x Abu Dhabi, UAETuesday 25 July 2017

Port rivals take aim at DP's world

Oman announces a new airport in the remote coastal area of Duqm as the country seeks to diversify its economy.

Port-to-port: competition between DP World and other major global terminal operators has heightened as countries are now more discerning in awarding port concessions to companies that have a wider financial girth.
Port-to-port: competition between DP World and other major global terminal operators has heightened as countries are now more discerning in awarding port concessions to companies that have a wider financial girth.

DP World's status as the international port operator with the broadest global reach is being challenged as its cash-rich Asian rivals venture away from their domestic hubs. The top Asian operators, with the world's factories virtually on their back doorstep, are now turning their attentions to new port concessions as countries around the world recognise the value of expertise and investment from these global players.

Five global terminal operators - Hutchison Port Holdings, Singapore's PSA, APM Terminals, DP World and Cosco - now dominate the industry, having cemented their positions following a series of high-profile acquisitions. Major deals - such as DP World's purchase of CSX World Terminals in 2005 for US$1.5 billion (Dh5.51bn), adding nine terminals to its portfolio and followed a year later by the $6.8bn acquisition of UK-based P&O, which was then the world's fourth-largest terminal operator - will become increasingly scarce.

The top operators "have created a competitive edge with regard to winning new concessions due to their expertise, track records and financial capabilities", said Samir Murad, an analyst with the National Bank of Kuwait. "Because the global operators have established relationships with the shipping lines, they can offer minimum throughput guarantees - a promise that cannot be made by smaller entities."

The competitive nature of the industry was illustrated this summer by DP World's unsuccessful bid to enter the Mediterranean market. Although it gave what it felt was a "fiscally responsible" attempt of ?430 million (Dh2.15bn) for the project and ?468m for upgrades to operate a Greek port, it finished a distant third behind Hutchison and Cosco. Hutchison's winning bid involved a pledge to pay ?3.1bn for the 35-year concession at Thessaloniki Port plus invest another ?489m to upgrade facilities - roughly four times the bid submitted by a DP World-led joint venture.

For DP World, the heated contest illustrated the fact that its rivals are just as keen to diversify across the world as the Dubai-based operator. "We see them everywhere we go," said Mohammed Sharaf, the chief executive of DP World. Ports management is a highly profitable industry. DP World, for example, saw net profits rise 123 per cent in the first six months of the year, while last year HHLA Hamburg earnings grew 46 per cent before interest and taxes, according to Drewry Shipping Consultants.

The fat margins have drawn interest from Wall Street. In 2006, as DP World was putting the final touches on its acquisition of P&O, the US market became a hot spot of merger and acquisition activity. More than $10bn was spent on terminal concessions from new players such as Morgan Stanley, Deutsche Bank and Goldman Sachs, along with AIG, the insurance corporation, and Macquarie, the Australian investment group.

"Investors have realised ports tend to be consistently profitable, and have good growth prospects," said Neil Davidson, an analyst at Drewry in London. "Unlike the shipping industry, where cycles of boom and bust prevail, the port sector is much more robust, with consistent growth and income." Lately, some infrastructure funds have begun selling off some of their assets as the global credit crunch raised their borrowing costs. That may bring some relief to DP World, the large acquisitions of which have set off a wave of record spending on remaining port assets.

It spent 14 times earnings on CSX World Terminals in 2005, but just a year later Ontario Teachers' Pension Plan spent a lavish 23.5 times earnings to buy Orient Overseas International's North American port assets. Mr Sharaf described the valuations as "crazy" and expressed optimism that the prices may begin to come down. "The acquisitions didn't make sense to us." Even with recent forays by Wall Street, the top five operators still hold a commanding position, each with their own strengths and regional characteristics.

Virtually by feat of acquiring P&O in 2006, DP World became the most geographically diverse company in the group. Although pressured by US authorities to sell off P&O's six assets on America's eastern seaboard, the Dubai company still retains a varied portfolio outside of the emirate, where its flagship asset, Jebel Ali, is the world's seventh-busiest port. DP World receives 35 per cent of its container throughput from the Middle East. However, the rest of its business is evenly distributed, with 21 per cent of business coming from the Far East and the rest coming from the Americas, Oceania, Africa, Europe and South East Asia.

Last year, DP World had a throughput of 43.3 million containers, making it the world's fourth-largest terminal operator. Of the others, Hutchison is the largest, holding 47 ports in 24 countries and handling 66.3 million containers last year. It has a heavy presence in Hong Kong and is heavily reliant on the export of goods from the Far East and South East Asia, where it receives 62 per cent of its container handling traffic. PSA, controlled by the Singapore government through Temasek Holdings, a sovereign wealth fund, is even more weighted towards Asia, relying on it for 82 per cent of its business.

Singapore acts as a hub for the main shipping lines to offload containers and reload on to smaller vessels to more than 200 destinations. Cosco, or the China Ocean Shipping (Group) Company, is also heavily dependent on its home market, receiving roughly 84 per cent of its work from China and Hong Kong. APM Terminals, a unit of the Netherlands global shipping giant, AP Moller Maersk, is the only company rivalling DP World in its global reach. APMT is the world's third-largest operator behind Hutchison and PSA, and has an even spread of 50 ports operating in the US, China and also Africa, where it manages six terminals.

Older and more well established than DP World, the other major operators can lay claim to a commanding position operating in some of the world's busiest ports in Asia. Although the Dubai company operates eight terminals in China and Hong Kong, company officials acknowledge its entry on to the global scene could have come sooner. "We were a little bit late into the market," Mr Sharaf conceded. At the same time, the officials tout DP World's focus on terminals where cargo either is shipped from or where it is received, called origin and destination traffic. Shipping customers at these ports are less sensitive to price increases, since they have no alternative port to ship to, giving DP World more leeway to increase prices to cover rising costs.

DP World has also invested in trans-shipment ports, such as the Tarragona Port terminal in Spain this summer, which unloads containers after large voyages and reloads them on to smaller ships. To hedge against the threat of losing business to other regional trans-shipment hubs, DP World often partners with a shipping line as co-investor. But even with the strength of financial and shipping partners, DP World may find that the niche it has developed as the world's most global operator will be challenged wherever it goes.

Its latest project, a bid for a new terminal at Nava Sheva outside of Mumbai, is said to have aroused the interest of another 20 interested parties. igale@thenational.ae