Maersk's latest purchase hastens shipping consolidation — for good or bad
Maersk’s bid last week to buy German shipping line Hamburg Sud has prompted at least two divergent reactions: It’s either the latest example of a trend that’s putting a financial squeeze on port operators worldwide.
Maersk’s latest purchase hastens shipping consolidation — for good or bad
Maersk’s bid last week to buy German shipping line Hamburg Sud has prompted at least two divergent reactions: It’s either the latest example of a trend that’s putting a financial squeeze on port operators worldwide. Or it’s another step toward industry consolidation that will let ports operate more efficiently and profitably in the long run.Jim Newsome, president and CEO of the State Ports Authority, prefers the second viewpoint. He thinks shipping line consolidation ultimately will benefit the Port of Charleston.“There will be the same amount of big-ship tonnage but fewer players, and that will make the industry more stable,” Newsome said last week. “It’s better for ports when we have a stable, profitable industry.”U.K.-based maritime industry consultant Drewry takes the opposite view. In a new report, it says fewer lines will have far more leverage over port operators when it comes to lowering terminal handling charges, even as the costs of servicing bigger ships moving through the newly expanded Panama Canal are rising.Add slowing global trade growth to the mix and you have all the makings of a looming crisis that could force terminal operators to stop investing in improvements, such as larger cranes and new terminals, needed to compete in big-ship world, the report states.“Shipping lines need to be careful how they play the situation,” said Neil Davidson, Drewry’s senior analyst for ports and terminals. “If the returns from investing in and operating terminals fall too far, or the risks become too high – or both – then terminal operators may simply stop investing.”No matter who’s right, the shipping industry is morphing into something vastly different than it was at the start of the century.In 2000, the top five ocean carriers controlled 35 percent of the world’s container capacity, according to the Journal of Commerce. Last month, those ocean liners controlled 55 percent of capacity. Industry analyst Alphaliner predicts that by 2018, there will only be 14 carriers and half of them will move 65 percent of the world’s cargo.The announcement that Maersk Line, the world’s largest and the Port of Charleston’s biggest customer, will buy seventh-largest Hamburg Sud for $4 billion in a deal expected to close next year only hastens that prediction.“I think this is a healthy trend, the beginning of industry stability,” Newsome said, adding that fewer shipping lines will be able to better control capacity, raise rates and make more efficient use of their ships. “They’ll restore profitability in three years, and that will be good for everyone.”If the shipping lines are making money, Newsome figures, they won’t be so averse to the SPA raising its terminal handling charges – something that must happen if the Port of Charleston is going to be able to complete and pay for all of its planned capital improvements.The SPA has roughly $2 billion worth of projects on the books to help lure more of the big container ships carrying as many as 13,000 cargo boxes each. There are big-ticket items like the $762 million Leatherman Terminal being built on the former Navy base and a $509 million program to dredge Charleston Harbor to 52 feet. And there are relatively smaller purchases, like the $13.5 million ship-to-shore cranes that will move those cargo boxes to and from ships.Much of that investment depends on the SPA doubling its operating earnings. That’s tough to do when the maritime agency’s biggest customers are losing money – an estimated $10 billion this year – because overcapacity has led to historically low shipping rates.“It’s our biggest challenge,” Newsome said.The SPA’s earnings through the first quarter of fiscal 2017 are tracking slightly ahead of last year, not counting a one-time insurance settlement booked in the previous period. Those earnings represent about a 3 percent return on assets, which Newsome hopes to boost to 4 percent by year-end. The SPA eventually needs a 6 percent return to attract the investors who will fund many of the improvements necessary to keep the Port of Charleston competitive.“We’ve got to keep growing and we’ve got to find ways to improve our revenue stream,” Newsome said. The SPA charges some of the nation’s lowest terminal handling fees and isn’t in a position to reduce those rates even under pressure from shipping lines.“We need modest rate increases over time,” Newsome said. “But certainly, if they’re losing that kind of money, it’s harder to make that happen.”Newsome this year predicted a 6 percent increase in containerized cargo movements through the Port of Charleston for fiscal 2017, even as global trade growth has slowed to 1.7 percent. So far, Newsome’s forecast has been on the mark – a 6.1 percent growth in loaded containers compared to the same period last fiscal year.The biggest drag this year on the SPA’s cargo totals has been empty boxes left at the terminals, but Newsome said shipping lines sent “an exceptional quantity of extra loaders” to pick up most of those empties in November.While Drewry warns that “container shipping lines are in danger of putting future port investment at risk in their demands for terminal handling cost reductions,” Newsome says such investment must continue if the Port of Charleston is to remain one of the nation’s top 10 seaports.He doesn’t see the port’s $2 billion worth of capital expenses as a burden mandated by shipping lines wanting to use bigger vessels, but “an investment to help the industry become more efficient.”After all, the big ships are coming – better to be ready for them than not.“We’re going to have a 13,000 (cargo box) system in our port come April,” Newsome said, adding that supersized cranes the SPA bought for the Wando Welch Terminal — part of its overall capital improvement plan – will be ready to unload the first ship when it arrives.“We’ll have our new cranes raised just in the nick of time for that,” he said.