Colombo breaks through as South Asia’s next big transshipment port

Colombo breaks through as South Asia’s next big transshipment port

Colombo International Container Terminals

COLOMBO, Sri Lanka — When the CMA CGM Marco Polo — until 2013 the world’s largest container ship with a capacity of 16,020 twenty-foot-equivalent units — arrived in Colombo in late September, it highlighted the port’s emergence as a growing transshipment hub capable of handling the increasing number of mega-ships that have become the workhorses of the Asia-Europe trade.

The Sept. 25 call at Colombo International Container Terminals underscores how the 2.4-million-TEU deep-sea terminal, a joint venture between China Merchants Holdings International and the Sri Lanka Ports Authority, has helped the port shake off years of miniscule container growth. The rise of major shipping alliances, or more integrated and expansive vessel-sharing agreements, has boosted traffic at Colombo and other Asia transshipment hubs.

Those hubs are benefiting from the inability of other nations on the Indian subcontinent to handle vessels with capacities of 10,000 TEUs and up — and the massive volumes they discharge into the hinterland. Colombo, particularly, has reaped the benefits of being at the nexus of the South Asia trade, a position that forces it to balance relations with India, its much larger neighbor, while still benefiting from terminal investment and trade fueled by China, Asia’s other heavy hitter.

New terminal propels growth

CICT’s ramp-up in volume has been staggering. In 2014, its first full year of operation, the terminal handled slightly more than 686,600 TEUs and expects to double that this year to about 1.3 million TEUs. Colombo, consisting of three container terminals, is expected to boost volume 5 to 10 percent this year over 2014, Upul Jayatissa, chief manager of marketing and business development, told JOC.com during a late-September visit to the port.

Thanks to the surge, total Colombo container volume grew 14 percent year-over-year in 2014 to 4.9 million TEUs, elevating Colombo three spots, to 30th, on The Journal of Commerce’s ranking of global container ports.  In the prior four years, Colombo had a compound annual growth rate of 1 percent. Transshipment cargo to and from India, east Africa and Bangladesh accounts for approximately 70 percent of the port’s volume, according to the Asian Development Bank. The remaining 30 percent is local traffic, driven by garment, tea and rubber exports, and consumer products, and industrial and agricultural equipment imports.

The port has an annual capacity of 7.4 million TEUs, but the addition of two new planned terminals, each with annual capacities of 2.4 million TEUs, in the South Harbor, where CITC is located, would bring its capacity to 12.2 million TEUs. Another 1 million TEUs of capacity or so could be squeezed out by maximizing the terminals, estimates Rohan Masakorala, CEO of Shippers’ Academy Colombo, a school of business for global commerce and logistics, and chairman of the first Colombo International Maritime Conference held in late September. Another 800,000 TEUs of capacity will be added in 2016, when the $500 million East Terminal comes online.

CICT’s importance to Colombo goes beyond just adding capacity. The terminal’s 59-foot draft and cranes with a 230-foot outreach allow it to handle the largest container vessels in service, giving the port a chance to stay competitive in a transshipment market plied by increasingly larger vessels. Fourteen services using mega-ships call CICT weekly, providing about 65 percent of the volume, with feeder traffic providing the rest. The terminal receives more than 100 ship calls a month, with the 2M Alliance of Maersk Line and Mediterranean Shipping Co., the two largest global carriers, driving the most volume. Singapore-based Pacific International Lines is the second-largest user of the terminal, followed by the CKYHE and G6 alliances.

The $500 million terminal investment was a bold move for China Merchants, considering few foreign investors were entering the country as it healed from the wounds of a 26-year civil war that ended in 2009. The terminal, originally slated to be constructed in 60 months, was finished in 28.

“The moment that happened, all the major carriers took a real look at Colombo,” said Tissa Wickramasinghe, CICT’s general manager. “The general trend in transshipment is that once the cargo is lost, it’s hard to get back. But the lines did come back, so obviously we are doing something right.”

South Asia’s weakness is Colombo’s strength 

The Asian Development Bank, which gave a $300 million loan to Colombo for harbor improvements, is optimistic about the port’s potential, noting most ports in South Asia face congestion. "Compared with its competitors, the improved efficiency and capacity to handle large vessels will be huge advantages to Colombo Port given its relative proximity to India's southern and east coast markets," the bank said in a report assessing the effectiveness and sustainability of infrastructure projects at the port. The loan, it added, will offer Colombo "huge advantages" over competitors in the battle for transshipment business in South Asia.

