Not Boxed-Out

Developments and opportunities in the container terminal business, from automation to Altasia to more Asian

Editor’s note: Ton van den Bosch is a partner in Singapore’s global law firm Clyde & Co. The Singapore office of Clyde operates as a hub, supporting clients with diverse business interests, including in key sectors such as transportation, terminals, ports, logistics, commodities, insurance, energy and infrastructure in emerging and frontier markets in Africa, the Gulf and in Asia. Clyde & Co. has the world’s largest maritime team and has done port related work in more than 60 countries around the world.

ton-The container shipping sector enjoyed an unprecedented boom during the pandemic, but tariffs have come down again and seem to have reached pre-COVID rates. Shipping volumes and port utilisation rates will probably continue to decline this year due to a worsening economic and geopolitical situation, with less port congestion cutting into the new revenue that terminal operators have reaped from excess demurrage and detention charges. This year sees a difficult combination of lower demand and higher costs for equipment, fuel, electricity, and labour. To top it all off, the container shipping industry is bracing itself for an unprecedented flood of new container ships about to enter service and the current orderbook continues to grow.

Despite these headwinds, our firm is bullish on the prospects for the container terminals business. In this article, we will discuss three reasons why we believe the container terminal business will not be boxed-out (as basketball players say), but instead may offer excellent returns.

Terminal Automation

First of all: automation. Since the development of the first automated container gate thirty years ago, there are now approximately forty partially or fully automated terminals in the world. Examples include VICT in Melbourne, ECT in Rotterdam and Singapore's new Tuas Mega Port. Automation in container terminals often includes automated quay cranes and driverless vehicles and can also include drones and automatic truck identification. Other initiatives to enhance the efficiency of terminal operations for example include DP World’s intelligent high bay storage system BOXBAY as well as Katoen Natie’s Twintag geo mapping technology.

Vertical integration of intermodal transport, ports and logistics is a widespread phenomenon around the world, and we believe this is the second reason to be optimistic about the industry as liners and terminal operators strive to become integrated logistics providers. The main drivers for the vertical integration are the ambition to provide complete logistics solutions, to increase efficiencies, reduce costs and to improve quality control throughout the supply chain. Part of this ongoing trend is the ongoing development of dry ports around the world. A dry port is a secure inland location for handling, temporary storage, inspection and customs clearance of freight and dry ports are also sometimes referred to as inland container depots (ICDs). There are many advantages in handling shipments closer to the end customer and in avoiding heavy congestion at some seaports. Recent examples of vertical integration include the acquisition by Maersk of LF Logistics and the takeover by PSA of three inland container terminals in Riyadh and Dammam in the Kingdom of Saudi Arabia.

Frontier Markets

The last and prime reason for our optimism is the rise of emerging and frontier markets. The ports business is now very much an emerging market story with two-thirds of the global container throughput being handled in ports in emerging and frontier markets. We are very optimistic about countries with fast growing populations such as for example the Philippines, Bangladesh, Tanzania, DR Congo and Egypt. In these markets, much inbound cargo is for basic consumption and this means that volumes can effectively only go up as the local population continues to grow. We also believe there are good port investment opportunities in countries such as Turkey, Mexico, Morocco, Honduras and other countries that benefit from “near shoring”, so from the relocation of manufacturing and supply chains closer to the markets for the end products.

The relocation of manufacturing away from China to other countries in East Asia, South Asia and Southeast Asia will lead to shifting supply chains and accordingly, to more volume in ports in countries collectively referred to as "Altasia" by The Economist a few weeks ago. These economies for example include South Korea, India, the Philippines, Indonesia, Malaysia, Thailand, Bangladesh and Vietnam.

Nearly sixty percent of Asia’s exports flow within the region and a whopping twenty-five percent of containerized cargo trades within Asia. The IMF expects the largest economies in South-East Asia to be among the fastest growing economies and this (growing) intra-Asian trade means more demand for logistics, container ships and container terminals.

Despite some headwinds for the container shipping sector, we see the container terminal business in very positive shape. Our industry offers long-term and outsized returns to companies willing to seize the opportunity in container terminals, particularly if this is conducted on a portfolio basis.