Amid the horror stories of failing Chinese shipyards and shipping lines, one area of maritime success has largely been overlooked. Port operators, which manage container ports and handle storage facilities, are doing well and are increasingly looking to expand overseas.
In a report issued this week, analysts at Barclays led by Jon Windham said they expect to see this trend continuing in 2014, driven partly by China’s broader “going out” policy and a slowdown in activity at Chinese ports.
Should this pan out, then dominant players COSCO Pacific, a unit of a major Chinese shipping line, and China Merchants Holdings International could secure their transition from being large players with potential to sitting at the top table of international port operators.
Going global marks a significant shift from the original focus of these firms on domestic operations. As China opened up to the world and began exporting it needed the infrastructure to ship goods abroad. Vast facilities opened to connect manufacturing hubs on the east coast and across Guangdong province to the world.
Booming trade has provided brisk business at these ports. But China can no longer be counted on to generate huge cash flows for the firms. Global trade and manufacturing patterns are changing, meaning that international expansion is increasingly necessary if they are to maintain growth.
“China’s share of low-end manufactured goods trade is starting to, at worst, decline and, at best, stagnate after rapidly increasing for 15 years. Low value, but bulky goods are the life blood of container shipping and China is losing market share of US imports in apparel, shoes and furniture,” noted the Barclays report. This means fewer vessels docking at Chinese ports.
Executives at the firms are therefore looking for where the action is, or is increasingly going to be. They have racked up millions of air miles flying to South East Asia and Africa. “ASEAN and African ports will be major targets because of booming economies and growing inter-Asian trade,” said Lawrence Li, senior transport analyst at UOB Kay Hian in Shanghai.
Europe potentially offers good deals given lower asset prices in the tough economic climate there at the moment, coupled with tentative signs of a recovery in the world’s largest trading bloc. However, as Li noted, Chinese firms are mostly limited to minor investments.
COSCO Pacific was one of the first Chinese firms to set sail for foreign shores. Between 2003 and 2007, it snapped up minority stakes in ports in Belgium’s Antwerp, Egypt’s Suez and Singapore – all important regional shipping hubs. In 2009, it took control of half of Piraeus Port in Greece, and last year announced plans to invest around US$300 million to increase capacity there.
China Merchants hasn’t been idle either, pumping in about US$2 billion into ports as far away as Nigeria, Sri Lanka and Djibouti, as well as investing in French-owned Terminal Link in early 2013. It is also in talks to build a port Tanzania.
“They are trying to transform into global port operators,” said Li. Yet despite these deals, Chinese port operators are still not considered by experts to rank among the major hitters, such as APM Terminals and DP World. Drewry, a London-based maritime consultancy, says they can close this gap through international deals.
In a report published in 2013, Drewry noted the rise of COSCO Pacific and China Merchants. “Port authorities looking to tender container terminal management concessions now have two Chinese players with overseas aspirations to assess.”
They certainly have the wind in their sales. Enviable ties to Chinese state banks and strong cash flow from domestic port operations have helped fuel their war chests. COSCO Pacific is currently packing an extra US$1.2 billion following an asset sale last year, and analysts say the company is likely to spend some of that on more terminal acquisitions in the coming years.
It could pick up some bargains. “China’s move to invest internationally coincides with deep distress in the container shipping industry,” said the Barclays report, noting that container liners are being forced to sell off non-core assets such as ports to pump cash into their main business.
Yet the challenges cannot be ignored. Making foreign deals a success, as their Chinese counterparts in other sectors can attest, will require a big effort from the terminal operators.
Li noted that one of the big obstacles to doing deals in the US and Europe is that Chinese port operators will have to negotiate with worker powerful unions, in which they have little experience. There are also foreign policy risks. China Merchants halted a port deal in Vietnam over territorial tensions with China in the South China Sea.
Protectionism is generally less of an issue. A question mark remains over whether the US would allow any large port deal, although smaller ones have been accepted. India, which is in need of big, modern-operated port facilities, remains off limits. Most other nations are welcoming.
Some initial overseas deals bode well for future. COSCO Pacific’s Piraeus port operations, analysts say, is a success. The firm has turned the port, the first to the west of the Suez Canal, into a trans-shipment hub, securing deals with the likes of Hewlett Packard and Lenovo.
The key driver behind the firms’ current expansion plans – a slowing Chinese economy and less container-heavy trade from China – is not going to change. This course has been set. Expect to see more Chinese managers at ports across much of the world.
What does remain to be seen is if COSCO Pacific and China Merchants will assume the power and reach of their biggest peers. Either way, they are keeping China’s maritime ambitions afloat.