Friday, December 2, 2016

For whom the bell tolls?

Once the critical instrument for the reconstruction of a Europe dilapidated by war, infrastructure today is increasingly becoming a private- rather than a public good, where the user pays principle ought to apply. In this sense, Germany’s road toll plans are in the right direction.

Port competition, for a common European hinterland, is intensifying as a result of plentiful road infrastructure, much of it in Germany. Motorways are thus becoming just transit links, with the benefits of costless infrastructure accruing to the origin (e.g. China) and destination (e.g. Switzerland) of cargo, rather than to the German taxpayer who is called upon to finance infrastructure development and maintenance.

The Dutch government ought to study more carefully its objections to the German road toll plan. The elasticity of demand for Hamburg port services is three times higher than that of the port of Rotterdam, and a more expensive use of German motorways could have the effect of diverting cargo traffic from Hamburg to Rotterdam. And few would mind this in The Netherlands; or would they? 

HE Haralambides

Wednesday, November 2, 2016

One Belt One Road, Port Capacities, and Industry Relocation along OBOR

The complexity of the OBOR network -both its land and ocean part- is such that the map is changing by the day. A very unstable and unpredictable geopolitical landscape is of course playing its role in this too.

Groundbreaking research, appearing soon in Maritime Economics and Logistics expands actual (physical) transport networks in malleable ‘super-networks’, able to identify shifts in manufacturing activity along the OBOR, as a function of port investments and rising land and labor costs in China. User equilibrium traffic assignment models estimate production impediment functions, analyze the path choice behavior of products in the super-network, and determine industrial relocation (and regional development) which minimizes generalized costs (production-transport-distribution).

Sri Lanka and its Port of Colombo, pivotal in OBOR, is used as a case study. The research shows that were Colombo to invest in an additional 8 berths, and price Terminal Handling Charges at 111 USD/TEU, the port could achieve incremental annual profits of USD 0.73 billion, with a Return on Investment of 7.3%. Total impact on the country’s GDP is estimated at USD 30 billion, while wages of manufacturing workers could rise from their current level of USD 420/month to USD 625/month as a result of higher labor demand.

Research is continuing on other countries and ports along the OBOR network.





Friday, September 9, 2016

The Hanjin bankruptcy: No one is too big not to fail

The (anticipated) collapse of the world’s seventh biggest carrier has undoubtedly created tsunami-class waves that continue to ripple throughout the supply chain: from shippers and forwarders, to ports, terminals and creditors. Still, this is just a temporary inconvenience and the Government of Korea, together with the Korean Development Bank, are only to be complimented for their tough stance. Had the same thing happened with the bankruptcies of 2009, the liner shipping industry would be in a much better state today than it actually is.

The issue here has to do with the important aspect of moral hazard; i.e. exercising lesser due diligence, or assuming a higher investment risk than what would normally be warranted, just because you know that if things turn out badly, there will always be a helping hand stepping forward to your rescue.

If carriers know that this is no longer the case, and “out is out”, they would be much more prudent before ordering new tonnage. Supply would thus correspond more closely to demand, rates would as a result be more sustainable, and the financial performance of the industry would be less of a roller-coaster.


A “no one is too big not to fail” approach in shipping is therefore just as good for the taxpayer as it is for the carrier himself.  HH 

Tuesday, August 30, 2016

Public financing of private ports?

After years of debating, I must admit I am quite happy that the European Commission appears to converge to my views on the subject, repeatedly expressed for more than 20 years now.

As ports are increasingly adopting an ‘enterprise’ model through the award of concessions to private port operators, the public financing of port infrastructure and operations assumes a very different dimension, even for ports that are under full State of municipal control.

For instance, what happens if a public intervention, intended to promote the ‘general economic interest’, instead favors only one concessioner, or group of concessioners, against some others located in the same port, neighboring ports, or neighboring countries? What are, finally, those ‘infamous’ sovereign state responsibilities, often taking the form of Public Service Obligations, that allow governments to pour public money into clearly private port infrastructure?

Dredging is a good case in point I have often used with my students. Providing and maintaining access to a port could be rightfully considered as a public good serving the general economic interest. But when the access channel is dredged down to 16 meters, surely this public good is not meant for my little fishing boat, but for a containership of 20,000 TEU. Once identified, it should therefore be the user of the good who should pay for the costs of its production and not the general taxpayer. In other words, port access is no longer a public good and, among other things, the taxpayer should be informed on how his money is being spent by public port authorities.

Last mile investments is another good example. Connecting the port with the national motorway system is in principle a public good, serving the general economic interest (I would happily take my bike and go to the shore for some birdwatching!). But what happens if this ‘connection’ favors just one terminal operator against many others? Clearly, this ‘last mile’ investment is a private rather than a public good and the terminal operator should pay; participate in the development costs; or pay for the use of the road, once completed. Finally, the absence of such a connection should be clearly discussed in the concession agreement: More often than not, concessions are awarded, with the concessioner quickly reverting back to the awarding authority to ask for more infrastructure and connections because, allegedly,  he cannot do his job as efficiently as he would like to. The awarding authority is often ‘obliged’ to accommodate such requests and this cannot continue.


