Supply, demand and profits

Supply, demand and profits

After growing by 10.5 percent in 1999 and 12.5 percent in 2000, world container-handling activity slowed dramatically to 4 percent last year. Because empty movements and transshipments rose, underlying container cargo growth was even lower ? about 3 percent.

A slowdown in container trade growth is inevitable at some point. During the last three decades, much of the growth in container trade has resulted from modal substitution ? breakbulk or other types of traffic moving into containers. Determining the ceiling for this penetration of general cargo is a matter of some guesswork, but I suspect the commercial, operational or economic limit for unitization across both containers and freight trailers ? the dominant mode in some short-sea markets ? is around 90

percent, and that for containers alone it might be 70 percent.

Partly because of this market maturity, container growth in virtually every world region will be lower in the coming decade than it was in the 1980s and 1990s. Even the hotspots will be several degrees cooler. At Drewry we forecast North American container volume will average 3.4 percent over the next decade, compared with 6.3 percent in the 1990s.

But slower growth is not the same as no growth. We broadly estimate that an average $3.1 billion of annual investment in new terminal capacity will be required worldwide to accommodate traffic growth over the next five years ? 24 percent more than in the 1990s. While percentage volume growth will be lower, the absolute size of the global market is now much greater.

In North America, however, we estimate that the annual investment needed for growth in terminal capacity might be 10 percent lower: $220 million per year compared with $240 million per year in the 1990s. Those figures are for standard terminal construction and equipment costs, exclusive of any associated dredging, navigational or intermodal developments. North American terminal development costs are likely to be much higher because of environmental issues.

Planning for growth is a theme that emerges from Drewry's new Container Terminal Investment Opportunities Database. We have 270 potential terminal deals, including 59 greenfield projects that are still seeking sponsors or partners.

Ports need to be ready for further changes in their traffic mix. Empty containers generate around 21.5 percent of all port handling moves. That is above the level 15 years ago, despite carriers' best efforts to reduce their huge cost exposure in this area. Since the Asian financial crisis, efforts to reduce empty moves have stalled, which seems to indicate that global trade has become more directionally imbalanced.

This may be good news for ports and terminals but very bad news for carriers. While not significant in North America, transshipment now accounts for 25 percent of container port handling. While still rising, the rate of increase is slowing.

Another interesting trend is the increased use of 40-foot boxes relative to 20-foot units. This could have financial repercussions for terminals if they end up moving the same number of TEUs, but get paid for fewer revenue-earning movements of containers.

Container carriers have seen average unit revenue fall in four of the last five years. In 2001, it was $300 less per TEU than it was in 1996. To partially balance this, carriers have had some success in containing costs. However, the estimated savings over the same period has only been $260 per TEU, so margins have obviously contracted.

When we compare the profitability profile of the global carrier and terminal industries, we see a major divergence. Some terminal operators, though certainly not all, have profit margins in the 30 to 35 percent range, and have only just started to show any contraction, while carriers are stumbling around in the 5 to 10 percent range with every likelihood of worse to come in 2002. It is no wonder that carriers view terminal operations as one of the prime targets for cost reductions, and they are sure to press for reduced terminal costs. Moreover, the level of service that carriers require for their terminal or port dollar will rise. In particular, I expect carriers to belatedly move toward much more differentiated pricing in freight rates, and consequently they will be seeking much more differentiated services, at differentiated prices, from stevedores.

The port and terminal sector has proved much better at managing the supply-demand balance than carriers, and has returned much better financials as a result. Carriers are going to be disappointed if they think that attacking the profits of ports and terminals will be their own financial salvation ? history suggests that any savings they claw back will be given away in lower freight rates. They need rather to get a much better handle on capacity management and pricing. They could learn a lot from ports and terminals in this respect.

Mark Page is research director at Drewry Shipping Consultants in London. This article is excerpted from his presentation at the recent Halifax Port Days conference.