The role of ports in liner industry by FANREVEL


									The Role of Ports in the Liner Industry
By Jaime van der Eb –
The shipping of cargo by sea can be roughly divided into tramp cargo transport and liner cargo services. A crude but effective analogy would be to liken tramp cargo services with those provided by a taxi. Tramp vessels ply the seas with no particular schedule in search of cargoes, which tend to be transported one at a time and usually comprise a full load for the vessel. When a cargo is discharged a tramp vessel is then open to engage in the transport of a further cargo.

Conversely liner companies provide a regular service between specific ports which is run to a schedule rather like a bus service. The predictability of service (typically weekly), provided by the liner companies allows them via agents in port to organize many small part cargoes in advance of a vessel’s arrival. The regularity of such services is attractive to those wishing to ship relatively small cargoes who are able to rely on its predictability and utilise the service only when the need arises bearing only a proportionate cost of the total voyage freight.

Typically in order to be able to provide a regular service it is necessary for multiple vessels to be employed on a loop/string. Consequently liner services tend to be run by organisations (lines) which maintain operational control over a large number of vessels. Over time a culture of cooperation and price fixing evolved to form the symbiotic associations of conferences and alliances. The power of these has however been eroded recently as they now fall foul of antitrust legislation in many countries.

It is the role of ports in the provision of liner services with which this essay is principally concerned. Ports have always been the link between sea transport and land, providing the facilities needed for the loading and discharge of vessels and the storage of cargo before and after shipment. The business of sea transport has however changed dramatically over the centuries and as a consequence so have the services and facilities offered by ports.

Prior to the introduction of containerisation the liner industry favoured the use of tween decked general cargo vessels. These vessels had an ability to transport the whole

The Role of Ports in the Liner Industry by Jaime van der Eb –

spectrum of cargoes available i.e. bulk, break bulk and passengers. Typically these vessels were geared with derricks powered either by muscle or steam and were capable of discharging themselves. Consequently there was little need for ports to provide cargo handling facilities such as cranes. Instead ports predominantly provided labour and storage facilities in the form of stevedores and warehousing adjacent to the quay.

Due to the regular nature of liner services, lines relied heavily on independent agents, resident in ports, who would advertise the lines services and organize future cargo for collection so that cargo would be gathered well in advance of the vessel’s arrival. The design of tween decked vessels and the comparatively large number of cargoes carried per voyage in the liner trade, led to the loading and unloading of liner vessels being extremely laborious and regularly resulted in vessels spending up to 50% of there time in port. Labour was comparatively inexpensive and so long periods of cargo handling did not produce excessive expenses. Hidden costs were however generated by the opportunity cost of the vessel’s time in port, since the time spent in port reduced the number of voyages and so services that an owner could offer and profit from.

Over the past century the story of the liner companies has been one of consolidation and growth coupled with falling profit margins. As a consequence the liner trade today is dominated by a few large and powerful players, who have partly as a virtue of their size been able to diversify away from pure sea transport and now also hold significant controlling interests in land based facilities. This expansion of facilities together with the benefits of advances in information and technology, has led to a general decline in the need for independent liner agents in port. Instead the role of the agent has been brought in house once again leading to a change in the services available and the relationship between liner companies and ports.

Containerisation was first introduced by Malcolm Mclean so as to take advantage of the transport opportunities presented by the back haul voyage of oil tankers. The basic principal of containerisation was to unitise all cargo into single standardised items. Initially there were a number of different standards, however in the modern container environment containers come in two distinct flavours, the twenty foot equivalent unit


The Role of Ports in the Liner Industry by Jaime van der Eb –

(TEU) and the forty foot equivalent unit (FEU), both having a breadth of eight feet and with there being a variety of specialised types e.g. tanker, reefer containers etc.

The standard unitisation provided by containers was particularly well suited to the liner shipping trade since it allowed for individual cargoes to be packaged, loaded and discharged discretely. The uniformity of cargo allowed for it to be handled in a standardised manner, greatly reducing cargo handling times and consequently increasing the time that vessels could spend at sea engaged in profit generating voyages. Containers also helped reduce the vulnerability of cargo to damage and pilfering in transit.

With the introduction of containerisation came a dramatic change in the role of the port. Container vessels are for the most part not geared (87.9% of world container capable fleet lacks gear). As a consequence, the burden of providing cargo handling facilities was rapidly switched from the ship to shore. This quickly changed the business of port operations from a labour intensive industry to a capital intensive industry. Ports had to invest in expensive capital intensive cargo handling machinery such as gantry cranes, transtainers and straddle carriers. Ports regularly cater to the needs of both the dry bulk and liner services; however with the advent of containerisation and the need for specialised cargo handling equipment dedicated areas of ports known as container terminals have developed. In many parts of the world ports are owned by government authorities who are happy to receive revenue from the ports operations but shrink away from the notion of substantial capital investment. As a consequence investment in infrastructure has been left to port operators such as stevedoring companies. Many of whom were unable or unwilling to make this investment and as a consequence a substantial number failed to make the transition between the break bulk and containerised eras. This left many ports lacking the investment in facilities that would be required to efficiently service container vessels. As a consequence many liner companies themselves e.g. Maersk Sealand, COSCO found it necessary to enter the business of port operations. Investing the required capital so as to provide appropriate efficient container friendly facilities, allowing them to minimise port time for their expensive vessels and there fore maximise vessel usage and consequently profitability.