As said, I am quite content with the policy orientations of Competition Commissioner Vestager  in terms of focusing on the real issues facing our ports. HH

Monday, July 18, 2016

OBOR Networks & Maritime Geopolitics: The Century of Eurasia

Introduction

OBOR is a US$ 1 trillion plan with an estimated economic multiplier of 2.5. Since the plan was announced three years ago, only 5% of this budget has been spent. There are as many plans as interested countries and China is talking to all of them. 10,000 articles have been written on the subject, but NDRC has retained only 100! Nothing is decided yet, and may analysts tend to see OBOR as a geopolitical “carrot and stick”, something similar to “Marshall Plan”.

China is not investing only in African infrastructure but it transfers manufacturing activity there. By the end of 2015: 128 industrial projects in Nigeria, 80 in Ethiopia, 77 in South Africa, 48 in Tanzania and 44 in Ghana. It seems developing Africa is much easier than developing China’s own northwestern territories.

With investments in Australia (Darwin) and a continuing interest in the Nicaraguan canal, China will soon be looking at the Pacific Ocean, expanding OBOR to a global, “around-the-world” network, in competition to TPP. What are the prospects of the Panama Canal, in view also of competition from the Suez Canal? To my view, not very promising.

Russia is squeezed from both sides: USA/NATO from the west / China-Eurasia-OBOR from the east. Russia’s response: its own ‘OBOR’: The North-South Transport Corridor.


Both Russia and China intend to develop their own currencies into reserve, clearing ones, away from the dollar and a crisis-prone, risky and overburdened western financial system. China in particular has created a currency clearing house in Qatar while Russia has an “oil for goods” deal with Iran. The latter country too has recently entered into a “rail for oil” barter deal with Turkey.






Conclusions

-The 21st century is the century of Eurasia.

-Eurasian Infrastructure investment plans amount to 8 trillion dollars.

-“Accessibility” (and not ports) is the bottleneck to trade.

-Investors (WB, EBRD, AIIB, etc.) abound, but attention and coordination are required.
(Lack of ‘discussion’ and coordination (e.g. within AIIB) are India’s objections to OBOR).

-Infrastructure investments have long gestation periods, while short-term debts accumulate dangerously.

-OECD forecasts show that the supply of infrastructure outstrips trade demand.

-Infrastructure investments should not be the outcome of geopolitical and security games.

-The debt of the developing world is a cause for concern.

-China’s NPLs correspond to 25% of the country’s GDP.

-Western banking is still precarious.

-A new economic ‘meltdown’ is not out of the question; this needs to be avoided at all costs.

Tuesday, June 28, 2016

BREXIT

The ramifications of BREXIT for global security could be much more important than its economic effects. After all, the UK economy represents less than 4% of the global economy. A weaker pound  -and a possible recession as a result- should not, in my view, have the grave effects many economic analysts predict.

But Britain is a protagonist in the defense theatre: the country is NATO’s staunchest ally, the "defense bridge" between US and EU, and the latter’s biggest contributor (both in money and means) in all EU-led operations. Would this stay the same after Brexit? Or would Britain move closer to NATO? And if this happens, what would be the impact on EU’s new defense policy orientation, and on the German-French idea of a true “defense union”? Would this be possible without Britain?

One shouldn’t forget that the Americans, for some time now, are becoming increasingly fed up of having to spend so much on Europe’s defense; their priorities are clearly elsewhere, including China’s incursions in the South China Sea.  In this regard, Americans see rather favorably Germany’s push for closer cooperation and coordination of defense budgets which, according to some, should be raised to 2% of GDP amongst all EU member states.

One thing is certain: the geopolitical chessboard has changed and exit negotiations aren’t going to be easy. Certainly, the process will take much longer than the envisaged two years, unless something else happens in the meantime. HH 



Wednesday, June 8, 2016

Panama and Suez canals on head-to-head price war


[Lloyd’s List, 8 June 2016: “Suez Canal offers up to 65% discount for Asia-North America east coast carriers”]
____
A few weeks ago I was commenting on the MoU Suez and Panama were signing, surprisingly with the blessing of the United States. I was saying that we should keep an eye on this development, for, although the MoU was described -as it is common in this type of agreements- as a “technical cooperation and information exchange agreement", its intentions could be quite different (i.e. collusion). Apparently "the plan" didn't quite work and the result, as was to be expected, is outright head-to-head price war.

Panama is again engaging  in new demand forecasting studies. In these, Panama should keep in mind that, in servicing the US East Coast, the role of Suez and of the Mediterranean hubs (Malta-Algeciras-but particularly Tangiers) is increasing. This is so, not so much in order to save on fuel costs, but mostly because carriers are able to feeder, from these hubs, the increasing trade of West Africa.

