Ports - There will be blood

The OOCL New Zealand is one of the biggest container ships on a regular run to New Zealand. Photo / Mark KcKeown

On Easter Sunday, Kiwi exporters witnessed a minor miracle. The 260m container ship OOCL New Zealand cruised into Auckland Harbour, the first port on her maiden voyage to these waters. Capable of carrying 4578 containers, she is the largest freighter conducting regular services to New Zealand.

For Auckland exporters the giant vessel was a welcome sight, as she was in the ports of Lyttelton, Wellington, Napier and Tauranga last week.

Shipping companies have drastically slashed services to this country as they try to stem crippling losses - estimated at more than US$20 billion ($28 billion) globally last year.

The shortage of space means exporters are having to book up to eight weeks in advance and orders are being bumped and left on the dock during the peak season, which ends next month. Goods are also taking a day or two longer to reach their destination thanks to a shipping company go-slow policy aimed at saving fuel, reducing the shelf life of perishable goods.

So the introduction of OOCL New Zealand's huge capacity is a boon. But she is also a troubling sign of changes in the industry that pose a direct threat to this trading nation's ability to earn its way in international markets.

Exporters' fates, and therefore New Zealand's, are tied to the shipping trade, say port bosses. The unacceptable fact, they say, is that trade is being constrained to drive up container occupancy in an attempt to make the route profitable.

Another solution to shipping line solvency is bigger vessels. And ships are getting much bigger than OOCL New Zealand.

In December the 5042-container-capable Maersk Detroit docked in Auckland, the port's largest container ship yet. Sixteen vessels with a capacity of more than 5000 containers apiece make their maiden voyages this month, reports the Journal of Commerce Online. The upsizing is driven by economics - bigger ships mean more cargo per vessel and a better price per unit to shipping companies that are haemorrhaging red ink.

Peter Casey, chief executive at Ports of Auckland's owner Auckland Regional Holdings, says it will not be many years before ships such as the monster 11,000-plus-container Emma Maersk are a common sight in the Tasman and the Pacific.

Yet most New Zealand ports can't handle such behemoths. Just two years ago the average size ship was 1500-1800 containers. Several billion dollars needs to be spent to bring the national port infrastructure up to scratch.

That's not a bill the nation, let alone the individual ports, can afford. Ports are capital intensive entities requiring huge investment. And yet, port executives concede, that money currently earns a return that is less than the risk-free rate.

According to an Auckland Regional Holdings report, in 2008 New Zealand's 11 container ports produced a return on equity of just 5.1 per cent.

"We will get to the situation where ports start losing money, I have no doubt about that," says Peter Davie, Lyttelton Port of Christchurch chief executive.

But if they don't spend the money, warns Auckland's Casey, shipping companies will cease direct services to New Zealand, relegating Godzone to a shipping subsidiary of Australia. Maersk chief executive Nils Anderson intimated in a recent interview that making New Zealand a spoke on the Australian hub was an option.

In a sector rife with commercial conflict, there is unanimity about the very real threat of New Zealand's relegation. Ports must change if the country is to grow. And while the ports themselves are locally owned, the issue is one of national importance.

Port Taranaki spent about $25 million deepening its harbour. It wanted to bid for the right to handle Pike River coal exports, and a substantial piece of Fonterra's action. But the large investment, ultimately funded by New Plymouth ratepayers, was in vain.

Pike River accepted Lyttelton's blandishments instead, and Fonterra took its toys to Napier and Tauranga. "That was driven by the tightening [shipping] capacity," explains Nigel Jones, Fonterra general manager of strategy, trade and operations. "We were encountering increasing problems around service delivery to our customers and it was adding a lot of cost. We had to look at change."

As a small port operator in Bluff, Southport chief executive Mark O'Connor can sympathise with Taranaki: "I'm not in a position to judge whether that was a smart use of port capital but if they didn't spend, they wouldn't have been in a position to compete for the coal."

O'Connor offers New Plymouth ratepayers a faint glimmer of hope: "They might still well benefit from that capital expenditure in the next one to two decades."

But Greg Steed, chairman of the Shippers Council, a body representing large commercial exporters, says the Taranaki fiasco encapsulates the industry's dilemma.

