www.drewry.co.uk

Global Trends and their impact on the

Port Sector

June 2016

Aden Wong

Senior Consultant – Ports & Terminals

2 www.drewry.co.uk

About Drewry

From our origins in 1970 London to a 21st century maritime and shipping

consultancy, Drewry has established itself as one of the most widely used and

respected sources of impartial market insight and industry analysis. This in-

depth understanding and objectivity provides our clients with the actionable

advice and recommendations they need to achieve their ambitions and stay

ahead of the market.

We provide our services through four business units: Drewry Maritime

Advisors supporting the needs of the industry; Drewry Supply Chain Advisors

providing seafreight procurement support to retailers and manufacturers;

Drewry Maritime Research publishing market-leading research on every key

maritime sector; and Drewry Maritime Equity Research delivering an

Investment Research Service on listed companies operating in the industry.

Drewry is a leading international provider of research and consulting

services to the maritime and shipping industry with unrivalled

experience and expertise across all market sectors from containers and

ports to tankers and dry bulk.

Aden Wong

Senior Consultant

T: +65 6220 9890

M: +65 9665 1926

E: aden@drewry.co.uk

SPEAKER’S CONTACT DETAILS

3 www.drewry.co.uk

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Part 1

Global Trends and Outlook

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0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

1Q

20

10

2Q

20

10

3Q

20

10

4Q

20

10

1Q

20

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2Q

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3Q

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4Q

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1Q

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2Q

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3Q

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12

4Q

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1Q

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2Q

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3Q

20

13

4Q

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13

1Q

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14

2Q

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3Q

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14

4Q

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1Q

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15

2Q

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3Q

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1Q

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2Q

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3Q

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4Q

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1Q

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2Q

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3Q

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4Q

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17

Glo

bal

Ave

rage

Po

rt V

olu

me

Gro

wth

Slowdown in Global Container Trade

Annualize

d Growth

in 2010

14.4%

Annualized

Growth in

2016

3.0%

After posting a minor growth of 1.7% for 2015, global port volumes grew by 3.0% last year. However, the

overall downtrend has persisted as factors such as sluggish global growth and saturation in container

penetration continue to weigh on growth in port volumes, while undercurrents like the changing nature of

China’s economy and rapidly ageing in wealthy countries transform the construct of world container trade.

Sluggish Global

Economic Growth

Saturation in

Container

Penetration

Near-Shoring &

On-Shoring

Miniaturization of

Goods

Demographic

(Expenditure)

Changes

Changing Nature

of China’s

Economy

Source: Drewry Maritime Research

5 www.drewry.co.uk

Severe Decline in Freight Rates

Unit rates for the East-West container market has fallen by about 34% since the beginning of 2013, with 13

of 16 quarters registering a negative growth. Global rates have trended similarly, as shipping lines continue

to battle declining revenue per teu with cost control measures. Excess capacity remains a major issue, one

which will continue to suppress freight rates as market share retention strategies prevail in the industry.

Historical Estimated Average Unit Rate for E-W Container Market

Source: Drewry Maritime Research

34% Decrease in Rates within 4 Years

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

$-

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

USD per TEU % Change YoY

6 www.drewry.co.uk

Consolidation within Container Shipping

Amid unprecedented struggles, the container shipping industry has undergone a major transformation in

the past year: High profile mergers and an alliance restructuring that would result in 3 main global alliances

with at most 13 carriers by mid-2017. This consolidation between lines amid downward pressures in freight

rates largely points to an increasingly difficult operating environment for ports.

Shipping Line Alliance

Maersk 2M

MSC

CMA CGM

Ocean Three China Shipping

UASC

NYK

G6 Alliance

OOCL

Hapag Lloyd

APL

MOL

HMM

Cosco

CKYHE Alliance

K Line

Yang Ming

Hanjin

Evergreen

Shipping Line Alliance

Maersk (Hamburg

Sud)

2M MSC

HMM

CMA CGM (APL)

Ocean Alliance

UASC

Cosco

Evergreen

OOCL

Hapag-Lloyd

THE Alliance

MOL

NYK

K Line

Yang Ming

Previous Alliance Structure Post April 2017 Alliance Structure

2018: MOL, NYK and K Line to

merge as one commercial entity.

2017: UASC merged with

Hapag Lloyd, to be finalised in

2Q.

2016: CSCL merges with Cosco

Group. CMA CGM acquired

APL.

2017: Maersk acquired

Hamburg Sud, to be finalised

end of year.

2016: Hanjin went under.

7 www.drewry.co.uk

Larger Vessels

The prevalent adoption of cost leadership strategy within the container shipping industry have led to a rapid

escalation of average vessel sizes since 2010. While this has brought economies of scale to carriers when

certain utilizations are met, the phenomenon may have introduced inefficiencies in the supply chain. Ports

are forced to persistently upgrade their infrastructure and to operate with lower returns and higher

productivity pressures.

Average Vessel Size in Global Fleet

Increased call sizes and reduced frequency.

This leads to higher productivity pressures

arising from greater peaks.

Additional CAPEX to cater for deeper

berths, stronger infrastructure and higher

capacity/productivity equipment.

Additional OPEX to cater for deeper water

alongside, higher peak resource demands.

Difficulty in resource planning and maintain

resource utilizations.

Source: Drewry Maritime Research

8 www.drewry.co.uk

Gravitation towards Direct Services

While traditional arguments for a hub and spoke transhipment model still hold, emerging factors such as

consolidation among lines/alliances and low bunker prices have lent support to a gravitation towards direct

services. This trend is further backed by improving port infrastructure and increasing gateway volumes in

traditional feeder markets.