The ports CICT serves via feeder connections on the east coast of India — Tuticorin, Chennai, Kattupalli, Visakhapatnam, Kolkata, Haldia, Krishnapatnam and Cochin — can handle 10,000-TEU vessels, but they need to be lightly loaded, making 5,000- to 6,000-TEU ships the workhorses, Wickramasinghe said.

Indian ports on the west coast served by CICT — Mangalore, Nhava Sheva, Pipavav, Hazira, Mundra and Kandla — generally have deeper drafts, but, like their east coast counterparts, the discharges of massive vessels overburdens their road and rail connections to the hinterland. Colombo handles about 30 percent of the transshipment volume heading to and from India. Colombo also feeds cargo to and from Karachi, Pakistan, which can handle the biggest vessels — 14,000 TEUs — that will be able to transit the Panama Canal when that waterway completes a decade-long project to add new, larger locks.

“There is no port in India at this moment that can handle (Maersk) Triple E-class ships,” which have capacities of more than 18,000 TEUs, said Wickramasinghe, a Sri Lanka native who came out of retirement to join CICT. The former head of commercial and marketing at South Asia Gateway Terminal was part of what, at the time, was the only privately run container terminal from its conception in the concessional negotiation period in 1998. “As long as the problems persist, it doesn’t make sense for 12,000- to 18,000-TEU vessels to divert out of major east-west shipping route to directly call India,” he said.

Demand for Colombo transshipment appears to be growing in India. The volume of transshipped goods moving through Colombo for India’s major public ports nearly doubled from 652,000 TEUs in the fiscal year ending March 31, 2014, to nearly 1.2 million during fiscal 2014-15, according to statistics obtained from India’s Ministry of Shipping. Total foreign transshipped volume through India’s major ports soared 34 percent to 2.5 million TEUs in the same period.

Colombo commanded the largest share of India’s foreign transshipment volume in the latest fiscal year, accounting for 48 percent of all traffic, according to ministry statistics. Singapore was the second-largest gateway for foreign transshipped cargo to India, with a 22 percent share, and Port Klang, Malaysia, was third, with a 10 percent share.

Chittagong, the gateway for nearly all of Bangladesh’s oceangoing container trade, is in a similar situation as the ports on India’s east coast, with a draft of about 30 feet. That allowed CICT to handle 220,000 TEUs moving to and from Bangladesh this year, up 40 percent from 2014, Wickramasinghe said. Of the 1.6 million oceangoing TEUs moving through Bangladesh annually, CICT aims to add 800,000 over the next two years.

Much of the cargo from Bangladesh, a major apparel exporter, is transshipped through Singapore; Tanjung Pelepas, Malaysia, where APM Terminals has a 30 percent stake; and Westport, CMA CGM’s hub at Port Klang. Geographically, Colombo has no competitor in South Asia, Wickramasinghe said, noting it takes 3 ½ days to sail from Bangladesh to Westport versus two days to Colombo.

Still, although its transshipment competitors aren’t precisely on the east-west trade like Colombo is, they attract more frequent services because they already have more cargo and run their own feeder networks. Singapore’s 2014 container volume rose nearly 4 percent year-over-year, to about 33.9 million TEUs; volume at Port Klang increased 5.8 percent to almost 11 million TEUs; and Tanjung Pelepas’s volume grew 11.4 percent to 8.5 million TEUs.

Pointing to the port’s 1 million TEUs in volume through the first eight months of this year, Wickramasinghe is confident carriers are changing their transshipment strategies with Colombo in mind. Some of that cargo was the more than 100,000 TEUs of east African trade that Colombo snatched from Singapore, he said. CICT has three weekly services connecting to the ports of Dar es Salaam, Tanzania; Nacala, Mozambique, and Mombasa, Kenya, Wickramasinghe said. Salalah, Oman; Singapore; Aden, Yemen; and Dubai-area ports, are CICT’s main competitors for east African business, he added.