The Role of Ports in the Liner Industry by Jaime van der Eb –

The movement of some large liner companies into the field of port facilities via vertical acquisitions marks a sea change in the relationship between ports and the liner industry, since they can no longer be seen as entirely separate entities. Port costs and the facilities provided by the ports are a significant consideration for liner companies. By possessing a controlling hand in these factors, a liner company can fine tune its operational expenses and supply chain whilst manipulating the viability and profitability of the port to competitors. Port operations have proved to be a lucrative business with some port divisions of liner companies, making more money than traditional vessel services.

Lines are naturally attracted to operate from ports which offer the greatest volumes of cargo for a particular route; they are then able to take advantage of the economies of scale offered by the use of larger vessels. However the ability of the port to efficiently serve these vessels is also a major consideration for both owner and shipper since delays created by sub optimal cargo handling practices in ports, can seriously erode margins. Owners for example run the risk of falling behind their schedule, reducing their overall profitability and displeasing their clients with a possible loss of future trade. Shippers run the risk of substantial unexpected delays to their cargo with all that this entails for the business, along with a potential liability for demurrage claimed by owners delayed by port congestion. At the present time the Australian government predicts that its demurrage bill for 2005 could reach 500 Million Australian dollars.

As container volumes have continued to grow, so has the pressure on container terminals to increase the speed and therefore efficiency at which container handling operations are conducted. The burden for this is borne by the development of more sophisticated cargo handling facilities and more efficient in port container management practices, since the terminal itself is prone to congestion at the quay face, terminal gate and at the interchange to rail transport (if present). Yard space is also an important consideration and may in certain ports be an overriding concern. In the absence of predictable container volumes there is naturally a time lag between the emergence of demand and the provision of supply which inevitably results in congestion. It should also be noted that the improvement of port facilities is an extremely capital intensive operation and therefore one which an operator will only embark upon if they foresee a positive net present value for the project. 4

The Role of Ports in the Liner Industry by Jaime van der Eb –

At present massive increases in Chinese imports and exports have driven a dramatic increase in the need for shipping services and this is reflected in increasing volumes of container traffic. For example traffic from Asia to North America grew by 14% and Asia to Europe by 16% last year. Such dramatic changes in demand are promoting further investment in port infrastructure. One example of which, are gantry cranes which are capable of handling two containers simultaneously.

One of the biggest changes in the role of ports was determined by the versatility of containers as a multi modal unit of transport, used for road, rail and sea. As a consequence the role of the port has changed from one of providing basic pier side storage and labour to that of being a sophisticated hub for multimodal transport driven by technology. The main role of ports is now to provide services which facilitate the quick, smooth and safe transfer of containerised goods from one mode of transport to another. Reliability and minimising the time which important cargoes spend waiting for onward transport has become the main preoccupation of those responsible for container terminal operations. This again has served to reduce the total duration and cost of shipping goods and as a consequence has further widened the scope of cargo available for shipment. Reliability and predictability have become even more important in the running of ports as a substantial number of shippers and consignees now depend on liner services as part of “just in time” supply chains.

The increasing importance of port facilities and the vertical integration of container terminals into liner companies along with the decreased cost of sea transport yielded by ever increasing capacities of container vessels has led to a significant increase in competition between container terminals. The giant liner companies of today are now in a position to pick and chose between ports far more so than ever before. Consequently ports compete on a basis of service and even the position of transhipment hubs is not invulnerable. Only recently the Taiwanese container line Evergreen Marine Corp decided to move its transhipment hub from Singapore to Tanjung Pelepas in Malaysia so as to take advantage of rates which were more than 50% lower.


The Role of Ports in the Liner Industry by Jaime van der Eb –

As lateral consolidation in the liner industry promises to continue to create ever larger and more powerful liner companies (both P&O and Royal Nedlloyd are expected to merge with Maersk Sealand shortly) it would seem that the trend for greater control of port container facilities will continue as liner operators strive to protect a vital part of their operation, whilst simultaneously attempting to minimise costs. It would also seem that the days of the independent container terminals may well in the long term be numbered as no terminal will be able to resist the awesome charms of a customer who controls an ever increasing proportion of their business.

Financial times Monday 23rd May 2005 – FT World Ports: Special report Lloyds List – various issues Trade winds – various issues Lecture notes Maritime Economics 2nd Ed. - Martin Stopford Port management and operations - Patrick M. Alderton


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