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A sea of uncertainty could herald new opportunities for ports

With uncertainty on the rise, the global maritime sector is characterised by conflicting indicators. However, Andrew Penfold sees several optimistic signs that could bring new opportunities to the ports and shipping sector.

 

With their outward perspective and connectivity, ports are more susceptible to changing international events. Therefore it’s no surprise that decisions made in places as far apart as Washington DC, Pyongyang and Beijing will impact global trade, investor confidence and in turn the economic health of the port market. The key factors impacting on ports currently are geopolitical uncertainty, continuing weak demand globally, the slowing of container growth rates and dry-bulk trades, and trade agreement uncertainty. Add all this up and you get a picture of what might be in store for ports. However, the economic and political uncertainties the sector faces could have some positive effects.

Three factors will exert significant pressure on port investment: globalisation, which drives trade and economic growth, and which in turn fund port investment; the global political situation, which appears more volatile now than in recent years; and technology, which looks set to continue its inexorable march in driving change. So what should we expect?

First a few negatives. Economic growth is critical for trade and port investment but, in uncertain times it is always difficult to forecast demand and project revenues. Predictions are made even more difficult when you have pressures pulling in opposite directions. In aiming to lower risk, investors are seeking security in cargo volumes and this requires increased reliance on shipping lines to secure those volumes. Ports seek financial wins from handling higher cargo volumes as securing investment for port development is now more complex. Even when economies recover, environmental considerations will kick in and start to impact on port development.

We are also seeing fluctuations in commodity prices, limited dry bulk investment, finance uncertainty, and trade agreement doubts. More importantly, falls are expected in Chinese GDP growth rates, in a country which, until recently, was a key driver of demand in commodities and trade.

Meanwhile, in place of expansion, terminal operators are instead focusing on margins and maximising their existing investments. We are seeing revised dock labour arrangements and the modernisation of existing facilities achieved through terminal combinations and automation. The latter is potentially a major enabler for cost reduction. Not surprisingly, greenfield projects are assigned ‘not right now’ status given their more capital intensive and problematic nature.

Also we can’t ignore the revolution in ship sizes, as much larger consignment capacities impact on ports. In the past ten years alone we’ve seen growth in ship capacity from 14,000 Twenty-foot Equivalent Units (TEUs) to 22,000 TEUs. This is an evolutionary process but it is noticeably putting pressure on smaller ports as larger vessels require greater handling capacity in terms of berthing and channel draughts, cranage, power requirements and storage.

Over-capacity on primary deep-sea routes is causing ‘cascading’ down to the secondary routes, thereby exerting further handling pressures on the smaller ports. Past increases may have been incremental but the next upsizing of container ships could spell trouble and significant capacity redundancy. Current demand may not justify these larger vessels but with significant orders in the pipeline the trend looks set to continue.

Yet there are reasons for optimism.

There is still a sustainable growth in the container trades, and increased demand and reorientation in the liquids sector. Generally, although demand remains weak, the latest data from the IMF stresses recovery in the US, and there have been encouraging signs in Europe despite Brexit looming. Furthermore, falling oil prices have brought greater demands for the storage and trading of oil-based products and chemicals. Overall terminal investment remains a strong underlying driver of our maritime business.

With such a mixed bag of positives and negatives, the next six months will provide greater macroeconomic clarity due to developments in China, the American presidency and greater Euro-zone stability. All this will determine the medium-term outlook and, hopefully, bring new opportunities to ports.

Andrew Penfold is director of maritime at WSP