Inc. Langdon Seah | Hyder Consulting | EC Harris

“Ports In The Crosshairs

– The Regulatory And

Competitive Impacts”v2

TPM Asia Conference11-13 October 2016, Shenzhen

Dr Jonathan Beard

12th October 2016

Source: Vesseltracker.com

Global Trade Remains Subdued World trade volume growth to remain

sluggish: 2016 at 2.8% (same as

2015), rising to 3.6% in 2017 (WTO

Over medium term world trade growth

& “container trade multiplier” has

fallen.1990-99, container volumes

grew 3.5x rate of global GDP growth;

2000-09 only 2.7x GDP growth;

average GDP-to-trade multiplier of

~1.2 since 2010)..

….and despite low fuel prices

Source: Institute for Shipping Economic and Logistics; CPB Netherlands Bureau for Economic

Policy Analysis; US Energy Information Administration

Container shipping trend throughput index, January 2007 – January 2016

Seasonally adjusted trend index, 2010=100

World Merchandise Trade GrowthLast 3 months on Preceding 3 months

Brent Crude Oil Spot Price FOB

Structural and Cyclical Factors at Play

Economic uncertainty in Europe,

US recovery relatively strong

Slowing pace of trade

liberalization…

China (fastest growing & 2nd

largest economy) slowing down:

Q1 yoy 6.3%, quarter over quarter

1.1%...

…and restructuring away from

dependence on export

growth….possible “hard landing”

China producing more semi-

manufactured products – share of

imported components in exports

60% 1990s vs 35% 2010s

India liberalization would help, but

cannot “fill the gap”

Source: WTO; National Bureau of Statistics China; ADB; ICF

Whither Globalisation and Trade Liberalisation?

Source: World Bank; WSJ; WTO; Christianpost.com

Percent of imported products subject to trade barriers in G20 countries

Rising labour costs provide supply chain

opportunities in rest of emerging Asia

Source: ILO; The GailFosler Group LLC; Arcadis

Mean Real Monthly Earnings of Employees, Average Annual Growth Rate, 2006-13

But scale, stability and logistics infrastructure of China cannot be easily

replicated…

…and China productivity improvements including major investments in

automation / industrial robots

Global Spot Freight Rates

Average vessel load factor

FE-US route

FE-Europe route

Source: Shanghai Shipping Exchange; Shanghai

Containerised Freight Index; Alphaliner; ICF;

Arcadis

Growth of Container Ship Capacity and Demand, 2000-16

$/FEU

Weak demand growth and

declining unit revenues….

…must cut unit costs, including

via mega-vessels, which has

exacerbated the supply-

demand gap and depressed

utilisation levels…and hence

revenues

Situation will continue for the

medium term. Hence

profitability will rely on further

cost reductions and possible

M&A activities

Lines will be ever more focused

on mainline network costs

Ports and Terminals will

continue to face downward

pressure on their charges and

demands for higher service

levels (faster turnaround)

Decreasing unit revenue for shipping lines places huge

pressure on cost reductionWhich cannot be passed on to customers, if lines are to recover

Safer Together - Filling up the mega-vesselsEconomies of scale via larger alliances…

New alliances to defray risk of introducing larger vessels

during weak demand conditions…

…and secure enough numbers of vessels that are of same

magnitude of size to offer fixed or weekly schedule

Following P3 rejection, four major alliances created /

remain:

– 2M

– Ocean Three (O3)

– G6

– CKYHE Alliance

Recent M&A (CMA CGM – NOL; COSCO – CSCL; Hapag-

Lloyd - UASC) is causing restructuring of alliances:

– Ocean Alliance

– The Alliance

– 2M

Account for significant portions of capacity on major trade

lanesSource: Alphaliner

…With significant impacts for port infrastructure &

competition in key transhipment markets

Fully accommodating an alliance in key transhipment (TS) markets (e.g. SE Asia) may require 7-

9 million TEU capacity…

...or mitigate risk with dual hubs (at additional cost & / or inability to fully “re-set” network)

Barriers to entry have risen in some port markets – must build to accommodate the largest

vessels and large TS volumes. In major TS markets (e.g. SE Asia), cannot enter the market with

just ~6-800m of berth

Threshold for direct calls raised – does

this mean “lock-in” for the mega-hubs?

Strategy of MPA / PSA at Tuas?

Lines / alliances now so big they

may have less market power:

i.e. too large to move easily –

in SE Asia, there are few options

for a “mega-hub” with available

capacity.

TS market appears to be slowing,

even before the boost from

mega-vessel mania has passed

Capex spend up, unit revenue

down – how do terminal operators

maintain margins?

