One Hundred Ports: Coronavirus curveball hits container port sector
Speculation about the impact of the coronavirus pandemic on box ports is rife. The only certainty is that global container throughput figures will be down in 2020 — and by a margin comparative only to the global financial crisis
Half-year figures for 2020 at the major box facilities have been telling, to say the least
THE impact of the coronavirus pandemic has thrown the ultimate curveball when assessing the fortunes of the container port sector.
A deep layer of uncertainty has been cast over the industry — particularly in the short to medium term.
With the International Monetary Fund revising economic forecasts almost by the week, pinning down the exact direction of global trade is, frankly, a thankless task.
Much hinges on secondary outbreaks and second waves of the virus, and whether it can be contained. A vaccine, of course, would be the game changer.
However, until then, uncertainty looms.
Indeed, the only certainty is that global container throughput figures will be down in 2020 — and by a margin comparative only to the global financial crisis of 2008-2009.
The initial outbreak that began in China hit liftings at the source hard during the first quarter of 2020 and then globally through the second quarter, as the virus gradually spread.
The first quarter saw world container port handling drop by about 4% compared with the first quarter of 2019.
This, however, was only a partial reflection of the supply-side shock caused by the Chinese production shutdown, which started in late February; ports in northern Europe did not see the full impact until late April.
The real pain was seen in the second-quarter figures, when not only were missed shipments from China evident, but the mammoth impact of the North American and European containment measures became clear.
The huge demand-side shock caused by the closure of the main consumption economies is projected to see port volumes fall by around 9% this year, according to Drewry.
Half-year figures at the major box facilities, too, were telling, to say the least.
Eight of the world’s top 10 container ports reported a drop in throughput numbers in the six months through to the end of June on 2019 levels.
Significantly, this included a near-7% decrease in liftings in Shanghai, the largest port complex; double-digit declines in Shenzhen; and a high single-digit drop at Europe’s premier port, Rotterdam.
Only Tianjin and Qingdao managed to report an uptick in volumes through the first six months of 2020. Increases were, however, minimal.
At the time of writing, other ports outside of the top 10 to post volume figures for the first six months of the year reported a similar story.
European ports, for example, had borne the brunt of lockdowns. Hamburg saw volumes slump 12.1% during the first half of the year; while at the extreme end, the Spanish port of Barcelona and the French port of Le Havre witnessed sharp drops in traffic of 21% and 28%, respectively.
In the US, Los Angeles on the west coast reported a 17.1% contraction; and New York/New Jersey on the east coast, 7.9%, in what was a similar story across North America.
Although Asia showed greater resilience, half-year performances in the region still lagged considerably in terms of comparable liftings.
For example, Malaysia’s Port Klang (-9%) and Thailand’s Laem Chabang (-5%) both reported significant volume declines against the first six months of 2019.
Ports that did manage to report an improvement in volumes during the first half of 2020 were largely down to the restructuring and rationalising of carrier loops and strings. They were also few and far between.
Greater resilience was particularly shown among transhipment ports.
Sea-Intelligence Consulting chief executive Lars Jensen highlighted how these ports are somewhat insulated, as the raft of blank sailings initiated by the carriers reduces the number of direct port-to-port connections.
“So that leaves the importers and exporters with no choice but to use transhipment services,” he told Lloyd’s List.
“As a hub, there is a positive effect. That does not necessarily mean you will see positive growth, but the overall decline in demand itself is partially mitigated by this factor.”
This explains how, despite regional lockdowns, the mega transhipment hubs of Singapore and Busan were able to absorb the initial hit of the pandemic better than most. These two managed to contain throughput losses in the first six months of 2020 to just 1.1% apiece.
Although first-half throughput numbers as a whole came in lower than last year, there were signs during the second quarter of a robust recovery in China, as factories reopened and manufacturing played catch-up.
Similarly, ports in Europe noted signs that volumes were beginning to ramp up once more as lockdown measures were eased in the later stages of the second quarter.