The country cannot afford to upgrade more than three or four of its ports at most, he says. "The worst thing would be if all four [Auckland, Tauranga, Lyttelton and Otago] try to spend the money at the same time because there will be a loser in that," Steed warns. "It's the New Plymouth scenario." But on a grand scale.

Choices have to be made now, he insists, and that means consolidation.

"We've been advocating that for the last decade," O'Connor notes ruefully, "and the concept has been around for at least a couple of decades." Auckland has wooed Tauranga, adds Casey, only to be rebuffed.

One benefit of Fonterra's decision to abandon Taranaki after its expenditure, according to one insider, was to reignite efforts to combine the Lyttelton and Otago businesses. This source says both ports saw their vulnerability to decisions by exporters - in turn affected by shipping constraints - as a reason to reconsider courtship. In other words, united we reluctantly stand. Lyttelton's Davie won't comment on the outcome but an announcement is due soon.

Davie's counterparts aren't prepared to predict success either but if the ports do merge, one piece of the puzzle will be in place. The logical endplay is the consummation of Tauranga and Auckland's dalliance.

Consolidation is essential, Casey argues, because it will would increase ports' bargaining power with shipping companies, ensure investment is prudent and timely and provide better returns on capital because of less duplication of services.

Hold on, urges Fonterra's Jones. In his opinion, the ports are putting "the cart before the horse".

"The thing New Zealand needs is increased productivity from its end-to-end supply chain and the ports are only one cog in a very big supply chain," Jones argues.

"They don't understand what is required and how those higher levels of productivity are going to be delivered to the wider supply chain," he says of people advocating port consolidation and immediate spending decisions. "Until we know that, we don't know what structures, ownerships and infrastructure you need in the port sector."

O'Connor begs to differ: "If you rationalise ports, that will lead to more consistent flows of cargo traffic which would encourage efficient transport solutions - where to invest in your roads and rail or whether coastal shipping should be the answer - that's part of Nigel Jones' issue."

Port of Greymouth's days as a viable commercial entity are history. There's still good fishing there, by all accounts, but Greymouth's a goner and may not be the only casualty as ports jostle for pecking-order advantage in preparation for the post-consolidation era.

Casey talks inclusively of every port in New Zealand playing its own special role in the new business environment. But as the biggest player, Ports of Auckland can get away with spouting platitudes; its commercial viability is unquestioned when other players concede there will be blood - either theirs or others. "There but for the grace of God" is the overwhelming sentiment.

"I can see Westport, once the [Holcim] cement works pulls out of there, which it's likely to do, shutting down as an operating port," predicts Lyttelton's Davie, in reference to Holcim plans to invest in new plant.

"You're getting this slow attrition."

As for Wellington's CentrePort, once New Zealand's second-biggest by container volume, a rapid decline to feeder port status beckons - a mere spoke on the hubs of bigger ports.

"They've been passed by Tauranga, Napier, ourselves and Otago," Davie says, a verdict supported by the Shippers Council.

"CentrePort will say they're big-ship-capable but ..." Steed comments, his words tailing off. "Let's reduce the number of ports spending money and make sure it's the right ones from the country's perspective."

"I think in a good year," Davie adds, "Timaru did more than Wellington did."

Timaru, with its reliance on container traffic, faces its own challenges. When asked which small ports will be harmed by consolidation, O'Connor hesitates, then says: "There's an obvious party that lies between Otago and Lyttelton."

Unlike Timaru, Southport has large regional bulk cargo requirements from the aluminium smelter and the forestry, fertiliser and petroleum sectors, products that O'Connor calls his butter and jam. "Our container activity is the cream on top of that."

That cream may go, although he contends that there are more opportunities for ports like Southport and Nelson to exploit a hub-and-spoke-type infrastructure.

Bulk cargo, for obvious transport reasons, tends to be localised to the area in which it is generated; as long as there's a refinery in Whangarei and an oil and gas sector in New Plymouth, those ports will survive, if not thrive.

In Southland, there are plans for projects to convert coal to urea, briquettes and diesel.

Ports without natural bulk cargo requirements compete for the container market and, in the future supersized cargo world, Timaru will struggle.

"Some of the ports in New Zealand have to put their hands up and say, 'There's no way we can spend the money to accommodate ships bigger than we get now,"' is Steed's pragmatic verdict. "They can't be primary ports, they'll be secondary ones. They'll have to cede some of their cargo to another port.