Unlike India, Colombo hasn’t had a work stoppage in more than two decades, Wickramasinghe said. Strikes frequently cripple India port operations, and are most severe at the country’s largest container gateway, Jawaharlal Nehru, on the west coast. India’s port labor gives “a good fight to the U.S. ports. They have American standards in that,” he quipped.

And India’s port labor is disrupting more than just daily operations. Labor threats, for example, in September helped derail efforts by the reform-minded administration of Prime Minister Narendra Modi to make major public ports more productive by turning them into independent companies under a so-called corporatization model.

Colombo, meanwhile, ranked first in JOC port productivity research for South and Southeast Asia in 2014, averaging 86 gross moves per crane, per hour while a vessel is at berth. That compares with Asia’s top port overall — Tianjin, China — with 127 moves per hour. The JOC data does not include CICT because 2014 was its first year of operation, but is based on Colombo’s other two terminals. The privately run SAGT in 2014 was the most productive port in South and Southeast Asia with 111 moves per hour on average, while the state-run Jaya Container Terminal was ranked 16th with 63 moves, according to JOC research.

Gross moves per hour for a single ship call is defined as the container moves — onload, offload and repositioning — divided by the number of hours the vessel is at berth.

Sailing choppy waters

Although the port’s enviable geography as the last Asian gateway before Europe has made it a maritime force since the Portuguese used it as a trading hub in the early 1500s, much of its success rests on other South Asian ports’ inability to handle volumes discharged by mega-vessels, both at the dock and in the hinterland. That’s created a delicate relationship between Sri Lanka and India, because the latter, while dependent on feeder ships connecting to Colombo, is looking to launch transshipment hubs of its own.

Adding to the complexity, the CICT terminal, of which CMHI controls 85 percent, is part of China’s so-called Belt and Road initiative, formerly known as One Belt, One Road. Through the 21st-Century Maritime Road, China is working to build a route from its coast to Europe through the South China Sea and the Indian Ocean on one route, and from China's coast through the South China Sea to the South Pacific on another.  

CICT’s entrance into the Colombo market also created some waves within the port itself. Carriers’ deployment of larger vessels that only CICT can serve has hurt SAGT and Jaya Container Terminal. Volume at SAGT through September was down 15.5 percent year-over-year, while traffic was down 13 percent at Jaya in the same period.

Ted Muttiah, chief commercial officer at SAGT, said the terminal has halted the decrease in volume, brought about primarily because two 2M services shifted to CICT when Maersk and MSC deployed larger vessels. Another 2M service still calls SAGT. The addition of six weekly services, bringing SAGT’s total to 18, has helped arrest the facility’s first-quarter loss of volume.

SAGT can handle 14,500-TEU ships, but they must be lightly loaded. The workhorse vessels are in the 9,000-TEU range. JCT, which has 24 weekly services, can handle vessels of up to 10,000 TEUs.

The deep-draft terminal, Muttiah emphasized, was good for SAGT, because it will attract more mega-vessels and supporting feeding services.

A single haulage company moves containers between the terminals, allowing the terminal to guarantee that boxes will be transferred between facilities within 12 hours and expedited if needed, Wickramasinghe said.

“There’s a perception that the three terminal operators are at each other’s throats. Not true,” Muttiah added. The three terminals come to each other’s aid when they’re overburdened, and SAGT has diverted larger vessels to CICT if the latter can handle them more efficiently, he said. Still, the terminals compete for cargo — and responsibly, so port-wide service doesn’t suffer, Muttiah said.

“The older terminals will continue to play a role,” he said. “No one terminal can handle all the business Colombo has today.”

Expanding ahead of demand

Because transshipment hubs must prepare for volume growth further in advance than gateway ports, Sri Lanka is proceeding with construction of two more terminals. A 1,300-foot berth already has been built at the East Container Terminal, adjacent to CICT, and the first phase of the project, scheduled for completion by the end of 2016, will increase Colombo’s capacity by 800,000 TEUs a year, Jayatissa said. At full build-out, the terminal will have annual capacity of 2.4 million TEUs.

During its six-month interim period, the administration of Prime Minister Ranil Wickremesinghe said it wanted a 51 percent stake in the terminal, which would have a 60-foot draft, but it hasn’t indicated whether it’s keeping to that course. A timeline for construction of the $500 million West Container Terminal, which also would have a 60-foot draft and 2.4 million annual capacity, hasn’t been set.   