On the transpacific trade, the signs at the time of writing point to a strong peak season — one that looked out of the question just a few weeks earlier.
Nevertheless, the risk of a rise in infection rates lingers large — whether at a national, regional or global level.
Optimism for a recovery is rising, but in these trying times, nothing is certain.
Serving as an example to the risks associated with coronavirus, analysts have been scurrying to dramatically downgrade pre-pandemic forecasts.
In early August, Drewry published its revised outlook for the container port sector, projecting throughput to grow by an average rate of 3.5% between 2019 and 2024.
In teu terms, this would be an increase over the five-year period from 801m teu in 2019 to 951m teu by 2024.
Growth in Europe and North America would remain fairly moderate at 2.3%. Asia is expected to fare slightly better, with liftings rising by an average of 3.9% over the five-year period; while the Middle East region is forecast to be the top performer, with volumes climbing 4.5% through to 2024.
Even so, Drewry said risks still remain to this outlook, should a resurgence in Covid-19 cases cause further widespread economic lockdowns over the forecast period.
Speaking to Lloyd’s List, Drewry’s senior analyst for ports and terminals Eleanor Hadland said failure to get to grips with the virus could see average annual growth during this period limited to as little as 0.8%. Worst-case scenarios would lead to a volume contraction.
Plans on pause
So, what does this mean for container port capacity?
In the wake of the slowdown in port throughput induced by the coronavirus outbreak, terminal operators will be actively reviewing the delivery of planned projects.
Drewry said it expects boxship terminal capacity to grow by an average 25m teu a year over the next five years, which is “well below” the annual average increase of more than 40m teu added over the past decade.
This translates into the expansion of new capacity slowing by as much as 40% in the years leading up to 2024.
“Major expansion projects and greenfield projects that are already under construction and due for commissioning in 2020 and 2021 may face minor delays due to interruptions to global supply chains during the first half of 2020,” said Ms Hadland.
“However, for projects that are currently at an earlier stage of planning — particularly where construction contracts and equipment orders have not yet been tendered — suspension or cancellation is more likely if market conditions remain poor.”
This slowdown was, to some extent, expected, with the container port industry already scaling back on greenfield projects amid an increasingly mature market.
Only a handful of new sites have been sounded out by port operators in recent years, with opportunities to expand globally becoming increasingly slim.
Jan Tiedemann, senior analyst for liner shipping and ports at Alphaliner, said the rapid expansion seen in previous years, too, was merely the industry playing catch-up to meet the demands of ultra large containerships.
“There have been a couple of countries that were economically strong and fairly big in populace, where port capacity was lagging behind. Look at all of West Africa, for example — and even Thailand that couldn’t really accommodate the really big ships,” he said.
With many of these projects now in operation and most of the world being so-called ‘big ship ready’, appetite for new port developments has understandably dwindled.
“Every new terminal has to come with the promise of new volumes, and justified by the market,” added Mr Tiedemann.
The coronavirus outbreak has certainly lowered such market justifications in the short to medium term.
New capacity, however, is very much an afterthought as the industry grapples with the consequences of the pandemic.
Yet unlike the container lines, port and terminal operators have fewer tools at their disposal to mitigate for the loss of volumes.
To their credit, the container lines have managed to weather the coronavirus storm better than expected, displaying capacity management that until now has been noticeably absent — particularly in times of crisis.
The disadvantage for the port sector is that it cannot respond to the shortfall in demand — contrary to the carriers — by adapting capacity.
As seen during the health crisis so far, carriers have been able to curb and hold loops or implement blank sailings, aligning capacity with lower demand and, in turn, propping up rates.
Unfortunately for ports, they are unable to remove a berth or quay from service for a given period to a similar end.
Ms Hadland also noted how port operators do not have the luxury of being able to renegotiate terminal rates either.
“Terminal operators cannot change pricing,” she said.
“They have their annual contracted price and are very unlikely to be able to move that upwards in a recessionary period, so they are seeing a major revenue hit.”
Terminals do, however, have strong earnings margins, giving a level of protection. There is also a degree of variable costs that would reduce with falling volumes.
