Economic indicators show the global economy is working its way out of the current pandemic-induced recession. While this is good news for many, including port operators whose fortunes are reliant on the resilience of the global supply chain, the recovery will be a period of transition, cost uncertainty and risk. In fact, the maritime industry is entering an era where technological transition, climate change, shifts in government policy (including increased protectionism) make a return to ‘business as usual’ unlikely.
According to Global Port Trends 2030, Deloitte’s most recent report on the sector, the competitive position of port stakeholders and their port ecosystems will be altered significantly from today’s models.
High-value container trades, which according to the World Bank account for about 35% of maritime trade by volume and more than 60% by value, starkly illustrate the challenges ahead.
Like the bulk shipping sector, the fortunes of container shipping lines were early to recover as consumer confidence returned to post-pandemic markets. But while few observers dispute a recovery is taking place apace, that may not translate to a return of the capacity expansion rates seen from port operators in the years immediately before the pandemic.
Container terminal capacity will grow at an average rate of just over 2%
The global shipping consultancy Drewry predicts investment in container ports will slow in the post-COVID economy; the pace of expansion to fall by at least 40% during the next five years. Container terminal capacity will grow at an average rate of just over 2% during the period, it says, or by 25 million twenty foot equivalent units (TEU) a year, compared with 40 million TEU throughout the previous decade.
The reasons for this fall are multiple, including the higher cost and decreased availability of urban waterfront near the consumer base. According to Deloitte, with less suitable land available for expansion, container ports are expected to transition to investment strategies that increase the productivity of existing spaces, support operational sustainability (in response to regulatory/social demand for lower carbon footprints) and increase collaboration between ports.
As port investment strategies transition from physical expansion to the adoption of information and operational technologies, their systems will become more connected, productive and efficient. Automated cargo handling equipment and supply chain management tools, block-chain solutions and industrial applications from the Internet of Things will all interconnect.
Solutions such as those offered by robotics and intuitive 'smart' systems and components will better connect port users
The adoption of new ‘smart’ technology will be a primary facilitator for all these transitions, especially those that raise the productivity on the waterfront. Solutions such as those offered by robotics and intuitive ‘smart’ systems and components will better connect port users – potentially reducing the idle time for ships, carbon emissions and delivery times to the end user – while reducing the labour costs for operators.
But these solutions do not come without risks: every ‘connected’ device added to a port’s digital community presents a new vulnerability. As digitalisation escalates, so must the investments in cyber security and other solutions that defend a connected supply chain.
Because ports are at the centre of the maritime trade’s ecosystems – and the epicentre of local economies - they always have been considered strategic infrastructure and an attractive target for organised crime, nation state/proxies intent on disruption, or extortion. As a digital community’s capability grows, so does its inherent vulnerability and appeal as a potential target.
For operators, any incident breaching IT security raises the prospect of liabilities, including claims, loss of revenue, litigation, and harm to its reputation.
In many respects, the ‘connected’ components that support port management have been accumulating across the maritime sector for many years. They have helped industry practitioners to monitor and improve industry performance, and allowed analysts to compare ports, carriers, countries and fleets, which in turn has helped governments and maritime authorities to adjust policy.
Growing data intelligence and social demand are the drivers behind the International Maritime Organization’s emissions targets for 2030 and 2050
Growing data intelligence and social demand are the drivers behind the International Maritime Organization’s emissions targets for 2030 and 2050; these can reshape maritime trade, benefitting wider society. They also add cost and uncertainty for ports who may have to risk building infrastructure ahead of the market demand. This cost trend is expected to continue.
In order to facilitate ports’ investment in ‘smart’ technology to improve operational efficiencies, many ports will require financing from banks or investment companies. Increasingly however, investors are asking ports to evidence how they will comply with ESG requirements, in particular with regards to climate change.
Investors across the economy have stepped up pressure on companies that don’t disclose environmental risk, with the likes of Larry Fink, CEO of the world’s largest asset manager Black Rock, using his annual letter to CEOs to call for TCFD (Task Force on Climate-related Financial Disclosures) aligned reporting. Such disclosures are expected to illustrate how ports could be affected by both the physical risks from climate change, such as increased storms and sea level rise, but also how they will be affected by transition risks associated with moving to a low carbon economy, such as heightened carbon pricing.
In addition to investor pressure, regulators around the world are increasingly pushing for climate disclosures. For example, New Zealand was the first country to implement mandatory TCFD disclosures for financial institutions in 2020 and Canada’s Prime Minister Trudeau made COVID-19 bail-out loans contingent on climate disclosures.
In addition, the Financial Conduct Authority in the UK is undertaking a consultation to make TFCD disclosures mandatory for all listed companies by 2022 and for large private companies and LLPs by 2025. There is also an expectation that the US will follow suit following its re-entry to the Paris Agreement, its recommitment to net zero and the recent statement from the acting chair of the SEC (Securities and Exchange Commission) indicating the agency’s intent to update disclosure requirements on climate related risks.
Geopolitical forecasting is also notoriously difficult. Most of the world’s physical choke points for maritime trade – such as the Suez Canal – are located in or near to regions that have a history of volatility. As both shipping lines and port operators have seen recently, this can have profit implications far from any incident.
In the past 25 years, the biggest container ships afloat have quintupled in size from 5,000 to circa 25,000 TEU
Recent trends towards nationalism and the emergence of protectionist policy also pose investment challenges for port operators. In the past 25 years, the biggest containerships afloat have quintupled in size from 5,000 to circa 25,000 TEU. Each incremental increase has forced operators in the capital intensive port sector to spend on berth and crane expansion.
A further rise in protectionist policies has the potential to shrink supply chains and re-emphasize regional/coastal trade, with smaller ships. What then for operators who have made significant investments, some with external financing, to increase the capabilities of their infrastructure to handle larger vessels?
When well assessed, data brings a wealth of opportunity - such as identifying where to digitise or automate to find operational efficiencies. According to data quoted in a report from the American Bureau of Shipping, ships spend about 50% of their operational time at berth, anchoring or manoeuvring into and around ports; and this ‘non-productive’ time involves more than 15% of these ships’ annual fuel consumption.
Ships spend about 50% of their operational time at berth, anchoring or manoeuvring into and around ports
It follows that any port community that builds systems to help reduce idle time would also help build a leading brand with its profit conscious clients and an increasingly carbon conscious society. But while supporting the data accumulation that builds industry transparency can help to build reputations for social and commercial leadership, it also identifies laggards and all that could imply for corporate images.
The World Bank’s recent report on container port efficiency was likely well received in East Asia, where seven of the top ten ports call ‘home’. But it would have come more as a clarion call in the United States, where no operators ranked in the top fifty.
So, while port efficiency impacts on their clients’ profitability and their global contribution to emissions reduction, the World Bank believes the impact of ‘poor-performing ports’ goes far beyond that. Conversely, instead of facilitating trade, the least-performing ports could increase the cost of imports and exports and reduce competitiveness; directly impacting economic growth and poverty reduction.
On this basis, it’s clear to see the far-reaching impact of risk interconnectivity and the importance of effective risk identification and its subsequent analysis. This is even more relevant to ports and terminals who are, by their very nature, hubs where many risks interlink, confirming that the management of risk, either through retention or more traditional risk transfer mechanisms, remains at the forefront of the industry’s resilience toolkit.
Considering the industry’s complex risk landscape, our WTW Ports & Terminals (P&T) specialists have created a risk community focused on collaboration, sharing knowledge and delivering sector-specific solutions. If you’d like more information about this P&T Risk Forum or would like to discuss the sector’s risk solutions available to you, please contact Nick May or Nigel Cassey.