Hub & Spoke Direct Services

Support the usage of larger vessels

Consistent with global trends in vessel

sizes

Potentially lower costs and faster

delivery times/frequencies

Simplify flow management via enhanced

focused on hubs and reduced

permutations in services

Bigger alliances / shipping lines create

more direct port pair connections

Low bunker prices and excess ship

capacity favor direct services

Traditional feeder markets are improving

port infrastructure to handle larger

vessels

Prioritized growth for previously

neglected markets Growth in gateway

volumes

Bigger alliances and

vessels could increase

the deployment of relay

transhipment and

interlining.

Global Transhipment

Incidence is likely to

remain the same

moving forward as

opposing forces

reach a balance.

9 www.drewry.co.uk

Changing Outlook

The outlook for ports is less positive than before, as global trends ensure an operating environment that is

increasingly competitive, risky and mired in slower growth. While the port sector will largely remain as a

profitable business, margins are expected to decline from “exceptional levels” enjoyed in the past decades.

Slowdown in Global

Container Trade

Past Port Sector Future Port Sector

Severe Decline in

Freight Rates

Consolidation

within Container

Shipping

Larger Vessels

Gravitation towards

Direct Shipping

High Growth Environment

Terminals are low risk assets with

high margins and steady returns

Fragmented Customer base due to

smaller shipping lines and alliances

Less pressure to upgrade

infrastructure and superstructure.

Less crowded competition space

Softer Growth– Drewry predicts

global container volume growth to

be at a modest 2.7% for the next 5

years.

Terminals are increasingly risky

assets with declining margins.

Fewer, but larger customers.

Customers enjoy higher negotiation

power?

Immense pressure to upgrade

infrastructure and superstructure,

due to increased competition and

rapidly changing customer

demands.

Crowded competition space.

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Part 2

Regional Focus: Southeast Asia & South Asia

11 www.drewry.co.uk

Outlook for Asia

Despite the tepid global outlook, several regions in the world do provide greater cause for optimism. In the

period of 2015-2020, Drewry projects growth in container volumes in Asia (inclusive of ISC) to be 2.8%,

slightly ahead of global averages. Within Asia, South Asia is expected to have the highest near term growth

of 5.0%.

2.8%

1.8%

3.0% 2.6%

5.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Asia North Asia Greater China South East Asia South Asia

Source: Drewry Maritime Research

Projected Regional Container Handling Annual Growth (2015-2020)

12 www.drewry.co.uk

Focus: Southeast Asia

Country Port Development

Indonesia

Kuala Tanjung

Kalibaru

Patimban

Makassar

Bitung

Sorong

Myanmar Thilawa

Kyaukphyu

Vietnam Lach Huyen

Thi Vai Cai Mep

Malaysia Port Klang

Tanjung Pelepas

Singapore Tuas Port

Cambodia Sihanoukville

Philippines Davao

Thailand Laem Chabang

Key Current & Future Capacity

Additions

With the exception of Singapore and Malaysia, Southeast Asia is generally behind the curve in terms of

modern port development. When coupled with untapped markets and a rising middle class, this presents an

opportunity for comparatively high growth port investments. However, investors must be cognizant of the

accompanying risks in the operating environment.

Prospects

Untapped markets provide significant

upsides for gateway ports: Eastern

Indonesia, Myanmar, Cambodia etc.

Upside for container penetration rates

Huge populations with good

demographics and emerging middle

class

Intra-ASEAN trade trending upwards

Shift in manufacturing from China to

Southeast Asia

Port infrastructure still relatively

backwards

Risks

Changes in political leadership

Ease of doing business: Processes,

delays

Greater uncertainties in operating

environment: governing policies,

supporting infrastructure development,

immature manufacturing sectors

Absence of skilled labor in certain

regions

Potential overcapacity

Forex issues

13 www.drewry.co.uk

Focus: South Asia

Country Port Development

Sri Lanka Colombo

Hambantota

India

Mundra

JNPT

Visakhapatnam

Krishnapatnam

Tuticorin

Colachel

Vizhinjam

Cochin

New Mangalore

Ennore

Bangladesh

Chittagong

Matarbari

Payra

Pakistan Gwadar

Key Current & Future Capacity Additions

IMF and the World Bank believe that South Asia presents a bright spot amid the gloomy global economic

outlook. With huge populations and rising private consumptions in its hinterlands, the region is poised to be

fastest growing in the next few years. There is also upside in production driven growth, although the risk of

overcapacity lurks in the background.

Prospects

Amid the global slowdown, IMF has

retained the 2016 GDP growth forecast

for Bangladesh and India while

downgrading most countries.

South Asia has 3 countries – India,

Pakistan and Bangladesh - in World

Bank’s top 6 fastest growing economies

in 2016-18.

Huge populations with good

demographics and emerging middle

class

Low TEU per capita (World: 0.092,

India: 0.0093, Bangladesh: 0.010)

Port infrastructure still relatively

backwards

Risks

Ease of doing business: Processes,

delays

Speed of pushing through reforms

Greater uncertainties in operating

environment: governing policies,

supporting infrastructure development

Potential overcapacity

Political and security issues

Concentration in textile industry

Source: IMF, World Bank

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Part 3

What’s next…

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Thinking Points

Terminal Operators

Port Investors Ministry of Transport / Port

Authorities

Enhance Management of

Port Development

(Capacity Planning,

Fragmentation)

Relook at

Risks, Re-

evaluate

Prospects

Strengthen the

Hinterland Advantage

Remain

Grounded on

Valuations

Dig Deeper to

Uncover Niches

JV with Key

Shipping Lines

More

Collaborative

Partnership

Higher Level of

Transparency

Continuous Process

Improvement

Source: Drewry Maritime Advisors

www.drewry.co.uk enquiries@drewry.co.uk

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