"Some of them are realistic about that, Nelson, for instance. Others think that if they can get the right money ..." he lets the thought trail.

If ports had returned on their capital at 10 per cent, we would have got another $120 million, equivalent to about 30 per cent of local authorities' rates," says Auckland's Casey.

Lyttelton's Davie: "If [ports] had to pay a fair rate of dividend they'd be out of business. You've got this transfer of wealth where the ratepayers are subsidising the ports because the ports aren't giving a return on their capital."

You can't accuse these executives of soft-soaping the situation. The question is, how can ports not make a buck, even given the capital requirements? And, what the hell's happening with shipping companies? Losses of more than US$20 billion? Is Maersk running a Merrill Lynch hedge fund?

On the first question, look to Australia, where ports get $400 to handle a container to our $260, testament to the fierce competition for container trade among the 11 viable New Zealand ports.

In Australia they've got six container ports, controlled by only two stevedoring companies, five times the population and an economy that dwarfs ours. The Australian ports are miles apart, so ships can't pick and choose as they can here.

We are also poor in terms of capital, land and berthing but there's plenty of choice of port and mode of transport. More muscle is needed to better negotiate with the shipping lines, but that will not address the catastrophic losses those companies are suffering. If they can't make money, they won't come.

In the pre-crisis boom, shipping companies were caught short by demand, and new orders spiked just as the global financial crisis hit. An average year saw up to 30 million dead weight tonnes (DWT) of new shipping capacity; last year double that came on stream at a time of unprecedented collapse.

"Shipping companies are to some extent their own worst enemy," comments Davie. "When there's overcapacity they take the view that they need to keep filling their ships, so they'll drop their rates."

He points to container rates for an order to Fiji at a cost to the exporter of about US$1000 a container. Five years ago the rate was US$5000.

New shipping is ordered years in advance and this year 120 million DWT is expected. In 2011 more than 90 million DWT is due. Oversupply amid falling demand explains why shipping companies are pulling out all the stops to stay away from the precipice.

New Zealand is tiny and in no position to negotiate. We handle 20,000 container per hectare per year; Hong Kong does 70,000. Casey points to the massive investment in Australian berthing and container land at Sydney, Melbourne and Brisbane. Our investment is minimal. We risk getting left behind, he says. What to do?

Steven Joyce, the minister responsible for ports, has made it clear that the Government will play no role in determining the sector's future shape.

"At the moment the Government's saying the market will decide," Steed observes. "We're not so sure that's the right answer. There's probably a need for Government to take more of a view rather than simply relying on the market to decide.

"They need to get more involved than they have been."

But there is no need for Government expenditure. It has already blown a small fortune supporting the national airline and railway, Steed notes.

Casey says there is now an encouraging consensus among port owners that they face a huge challenge shifting to a new port infrastructure model. Fear of Australian dominance is palpable in every conversation with the stakeholders.

Adding one day to a shipment's journey can have a 3 per cent impact on market share, Casey says, citing research. Hubbing out of Australia could add an estimated four days to the supply chain, a catastrophe for exporters.

Everybody talks of the requirement for decisions to be made in the national interest. But the phrase "New Zealand Inc" is uttered when justifying positions that plainly benefit the individual entity.

For instance, a consolidated port industry would be better able to impose additional costs on exporters, a practice that would be difficult to justify in the name of New Zealand Inc, and perhaps explains Fonterra's Jones' reluctance to endorse immediate action.

But then Jones can also confuse his company allegiance with patriotism: "There isn't an understanding, at a pan-Fonterra - sorry, pan-New Zealand - level, of what is required of infrastructure spend."

But Jones is surely right to question an approach to reform of port services that ignores the "big picture" perspective, a point picked up by Southport's O'Connor.

"Part of the problem with the model is the ports are still owned by local authorities and a number of them treat their port activity as regional development," O'Connor asserts. "Until the industry moves to a pure commercial model, you're not going to get those motivations driving the business fully."

But consolidation and rationalisation is inevitable and, as Lyttelton's Davie points out, Darwin's theory of survival of the fittest has been in evidence for more than 40 years. "In 1965, New Zealand had 135 ports because every little nook and cranny in the coastline was a port. Now we've got somewhere between 13 and 15 commercial ports."

It's still too many. The decisions made in the next few years will decide who lives and who dies.

Nick Smith is an Auckland business journalist.