“However, the free cashflow coming out of the operation will be reduced with reduced volumes and revenue, even if the margin is maintained,” she said.
This, in turn, would lead to a stronger focus on cutting costs. It is also why terminal operators — as mentioned previously — will look to scale back on capital expenditure programmes, including new port developments.
Unlike the carriers, however, terminal operators and their investors tend to take a long-term view when it comes to their port interests.
Often it can be decades before port investments begin to pay back the considerable sums it takes to design, build and operate a successful terminal.
Mr Tiedemann says taking a step back, they will view the current health crisis as a mere blip — or “one bad year”.
“Where many carriers have been marginally profitable or even loss-making, most terminal operators — even in bad times — have at least been able to break even,” he said.
With terminal portfolios among the handful of truly global operators covering all major markets, in times of hardship, they have often been able to offset regional losses with gains elsewhere.
Of concern, however, is how all terminal operators have definitely felt the pinch in the first six months of 2020 due to the pandemic.
Those that have released financial figures for the first half of 2020 have all seen earnings deteriorate, while Mr Tiedemann noted how the Eurogate Group had posted substantial losses within its German interests.
“This is almost unheard of that terminal operators are loss-making... it used to be like having money in the bank,” he said.
Nevertheless, he is adamant there will not be a strategic shift in the fallout of the coronavirus pandemic — and ports will be raking in the cash again before long.
“If everything goes to plan, Maersk, for example, expects that by next year, volumes will be back at 2019 levels,” he says.
Supply chain shift
One major talking point stemming from the health crisis is whether its impact will lessen China’s central role in the global supply chain and prompt acceleration in the manufacturing shift to Southeast Asia.
As China effectively closed its doors to the world in early February during the initial outbreak, the pandemic served to make even clearer to manufacturers the need for a more resilient and disperse supply chain.
This point was also raised at the height of the US-Sino trade war last year.
Ports in Vietnam, Bangladesh, Indonesia and other Southeast Asia facilities have reported exponential growth in recent years as this trend has gathered pace, with manufacturers increasingly drawn in by potential labour cost-savings, ranging from 20% to 80%.
Earlier this year, Drewry stated that upgrading Southeast Asia’s container port capacity to a level able to support this much-mooted supply chain shift away from China will require an estimated $13bn of investment.
In addition to 30m teu of new capacity across the region, as much as 24m teu of existing port capacity will need to be upgraded to provide a similar level of capability to China.
Ms Hadland also pointed to how the opportunity for diversification is also still limited by the available workforce.
“China's huge workforce is almost two-and-a-half times larger than the combined workforce of all major Southeast Asian economies. And this isn't going to change,” she said.
It is also worth noting that it is not just the multinationals moving factory production to Southeast Asia; Chinese companies, too, are taking advantage of the significant cost-savings.
Ms Hadland added that China’s move to outsource manufacturing to Southeast Asia contributed substantially to its “strong bounce-back” in the second quarter, helping to drive intra-Asia traffic through its ports and terminals when Europe and North America were effectively in lockdown.
Alphaliner’s Mr Tiedemann is also unconvinced that Southeast Asia will replace China as the powerhouse of global trade anytime soon.
“The shift we have seen in exports, for example, to the US from Vietnam was 90% down to tariffs put on Chinese goods. People were trying to work around that.”
All too often, he says, the shift is also viewed through the eyes of the manufacturers, but one should not forget China has a growing middle class and a population of around 1.5 billion people.
“If only 10% of the Chinese population has a living standard comparable to Europe, that is already a market of 150 million people — or a market the size of Germany, the UK and France combined.”
Ports in China will need to meet the increasing demand for goods from overseas this will generate.
“We already see the Asia-Europe trade becoming more balanced. It is no longer just empties going back to China; the Chinese are increasingly buying French wine and cheese, as well as German kitchen appliances,” said Mr Tiedemann.
“I’m not sure we’ll see a permanent shift. China will always be the dominant force in that market.”