One Hundred Ports: Box terminals face earnings and cost pressure in slower market
Falling volumes and increased labour costs will pinch profit margins
Congestion has ended, removing a revenue stream just as demand slows; but costs incurred during the pandemic — particularly for labour — are now baked in
THE pandemic years have all but passed for the container terminal sector, which now finds itself facing falling volumes, lower earnings and increased costs.
In some ways, it will come as a relief to have moved on from two years of congestion, where terminals were running at full capacity and were unable to move containers smoothly in or out of their facilities.
Yet those backed-up containers were also a revenue stream that has fallen away, as has the number of containers being lifted.
Figures from Drewry show that the four-quarter rolling average growth of container ports had fallen from a high of 8.7% during the third quarter of 2021 into negative territory by the first quarter of 2023.
This has been largely due to weak demand in key markets in North America and Europe, Drewry said, with North America’s four-quarter average showing a 5.6% decline in volumes.
Europe, meanwhile, had seen a decline of 7.3% on the same basis.
Drewry’s latest forecast expects just 1% growth in port throughput in 2023. However, this hides big downgrades for North America, where volumes were estimated to have fallen 18% year to date.
“As each month passes, we have less time to catch up,” said Drewry senior ports and terminals analyst Eleanor Hadland.
“The outlook for a strong peak season is definitely not positive.”
Even in China, which had a later reopening from the pandemic than other countries, port operators are struggling to record growth in volumes.
Cosco Shipping Ports and China Merchants Port Holdings both saw contractions of 0.5% and 0.4%, respectively, during the first five months of 2023 compared to 2022.
These weaker conditions, driven by economic headwinds and geopolitical disruptions, have had a damaging impact on terminals’ earnings, which had fallen 7.4% year on year by the first quarter of 2023.
Nevertheless, terminals were able to lock in gains made on their core stevedoring activities, with indexed uplifts in annual contract prices.
“We are not expecting to see revenues retreat in full from the gains between late 2020 and the second quarter of 2022,” Hadland said.
Storage revenues had, however, returned to pre-pandemic norms as local supply chain issues were resolved.
As revenues have come down, costs have gone up, with a huge surge between 2020 and 2022.
“Personnel costs, which are typically fixed and account for the highest proportion of OpEx per unit, have increased, but we are starting to see fuel and energy costs retreat.”
Those personnel costs were baked in, however.
“Cost will never go back to pre-pandemic levels,” Hadland said.
“When you have given workers a pay rise, it is very hard to take it away. Labour costs are now locked in.”
Even a return to normal levels of productivity would not offset those increases.
Labour has become an increasingly big issue for terminal operators.
2022 saw strikes in the UK, Germany and France, while on the US west coast, contract negotiations rumbled on for more than a year, threatening to break out into full-scale action.
This may have been averted in that location, but further north in Canada, International Longshore and Warehouse Union members had since gone on strike at the time of writing, paralysing the ports of Prince Rupert and Vancouver, demonstrating the continuing relevance of labour in the terminal.
Nevertheless, terminals will use this lull in demand for their services to push ahead with digitalisation and efficiency gains in an effort to reduce costs.
For those that can afford it, there will be continued moves to automation, although the jury remains out on the benefits.
“Terminals want to reduce the workforce and handle more teus per employee,” said Hamburg Port Consulting managing director Nils Kemme.
“Some are still thinking about capacity gains, but that depends on the starting point.”
He warned that developing automated terminals was far more expensive than manual ones and that the investment case was not necessarily obvious.
Valuations of terminal assets have fallen since the end of the boom and for those terminal operators that need to raise cash, higher inflation and tighter monetary policy, leading to higher interest rates, had made capital raised through bonds less attractive.
Nevertheless, a report from Moody’s indicated that in the US, at least, ports still have healthy balance sheets and strong credit metrics that will help them through the cargo downturn.
“Even after a recent pullback in demand for goods, absolute cargo volumes will remain near 2019 levels, having been boosted by strong demand for goods during the height of the coronavirus pandemic and continued consumer spending,” said Moody’s Investor Services vice-president Moses Kopmar.
And the International Association of Ports and Harbours is also confident about the future of the sector, despite current headwinds.
“The noticeable upgrades being delivered to terminals in 2023 are a clear affirmation of the positive investment sentiment ports communicated to us during the Covid pandemic,” said IAPH managing director Patrick Verhoeven.