Although there is some local concern that capacity is growing too much, too soon, Wickramasinghe isn’t concerned because certain volume thresholds must be met before new terminals can come online.

The big question for Colombo is whether the port will lose transshipment business from India, or at least see its growth slow, as neighboring ports and hinterland connections improve. For now, that hasn’t been the case. The DP World-operated Vallarpadam International Transshipment Terminal at Kochi, for example, hasn’t had an impact on Colombo’s volume, according to Sarathkumarama Premachandra, regional manager of Asia ports and terminals at CMA Terminals, a division of French container shipping company CMA CGM.

That’s widely believed to be the result of India’s reluctance to ease its cabotage rules that require India-flag vessels to ship cargo between the country’s ports. Domestic transshipped volume handled at India’s major ports fell almost 14 percent year-over-year to 390,000 TEUs in fiscal 2014-15, according to Indian Ministry of Shipping statistics.

India is pinning its hopes on a deep-water, greenfield site at Vizhinjam, about 10 miles southwest of Trivandrum, to build a new privately operated container transshipment terminal to retrieve some of the domestic cargo currently relayed over foreign hub ports in the region, especially Colombo. After years of uncertainty and bidding delays, the project was awarded to domestic port infrastructure developer Adani Ports and Special Economic Zone, which operates a clutch of cargo terminals across India, including fast-growing Mundra Port on the west coast.

The project involves public and private investments worth nearly $1.2 billion. The first phase is designed to handle 18,000-TEU ships, have a berth length of 2,625 feet, a 130-acre container yard and annual capacity of 1 million TEUs. APSEZ already has signed a 40-year concession with the local state authority, and unofficial indications are that work will begin in December. Adani expects to commission the facility in about 1,000 days and handle 300,000 TEUs in its first year.

From a location perspective, Vizhinjam has some distinct advantages. The site already has a natural depth of 59 feet, with room to increase it to 72 feet with dredging, and is close to the main east-west international shipping route. Although the project could become a transshipment point for cargo moving via ports in eastern India, however, much of its success will depend on connectivity to hinterland infrastructure and how effectively it can compete with Colombo, about 175 nautical miles away. The site already connects to the interstate highway system, and the local administration has committed to providing dedicated intermodal rail connectivity to and from the port site over the next six years, Adani said.

Adani said it is looking to set up strategic partnerships with major ocean carriers in an attempt to make the Vizhinjam project more viable and attractive. This business model has significantly benefited Adani at Mundra, India’s biggest non-government cargo gateway. “We are very much confident of collaboration with major shipping lines for our Vizhinjam Port,” Adani Ports said in response to a Journal of Commerce query.

Bangladesh also is considering building a deepwater port at Payra with the help of China, and it could be used as a transshipment hub, according to Ahamedul Karim Chowdhury, terminal manager at the Chittagong Port Authority.

A violent history also hangs over the country that is showing signs of easing, after the Wickremesinghe administration in October agreed to cooperate with the U.N. to forge a judicial process tasked with investigating war crimes during the long-running civil war with the Tamil Tigers. That will likely have ramifications for trade, Muttiah said. Better relations with the European Union could lead to the reinstatement of Generalised System of Preferences Plus, a program that allows developing countries to pay little or no export duties to EU member states. Reinclusion into GSP+ and warmer relations with the U.S. would help lift garment exports, on which the country depends.

Creating a foreign trade zone, a special region where goods can be assembled free of local duties if they don’t enter Sri Lanka, would help make the country a stronger logistics hub, Muttiah told JOC.com. Garments from Bangladesh headed to Europe and the U.S. could be hung on containers in a Colombo FTZ, allowing fast-fashion shippers to avoid having to handle at destination, he said. To maximize the port’s potential, the government needs to create a maritime blueprint, and Arjuna Ranatunga, the new shipping minister, told the CIMC conference that he plans to create a national policy framework.

“Transshipment is very volatile cargo,” Wickramasinghe said. “We need to be one step ahead to deliver.”

Contact Mark Szakonyi at mark.szakonyi@ihs.com and follow him on Twitter: @szakonyi_joc.