Who will buy this wonderful morning?
Such a sky you never did see
Who will tie it up with a ribbon?
And put it in a box [terminal] for me?
Who will buy? It is a refrain from a song that gets stuck in one’s brain and keeps playing over and over. In the shipping industry’s uncertain world of mergers and bankruptcies, the refrain, Who will buy? Who will buy? plays on the mind of all involved in the global supply chain.
With apologies to songwriter Lionel Bart and the play Oliver, the question is especially acute for terminal operators.
It seems everything is for sale as the container shipping industry ROIs (return-on-investment) bump along the bottom like a dragging anchor that can’t catch hold.
The bankruptcy of South Korean carrier Hanjin (not to mention the near bankruptcy of fellow Korean carrier Hyundai Merchant Marine), the merger of COSCO and China Ship, the sale of Singapore’s NOL/APL to the French carrier CMA CGM and the newly-announced merger of the Japanese big three (MOL, K-Line and NYK) carriers’ container divisions in 2018, all reflect an industry in distress.
Sounds bad. But one man’s distress is another’s opportunity and for many containership operators the gem in their portfolio of assets is the terminal facilities. The trouble with terminal facilities is that the reshuffling of lines also means the reshuffling of alliances, services and ultimately ports of call.
Take for example the ensuing deals after the June CMA CGM acquisition of NOL and the Singapore carrier’s APL subsidiary. NOL was essentially Singapore’s national carrier, and indeed the biggest shareholder was Temasek at 67%, the Singapore government’s investment vehicle. Thus it was no surprise that CMA CGM and PSA Singapore Terminals announced the establishment of a terminal joint venture. The company named CMA CGM – PSA Lion terminal PTE Ltd (“CPLT”) is owned in proportions of 49% and 51% respectively, and will lease and operate four container berths in the Port of Singapore. Naturally, PSA is 100% owned by the aforementioned Temasek, so the divestiture is matched by an investment by the buyer CMA CGM.
While the move will certainly help the Port of Singapore, as indicated above, for all the winners there are losers. In this case, the principal loser from the CMA CGM transaction will be Port Klang, currently the carrier’s Southeast Asian hub, and its main operator, Westport (see chart on page 4). Around 20% of Port Klang’s throughput is CMA CGM related. But the move could become even more significant with Evergreen joining CMA CGM, COSCO and OOCL in the new version of the Ocean Alliance, scheduled to start next April.
Wheels Within Wheels
In some ways the Asian terminal scenario is wheels within wheels. In March, COSCO Pacific (terminal division of the COSCO Group) and PSA reached an agreement to move the current JV terminal operation at Paisir Panjang Phase 1 to three new berths being built at Pasir Panjang Phases 3&4 which are scheduled for completion next year. China Shipping, which was merged with COSCO, like CMA CGM also uses Port Klang as its Southeast Asian hub port, while Evergreen uses the Malaysian port of Tanjung Pelepas, located in nearby Johor Baru. The other future member of the Ocean Alliance, OOCL already calls at PSA Singapore, as the Hong Kong carrier uses the port as its Southeast Asian hub. Considering the new agreements, will the other Southeast Asian port hubs be able to retain Ocean Alliance calls in the future? The potential shifting of services in Southeast Asia with the combination of mergers and investments is really just one of dozens that are playing out throughout the global trade lane.
Over the years, the terminal operators have employed a number of strategies to keep their portfolios viable during the periods of ocean carrier volatility. In the main, this meant being ready for increasingly larger vessels and improving on and off the terminal stratagems to improve velocity. Besides the focus of the facility itself there has been a holistic approach to the terminal business. One element of this strategy is simply putting terminals in regions that are likely to have greater container trade growth rates. Emerging nations have been a target for investment: Africa, the Indian Subcontinent, Latin America and Southeast Asia, have all seen increased activity over the last five years.
Some terminal companies like Philippine-based ICTSI, have almost exclusively focused on emerging nations. In recent years, APM Terminals heavily invested in emerging nations, as has DP World. Other terminal operators like CMSN and COSCO have focused on developing terminals at the source, China being the predominate source of containerized goods.
There has also been a sort of rebound into mature containerized markets. The economic performance in emerging markets has been less than expected and this has somewhat dampened enthusiasm as risk in these markets has increased. Projects have slowed or been delayed and a wait and see attitude has taken hold in some regions, although there are still plenty of exceptions.
But mature markets like Canada, with DP World investment in Vancouver and Rodney Terminal in St. John and Gulftainer’s (GT) investment in Port Canaveral, are part of that movement to the consumer side of the container handling equation. In Europe APM finished construction on the construction of Maasvlakte II in the Netherlands. The terminal giant also is investing $70 million in Port Elizabeth, New Jersey.
Mexico, which fits in the gray area between mature and developing, also has seen considerable recent investment because of its access to the U.S. market and possessing Pacific and Gulf ports. For example, ICTSI acquired 100% ownership of Terminal Maritima de Tuxpan (TMT in Veracruz). APM has a $900 million investment in Lazaro Cardenas TEC2, located on the Pacific Coast.
The expansion of the Panama Canal has contributed to a new look at the Gulf of Mexico and Central American and Caribbean ports. Carriers are looking at new hubs that can service not only the U.S. Gulf region but at relay points for the entire east coast of South America. Added to this is the possibility of within a decade Cuba becoming a major player in the Gulf’s trade lanes for both import and export freight.
Who Will Buy?
About a decade ago marine terminals were the target of investors from all sectors of the world of financial funding: institutional, private and venture capital. Funds with names like OTTP (Ontario Teachers’ Pension Plan) Macquarie Group, GIP (Global Infrastructure Partners) Highstar, Oaktree Capital, Hilco, Redwood Capital Investments, Goldman Sachs, SteelRiver, Nautilus and more recently Lonsdale Capital and QIC are just part of a long list of investors in marine terminals. The reasons for the investment vary but generally the investment was deemed low risk and fulfilled the needs of the infrastructure fund portfolio. After all, at the end of the day, marine terminals are property on the water, which has an intrinsic value. Further the ROI on the terminal side of the business looked far more secure than the ocean carrier side of the equation.
But All That is Changing
Then there is Hanjin. The Hanjin bankruptcy has thrown a major monkey wrench into an already messy time for the industry. To say that the bankruptcy has made marine industry investors nervous would be a gross understatement. From simply the Hanjin bankruptcy perspective, there is still a great deal of speculation on how the terminals will be handled.
COSCO would dearly like to buy Hanjin’s terminal assets in Long Beach (the company also has two facilities in South Korea). The same can be said for the newly resurrected Hyundai Merchant Marine.
But Hanjin’s terminal assets might the beginning of an industry wide sell off as the marine terminal industry reshuffles.
The question is how long is long enough for a fund to hold onto a terminal? Is it better to move off the asset now, before the carrier realignments force the issue, or wait out the market and enjoy the rebound? Big name brands like Ports America and GCT are said to be on the block because their fund investors are ready to move off the sector.
Will it happen? Difficult to say, but as the ocean carrier realignment marches forward, more terminal owners are going to be whistling that tune, “Who will buy?” in hopes of an answer.