Eight trends that may affect Australian port valuations

Australian ports have generated strong growth in returns for infrastructure investors in the past few years. There has been a focus on privatisation with long-term leases of the ports of Melbourne, Darwin, Newcastle and Botany/Kembla. While additional port privatisations in West Australia and Queensland are currently in doubt, there may be more in future – if political will changes.

Looking forward, there are several trends that can have an impact on port valuations.

POPULATION GROWTH

One of the biggest factors that will drive port revenues is Australian population growth. Increasing headcount raises GDP and demand for goods and services, which in turn leads to increased traffic through ports and increased revenues.

In August 2018, Australia’s population hit 25 million. The latest World Bank data reveal the country’s population growth rate is easily outpacing India’s, China’s, the UK’s and the US’s.

The population of the four-largest Australian cities is expected to increase by close to 50 percent in the next 15 years. According to the Australian Bureau of Statistics, at current growth rates, by 2055 Sydney and Melbourne will each be home to around 8 million residents.

Population growth should have a clear benefit in terms of revenues for Australian ports, particularly for ports where a large percentage of revenue is driven by state consumer demand, such as the Port of Melbourne. However, congestion and capacity constraints in ports will need to be addressed.

SUPPLY CHAINS

While population growth will increase traffic through Australian ports – and therefore port profitability – it will also cause increased congestion in cities. Unless congestion is carefully managed, this could compromise supply chains to and from ports.

In addition to protection and planning for road and rail corridors to ports, port upgrades and expansions, and the construction of new ports is required to meet capacity forecasts.

There are several port-related projects that are proposed, which should improve supply-chain efficiencies, including a dedicated freight rail connection at the Port of Brisbane and increasing the capacity at Melbourne’s container terminal.

Capacity and supply-chain projects have the potential to enhance value for ports. An efficient supply chain to and from the port ensures more efficient movement of goods; improving both customer service and the port’s capacity. It is, however, important that the cost-benefit analysis of major projects is rigorously considered, and major projects are properly executed. The risks associated with major projects should also be factored in to cashflows.

GOVERNMENT INTERVENTIONS

Recent proposed government interventions include the biosecurity levy and the Coastal Trading Amendments.

The proposed Biosecurity Import Levy was announced in the Federal Budget. The levy will charge A$10.02 ($7.13; €6.14) per incoming container and A$1 per tonne of non-containerised cargo, generating an estimated revenue of A$360 million for government.

While the levy does not affect port revenues, it has the potential to cause minor complications in operations. Any additional costs associated with the levy could affect port value (in a minor fashion).

The Coastal Trading Amendments were introduced into Parliament in September 2017. The amendments would remove the five-voyage minimum requirement for issuing temporary licences for foreign ships and lift restrictions on multi-port visits, to allow for greater movement in Australian waters.

The Coalition government believes these changes and others would result in greater flexibility of ship movements and assist the country in meeting its future freight needs. In 2017, the Australian Competition and Consumer Commission said that lowering barriers to foreign shipping lines to ply the domestic route would lower freight costs. The opposition Labor party, however, believes it would disadvantage Australian shippers and make it easier for crews to be replaced by low-paid foreign workers.

If the amendments do pass, there is likely to be an increase in traffic between Australian ports, increasing port revenues, particularly in regional ports.

TRADE WARS

While global trade has been strong, trade wars have the potential to disrupt current global trading partnerships.

China is facing a trade war with the US and slowing growth. According to an August 2018 study by KPMG, if the US-China trade war is confined to those two countries – and restricted to currently announced measures – then the negative impact on the world economy would be kept to below 0.5 percent of global GDP. Australia’s GDP would be cut by 0.3 percent over five years, with a loss of $36 billion. However, if the trade war escalated to a 25 percent tariff on all goods traded between the US and China, both countries are expected to end up with GDP 1 percent lower, and Australia’s GDP would be cut by 0.5 percent.

Currently, there has been limited impact on Australian ports and on shipping from trade wars. If these do not escalate significantly, they may continue to have a limited impact on throughput and revenues. However, there is the potential for a significant downside risk if trade wars escalate.

OIL COSTS & CAP ON SULPHUR-MARINE FUEL

On 1 January 2020, a new cap on sulphur in marine fuel that powers the world’s largest diesel engines comes into force. Ships will be required to burn fuel with no more than 0.5 percent sulphur content outside emission-controlled areas, unless they are fitted with exhaust-gas cleaning systems known as ‘scrubbers’. The current legal limit is 3.5 percent.