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

y-o

-y (

%)

Klang

PTP

Singapore

Regional Sub-totalLinear (RegionalSub-total)

*regional sub-total = Klang + PTP + Singapore

SE Asia Transhipment Market

Source: MPA; Port Authorities; Arcadis

Major shipping lines want high performance

- > 35 moves per crane per hour, 230-250 moves/ship hr @ berth for larger vessels

- Reliable berth windows and turnaround time

- Maersk EEE seeking 6,000 moves within 24hrs from terminals….but this requires adequate cargo

Major hub ports (& some gateway ports, e.g. Rotterdam) must efficiently accommodate variety of

vessels sizes (e.g. from feeder / barges to mother vessels) - flexibility in operations

Risk/reward: investment requirements are higher but in the absence of base-load

import/export (IE) cargo, incentives for largest vessels to call may be insufficient – challenge for

smaller transhipment hubs, less so for the major gateway terminals…and major TS hubs?

Possible scenario? Winners “lock in” volume (e.g. Colombo? Singapore?) and establish a

virtuous circle, become mega transhipment (& gateway) hubs; losers, even some smaller gateways

see IE volume routed via a third port, increasing cost of import/export

Infrastructure and services:

- 18m water depth;

- long straight / contiguous quays (1,000m or longer) to provide

maximum flexibility

- adequate number of super post panama cranes: outreach

for ≥23 TEUs across

- land: adequate yard to support quay face operations & large box

exchanges (ideally 600-650m average yard depth / m quay)

- inland connectivity: gate, road, rail, barge, etc. (for gateway ports)

- capacity to accommodate all alliances partners

Source: World Maritime News; ICF; Arcadis

Port Planning & Performance in an Era of Mega-vessels & Alliances

Ports of the Future – New Technology, New

Ways of thinking, New Ways of Competing?

More of the same but a bit better (e.g. VICT,

Melbourne; Maasvlakte 2, Rotterdam)…

…or a step change in design & operations?

But what is the return on investment

and are customers

willing to pay for

superior

productivity?

Source: APMT; GRID Logistics Inc;

Hyperloop One

Terminal Operators Have Outperformed LinesBut what impact from mega-vessels, increased capex requirements, alliance and downward

pressure on terminal charges?

0%

10%

20%

30%

40%

50%

60%

70%

APMT HHLA Eurogate DP World ICTSI HPH HPH Trust CMHI PSA

EBITDA Margin - CT Operators 2009 2010 2011 2012 2013 2014 2015

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Ma

ers

k

CM

A C

GM

Hapag‐L

loyd

AP

L

Ha

njin

CO

SC

ON

MO

L

OO

CL

K L

ine

NY

K

EBITDA Margin - Liners 2009 2010 2011 2012 2013 2014 2015

Source: Annual Reports; ICF Analysis; Arcadis

Notes: EBITDA / Revenue; recent PSA performance to be confirmed

Transhipment (TS) volumes growing, in part driven by mega-vessels, but typically lower revenue

and more footloose than IE cargo

Major Asian TS hub ports must accommodate the largest mother (mega) vessels and high volumes

to compete hence high capex requirements, but low revenue per lift means a tendency for

public subsidy. Even minor hubs must typically build beyond what would be needed purely for IE

Economic benefits to the ‘host country’ may be limited:

– Value added per TEU of IE cargo at least x1.5 higher than TS cargo ; employment impact at x2*

– But benefits from TS are net additions (i.e. would likely be lost without port). IE significant portion of

benefits (e.g. trucking, freight forwarding, etc.) would remain, even without port.

Some (e.g. Colombo, Busan) argue attracting TS ensures better connectivity for its exporters…..

…whereas importers / exporters often complain they are subsidising ‘cheap transhipment’

Would public funds be better spent elsewhere or do the economies of scale & “lock in” offset the

spend?...or perhaps IE / TS relative charges should better reflect relative costs of handling?

“Winner takes all game” emerging with high entry requirements? If so, can TS hubs afford not to

keep in the game…and how will the alliance evolution affect this? Are they too big to have

options?

If the liner market finally clears / exit by loss making companies, and commercial discipline becomes

the norm, will the profitability balance shift away from CTOs to carriers?.....or is this “win win”….?

Wrap - Port Strategy & FundingAccommodating liner requirements poses commercial and operational challenges; further

complicated when competing with state backed entities

Notes: *ICF example from Malaysia

Thank you

Any questions?

11-10-2016 13

T +852 2263 7300

M +852 6095 8434

E jonathan.beard@arcadis.com

Arcadis 38/F AIA Kowloon TowerLandmark East100 How Ming StreetKwun Tong, KowloonHong Kong

DR JONATHAN BEARDHead of Transportation & Logistics, Asia

11-10-2016 14

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