises already had been snapped up.
Davidson said prices of eight to 12 times EBITDA is the probable current range for terminal M&A activity, although the paucity of deals makes pricing benchmarks difficult. “There’s been a lack of financing and a lack of demand,” Davidson said. “We haven’t seen many merger and acquisition deals in ports for about a year now. That’s partly because of lack of financing and partly because there’s still a gap between buyers’ and sellers’ expectations on prices.”
One company still investing in additional terminals is Highstar Capital’s Ports America, created with the North American assets that DP World divested after its 2005 takeover of P&O Ports sparked a political uproar in the United States.
Ports America agreed in November to lease the Port of Baltimore’s Seagirt Container Terminal for 50 years. Earlier in 2009, the company signed a 50-year lease, starting in 2010, for five berths at Oakland.
Both ports had been seeking private capital to expand their container-handling facilities. At Baltimore and Oakland, Ports America agreed to an upfront payment and annual lease payments, along with commitments to operate the terminals and fund major expansions, including a 50-foot-deep berth at Baltimore.
The recession and credit crunch caused terminal operators to delay or slow expansion projects. APM Terminals said it has reviewed, postponed and in some cases canceled projects to control costs until volume rebounds.
That could take awhile; most analysts predict global container volume won’t recover to 2008 levels until 2012. Still, Christian Moller Laursen, vice president and chief financial officer at APM Terminals, said the terminal industry’s long-term prospects are bright.
“Despite the slower growth in the coming period, the port industry remains fundamentally attractive,” he told a recent conference. “The world will continue to grow in the longer run, and globalization and the containerization of goods will continue, particularly in emerging markets.”
Despite a wave of consolidation among global terminal operators a few years ago, the business remains fragmented. The Big Four operators — Singapore’s PSA, Hong Kong’s Hutchison Port Holdings, A.P. Moller-Maersk’s APM Terminals and Dubai-based DP World — have a combined share of just under 30 percent of global container throughput.
Container carriers own 10 to 15 percent of global capacity, but Davidson said financial pressures could force some container carriers to sell terminals in an effort to stay afloat financially. “It’s a tricky situation for the liner companies,” he said. “They may need to sell terminals to raise cash, but at the same time the terminals are an asset that generates cash.”
And although economic circumstances have slowed merger and acquisition activity involving terminals, Davidson doesn’t expect that to last forever. He sees indications companies no longer are buying terminals with the idea of holding onto them forever.
“In the past, they’ve just focused on adding more and more ports,” he said. “Now they’re taking the view that they should manage them more as a portfolio, and they should buy and sell terminals when it makes sense. If they don’t fit or they’re not performing, perhaps you get rid of them. Not all of them are following that route, but some of them are considering it. It’s fairly new thinking and something that’s developing.”
Contact Joseph Bonney at firstname.lastname@example.org.