Most global shipping is likely to opt for a blend of oils to comply with the 0.5 percent cap, says Angela Gillham, of Maritime Industry Australia. However, Gillham predicts blended-fuel oil probably will not be supplied to Australia because its market is considered too small. That would force operators to use automotive diesel, which is significantly more expensive. Consequently, foreign vessels that visit Australian ports will almost always refuel overseas, where prices are lower.

Most Australian Ports are landlords and it is their tenants that supply fuel to vessels via direct contracts. While port suppliers rather than landlord ports will be focused on supplying the fuel, Ports Australia policy director Ashween Sinha says that security of supply is a “legitimate concern”, given Australia’s relatively small market and the fact that visiting ships tend to be older and more highly polluting than bigger, newly built vessels. However, failure to guarantee supply is not an option.

As long as landlord ports can ensure suppliers provide low-sulphur fuel by 2020, they should not be impacted by the sulphur cap. However, the cost of the cap, combined with trade wars, may hit shippers who may, in turn, negotiate harder on port fees. This may potentially result in reductions to port revenue.

OVERCAPACITY & CONSOLIDATION IN SHIPPING

There are several other trends affecting the shipping industry that may, in turn, affect Australian ports. Overcapacity and shipping-line consolidation have been under way for several years.

Consolidation results in larger shipping lines, which have greater bargaining power. However, this is more important for international ports than Australian ones, because a large amount of trade into Australian ports relates to the relevant state economy and, in addition, most Australian ports face relatively little competition. Which means the bargaining power of large international shippers is more constrained.

Australian ports are less subject to competition than international ports, and therefore have greater bargaining power relative to large international shippers, meaning the impact on valuations may be limited.

MEGASHIPS

To improve shipping profitability, there has been an increase in megaships, or ships at or above 8,000 TEU. According to Travis Brooks-Garrett, while carriers will experience productivity benefits from megaships, ports will not.

For a start, not all ports will be able to accept megaships. While Sydney, Brisbane and the Port of Tauranga in New Zealand have the capacity, these ships could not currently go up the Yarra River to Port of Melbourne. According to Shipping Australia, there is some risk that shipping lines may consider bypassing Melbourne for Adelaide or Sydney and use rail, or a smaller ship feeder service (possibly from New Zealand) to make the connection.

However, others do not consider this a significant risk for Port of Melbourne, because most trade into Port of Melbourne relates to the Victorian economy and there is the potential for berthing larger ships on the edge of the Yarra. For example, Melbourne’s ICTSI-operated Victoria International Container Terminal handled the 8,063 TEU OOCL Seoul in August 2018, the first call of the enlarged joint Asia-Australia service.

While some ports can cater for megaships, Brookes-Garrett says that megaships can increase port costs through:

• Increased time spent in port;
• Increased container handling costs;
• Larger yards and cranes required to handle peak loads;
• Higher staffing required for peak loads;
• Potential volume spikes, creating supply chain issues, including inventory management issues and potential dumping of cargo; and
• Reduction in frequency of services, which would affect Just in Time supply chains and could reduce export competitiveness.

The valuation impact depends on the specific port. However, it is expected that for most ports the impact of megaships will be increased costs. At the same time, it is not clear if the megaships will provide increased revenues. For ports that need to cater for megaships and which require significant new infrastructure spend, costs could be high, and benefits may be limited.

NEW TECHNOLOGIES

In our view, it is likely that overseas ports may be early adopters of many technologies, with their Australian counterparts adopting later once technology is proven. This is because Australian ports are less subject to extreme competition and complex vessels routes.

In our view, Australian ports will only adopt new technologies if they improve returns, therefore any technologies ports adopt are likely to improve value. However, cybersecurity is likely to become an increasing risk and may result in additional costs. A long-term trend away from coal and hydro carbon energies could affect some Australian ports.

EXPECT CONTINUED CHANGE

Australian ports have experienced tremendous change over the past few years and the trend is expected to continue. We believe population growth will benefit most Australian ports, although some ports may suffer because of declining demand for coal and other hydrocarbon energies.  Ports that are at the forefront of improving supply chains and effectively implemented new technologies are likely to yield a significant growth in returns. We consider that expected trade war risks and shipping industry trends such as consolidation and megaships, as well as fuel costs will moderate growth in returns.   n