Time For Asia’s Ports to Rebuild

Declining freight volumes and reconfigured container vessel deployments may give Asia's ports time to regroup, say industry analysts, who add that investment in infrastructure is badly needed.

When Maersk Line – the world's largest ocean cargo container company – announced last month that it would stop services to and from 10 ports in China, shipping experts reckoned that it was primarily a move to reduce costs.

Earlier this summer, weak market conditions in the Far East – North America transpacific trade had claimed its first casualty as the French shipping company CMA CGM, Germany-based Hamburg Süd and United Arab Shipping Company decided to withdraw their joint Far East service. According to the Paris-based consultancy, Alphaliner, this move alone would reduce total weekly capacity on the Asia to North America corridor to 429,000 twenty-foot equivalent units (TEUs) by September, marking a decline of 4% from the corresponding period of last year.

Now supply chain managers are being told that Maersk will no longer call ocean cargo gateways in Chizhou, Luzhou, Yingkou, Jinzhou, Rizhao, Yueyang, Lijiao, Taiping, Jiaoxin and Nansha old port. It should be noted that all these “niche” ports are currently served by feeder ships that move goods to larger ports where mega-vessels take on the cargo for transpacific carriage.

However, the timing for these decisions might be a blessing in disguise for Asian port operators, contends a recent report issued by Moody’s Investors Service. Analysts there say lackluster global growth, weak commodity prices, high capital expenditure commitments and a liner industry struggling with overcapacity is testing the mettle of these players.

“While the rated port operators in Asia have scope for cost cuts and are generally supported by their dominant market position, their resilience is being tested by these challenging operating conditions,” says Ray Tay, a Moody’s Vice President and Senior Analyst.

According to Moody's Rated Port Operators – Asia: Challenges on the Rise, the smaller ports in the region are grappling with slowing or negative growth in cargo volumes due to China’s slowdown, sluggish growth in Europe, and persistently weak commodity prices.

“The port operators also have substantial commitments as they seek to cater to ever-larger ships entering service, while overcapacity in the liner industry is making it harder for ports to pass on these costs to their customers,” adds Tay.

Across the Far East, Moody's notes transshipment ports where containers are reloaded onto new vessels – such as PSA Corporation Limited and Hutchison Port Holdings Trust are more affected than gateway ports where containers reach their final destination – like Shanghai International Port (Group) Co., Ltd and Adani Ports and Special Economic Zone Limited.

This is because transshipment ports are more sensitive to competitive pressure, whereas huge Pacific Rim ports benefit from innate demand as they serve regions with major populations and industrial centers.

Overcapacity in the liner industry—the key customers of port operators—is also pressuring the operators’ margins. Moody’s forecast global containership capacity will increase by 4.5%-5.5% in 2016, outpacing the expected demand growth of 1.5%-2.5%. Consequently, shipping lines are facing significant pressure on freight rates, which in turn will make it increasingly difficult for port operators to negotiate higher container handling charges.

Nevertheless, Moody's expects that port operators across Asia have sufficient headroom to weather these trends for the next one to two years.

Indeed, most “rated” container port operators have scope to take corrective measures such as debt, dividend and capacity reductions, while they also benefit from dominant market positions that underpin continued cash flow generation.

One would hope that when the fortunes for transpacific ocean carriers are finally reversed, there will be more options for vessel deployments and supply chain optimization.

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