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Postscript
Is investment in the terminal sector about to turn ‘‘ again, with more emphasis on the common-user terminal as opposed to liner sector led investment? Potential regulatory changes and marketplace conditions signal changes ahead
LINES AND TERMINALS: ANOTHER TWIST?
Container shipping lines have done very well from Covid. Freight rates reached exorbitantly high levels between mid-2021 and the first half of 2022. The resulting extremes of profitability have exceeded anything recorded since the advent of containerisation in the late 1970s and early 1980s. This has allowed the major container lines to adopt different investment strategies, with a favourite option being massive ordering of new tonnage – as seen many times before – based on the idea that current conditions will continue.
But, as is always highlighted in consumer investments, ‘past performance is no guide to future results’. The orderbook currently stands at around 30 per cent of existing capacity and, although this is less than the previous peak of around 60 per cent in the late 2000s, its pretty obvious that demand will not absorb this capacity – especially as we head into an economic downturn. The focusing of this investment in the largest vessel size ranges (with their restricted employment potential) exacerbates this emerging problem. Indeed, freight and charter rates are already on the way down and this process can only have further to run.
Other strategies have included upping investment in associated companies – forwarders, inland distribution and, even, air cargo. This has sounded alarm bells in some quarters with this leading directly to increased examination from the Federal Government in the US and renewed focusing on the controversial Consortia Block Exemption Regulation (CBER) in the EU that enables current container shipping alliances to operate and share vessels. The latter is due to expire in April 2024.
Until Covid-19 it was grudgingly accepted by cargo owners and 3PLs that these exemptions were the price to pay for regular and reasonably priced container transport but it’s clearly the case that neither have been delivered and the lines’ strategy of simply blaming the ports and trucking companies for recent problems won’t wash. Things are, therefore, likely to change.
THE OUTLOOK
The outlook is now one where the shipping market is heading into a serious downturn and their ‘block exemption’ status is being called into question. The degree to which lines have exploited the Covid confusion to their own benefit leaves them highly exposed to changes in the regulatory regime at a time when they will be least able to afford it. With shippers increasingly vocal about both the level of freight rates they have been obliged to pay and the level of services that the lines have offered this can only mean very severe pressure on the shipping lines. Combining this with the increased green pressures that the shipping lines are facing – and the required degree of investment to comply with environmental regulations developed during wildly different market conditions – can only result in forced restructuring.
What will this mean for the port sector? Many of the shipping lines’ investments in terminal capacity have been predicated on not simply directly controlled cargoes but also those handled by their alliance partners. This is especially true in terminals in the developing world where individual lines seldom provide the required critical mass to justify terminal investment. Any far-reaching reform of the liner alliance system will call all of this into question, with terminal investment strategies highly vulnerable to revision. These developments – resulting directly from increased regulatory involvement – open the way for the common-user operator.
The past few years have favoured the development of line-owed terminals, and this has been sharply accelerated and facilitated by the windfall profits lines have made in the past two years. If the system is unpicked at the alliance level (and it seems likely that these pressures will be difficult to ignore or sidestep), then the market may well swing in favour of the common user (or partnership) structure of terminal ownership and operation. With lines set to face severe financial headwinds there will be opportunities for more broadly-based investors. The circle seems set to turn once again….
8 Potential changes in regulatory regimes and market-