If to the above one would add: a) the new generation of containerships (too large for the Panama Canal); b) the interest of China in Port Said and in the Nicaragua canal; c) China’s grandiose, US$ 1 trillion “One Belt One Road” network and, in this context, China’s interest in the Mediterranean ports (Venice, Piraeus), East African ports (Mombasa, Djibouti), and Gulf ports (Oman, Qatar), the future prospects of the Panama Canal do not look, at least to me, as promising as one might like them to be. 

HE Haralambides

Monday, April 25, 2016

Chinese cruise ships? Thanks but no thanks


Shipbuilding is an economic activity that has in substance left Europe long ago. With one exception: Cruise ships. There is a reason for this. Cruise tourism, and carriers, are inextricably linked with the concept of quality; and quality is a ‘way of life’, a philosophy, difficult to copy. 

In spite of the global economic crisis of 2009, cruise tourism has been growing steadily. Carriers are working to near capacity and so do European yards in Germany, France and Finland. Orderbooks are full, without counting newbuilding options. Shipbuilding berths will be the bottleneck in the further growth of the sector going forward.

Aspiring volunteers, such as China, do of course exist, and European builders, such as Fincantieri of Italy, are already considering joint ventures. To my view, this would be the wrong thing to do. A JV entails transfer of technology and as such it is the surest way of offering the knife that will eventually stab you in the back. We have seen this happening in every other European industry and we should be learning from our mistakes.   


It will therefore be quite some time before China enters seriously into the cruise shipbuilding market. No doubt this will eventually happen. But in the meantime, a carrier should think twice before assigning an order to a yard which does not have the experience, suppliers and logistics to carry out the work as expected, and he would be fast to stealthily advertise, negatively, competitors’ decisions to do so. At a consumer level, personally I would think twice before boarding a cruise ship made in China…  

The result of all this will undoubtedly be an increase in the price of cruise tourism products which, we must admit, has dropped to ridiculously low levels due to competition among carriers. Time will tell. HH 

Wednesday, April 20, 2016

Container shipping: In short, you have a ghastly mess

Containerization has gradually led to the commoditization of the ocean liner service and thus to higher competition among carriers. In an effort to differentiate their service, as well as better control the supply chain, in the 1990s carriers started to invest in the other components of the supply chain, such as container terminals, distribution centers, road, rail and air transport, and in a miscellany of other logistics services, such as bar-coding, assembly, documentation, etc.  Investment in logistics services and related infrastructure, rather than in ships, -which, incidentally, could be chartered-in from private equity investors (e.g. KG funds in Germany)- allowed the carrier to become more asset light, thus more agile in coping with the vagaries of the business cycle.  In addition to service differentiation, vertical integration also serves in increasing both the complexity of operations and the sunk costs of aspiring new competitors (carriers) , particularly if shippers are convinced, through effective marketing, that an integrated service is the only way to better serve their requirements.

This situation has started to change. Carriers appear to be returning back to core business, shedding the idea of vertical integration in favor of better horizontal integration (alliances) and dominance in the sector (shipping) where they have the comparative advantage. Partly, this return to roots has been the result of the weakening or banning of liner conferences, and the low freight rates and service unreliability that have ensued. Presently, you can bring a container from Hong Kong to Rotterdam with $300; far below break-even point. Laid up container tonnage is 5% of the total fleet (over one million slots) and, interestingly, it is often the largest and newest ships, such as MSC Oscar, which are laid up. To no avail, consignees are desperately looking for someone to talk to on the phone. In complex ports like Los Angeles, the terminal of arrival is often unknown until the last minute. At the other end, in Asia, to be filled, a mega ship would call at far more ports than what its size would warrant; something creating a stowage nightmare at the receiving ports. In short, you have a ghastly mess,[1]  brought about by the shippers themselves. HH 






[1] Lyrics from “The life I Lead” (Mary Poppins) […] A British bank is run with precision. A British home requires nothing less. Tradition, discipline and rules must be the tools; without them: disorder, catastrophe, anarchy, in short you have a ghastly mess. 

Tuesday, April 12, 2016

Export logistics: the culprit of sluggish trade growth

Years back, a friend of mine at Stanford was making headlines for months by claiming that trade agreements were a bad thing for international trade. 

At the same time, I was claiming that it was the abysmal state of logistics in large countries such as India and China that was holding back container penetration and thus international trade growth. 

The World Bank seems to agree to this. In addition to the usual culprits of trade destruction, such as product standards in importing countries and other non-tariff barriers to trade, the WB now finds that, since the 2009 economic meltdown, the size of exporting firms in developing countries has gone down. 

Apparently, as I had been claiming, the smaller the size of producers, and the larger the size of the country, the more difficult it is to organize export logistics in a system based on containerization and hub-and-spoke consolidation and distribution.  HH