Drewry Shipping Consultants, the world’s leading maritime consultancy, has published its latest port sector report, “Annual Review of Global Container Terminal Operators 2009.”
2008 was a turning point for the container terminal operators as the final quarter of the year saw unprecedented volume declines set to worsen in 2009… leaving the industry facing its toughest trading conditions since the inception of containerisation in the 1960s.
On a number of key measures, 2008 represented continuity with previous years as far as the global terminal operators were concerned. The top five players in the global league table remained the same, and their market shares stayed close to 2007 levels.
Top 5 global terminal operators’ equity based throughput, 2008
Rank Company Equity throughput (million teu) Percentage share of global port throughput
1 PSA 50.4 9.6%
2 HPH 34.4 6.6%
3 APMT 33.8 6.5%
4 DPW 32.9 6.3%
5 Cosco 11.1 2.1%
The contraction in global container port throughput in 2009 is likely to be in excess of 10%. In 2010, Drewry expects to see little or no growth, and anticipates that it will be 2011 before a modest recovery in demand growth will return... and 2012-2013 before most regions see their throughput regain their 2008 levels.
Limited organic growth
Despite this turmoil, the relative importance of global container terminal operators as reflected by global capacity and throughput is unlikely to diminish significantly. However, the global container terminal operators’ scope to achieve organic throughput growth will inevitably be limited by the recession and its impact on world GDP growth over the next few years. The financial crisis may also make it more difficult to secure funding for new projects, or achieve growth through acquisition. The viability of many planned projects may also be put into question by forecast reductions in container throughput growth levels.
Projects deferred as caution seeps in
The analysis contained in Drewry’s Report is vital reading for operators and investors, including port authorities, stevedores, terminal operators, container shipping lines, financial institutions, market analysts and port equipment suppliers.
Most of the leading global container terminal operators are forecast to add capacity to their networks by 2014. However, this report makes clear that the changed economic situation means they have adopted a more cautious assessment of future prospects. Neil Davidson, Drewry’s Director - Ports comments, “Capacity expansion projects are being shelved, deferred or cancelled on an unprecedented scale, although there is a lack of transparency about global operator plans which makes accurate assessment of capacity development plans very difficult.”
Shrinking trades relieve pressure on capacity
As recently as a year ago, there were still widespread concerns over a growing shortage of capacity in the container terminal sector relative to demand, causing periodic supply chain bottlenecks. Now, container terminal capacity will come under much less pressure over the next few years as the world’s container trades shrink, or at least grow much more slowly than originally forecast. Utilisation levels will fall significantly in 2009 and 2010, even with the scaled back capacity plans. By 2014, average utilisation levels at the world’s container terminals are expected to be no more than their 2008 level, i.e. around 70-75%. By comparison, in last year’s pre-recession report, it appeared likely that by 2013 average utilisation would have reached close to 90%.
The global economic crisis and the woes of the liner shipping industry in particular may generate M&A activity. Neil Davidson comments again: “The general economic slowdown may well result in some investors having to sell off terminal interests and this may create opportunities for those global terminal operators and financial investors with ready access to the necessary funds. The most likely terminal portfolios which may become available are in Drewry’s view those owned by shipping lines. With all container lines under severe financial pressure – and some bankruptcies expected – the sale of some terminal assets owned by carriers in the near future seems likely.”
Of key interest in any M&A activity will be the valuation of port and terminal assets. In the peak period of demand growth and interest in acquiring terminals during 2005-2007, port companies were being valued (and paid for) at EBITDA multiples in excess of 20 times. With the crash in demand and the credit crunch, these days are over, at least for the time being. Anecdotal evidence suggest that multiples of around 8-12 times EBITDA are the new benchmark, but there have yet to be any deals go through to cement these new levels in the market.
The other remaining way to acquire port businesses (or at least a share of them) is by buying shares in companies quoted on the stock market (e.g. HHLA, DP World and ICTSI). The share prices of all of these companies have dropped markedly, dragged down by the general malaise of the stock market. However, this tends to overlook the earning power and resilience of these companies and suggests that they are undervalued. This may well persuade some investors to acquire stakes in the near future, in the expectation that there will be a significant recovery of the share price over the next few years.
The impact of the global economic crisis is reflected to some extent in the financial performance of the global terminal operators. Earnings were down for a number of companies and the rate of turnover and profit increase compared to 2007 was much lower than in the previous 12 months. However, in 2008, all of the global container terminal operators for which data is available made a positive EBITDA/net profit. Given the sharp contraction in container volumes in 2009, a much weaker financial performance can be expected. However, Drewry notes that whilst absolute profit levels will inevitably be down in 2009, many international terminal operators are likely to still be able to maintain a reasonably strong EBITDA margin in percentage terms. Neil Davidson notes “This will be a remarkable achievement in the worst year the industry will have ever experienced.”