COSCO Pacific, the Hong Kong-based terminal-operating subsidiary of the China Ocean Shipping Co. Group, said in late March it made nearly $100 million in operating profit in 2009. Sure, that was a nearly 40 percent drop in profits from 2008, but in a year when every carrier will have posted losses, profit of any kind looks pretty good.
But the truly eye-bulging numbers come when comparing profit to revenue. According to COSCO Pacific's annual report, the $100 million in operating profit came on $349 million in revenue. Some calculator tapping reveals a profit margin of more than 28 percent. Its revenue includes a major container leasing division, but the terminal business' profit margin is actually higher than the leasing business. So the margin could have been even higher.
COSCO Pacific isn't alone. Hutchison Whampoa, parent company of Hutchison Port Holdings, reported 2009 operating profit for its terminals division of $1.3 billion on revenue of $4.3 billion. That's a profit margin of 31 percent. While the $1.3 billion in operating profit was down 21 percent from 2008, it's a little easier to swallow when the profit margin is so high.
DP World, the Dubai-based terminal operator, had profit margin of 38 percent, on $2.8 billion in revenue.
Even the operator with the lowest margin among the top five operators, APM Terminals, had a margin of 15.5 percent ' $468 million of operating profit on $3 billion in revenue. That APM's revenue declined marginally from 2008 to 2009 while TEU volume decreased 7 percent shows the company was much more successful than sister company Maersk Line in deriving profit from lower trade volume.
COSCO Pacific, for example, grew revenue in 2009 even though its volume fell 5 percent.
To put this all in perspective, the ocean carriers with the highest operating profit margin in 2007 were China Shipping at 11.1 percent and CMA CGM at 11 percent. In 2008, as the global recession started taking hold, the highest margin was Hyundai Merchant Marine, at 7.3 percent. In 2009, there was no profit margin for carriers.
It may not be surprising terminal operators are grabbing such large margins in a downturn, but it's surprising it doesn't get more attention. Trade talk seems to constantly revolve around the shipper-carrier power struggle, while terminals get little mention.
But imagine the outcry if shippers found carriers had 30 percent profit margins? Or if carriers found, in the depth of the downturn, with rates at rock bottom, their shipper customers had such robust margins?
In a supply chain that goes factory, truck, container terminal, ship, train, then truck, it seems inconceivable one link of that chain could be hauling in such high margins while the rest of the chain struggles for breath.
It's true many terminal operators, including COSCO Pacific, APM and a handful of operators outside the top five, are associated with shipping lines. It's easy to connect the dots and say those operators have direct ties to lines and are not making as much money as it seems because the lines have been a huge drain on profits.
But that's ignoring a couple key issues: one, many terminals that operators like COSCO Pacific and APM manage are multiuser facilities; and two, profit margins of operators unaffiliated with lines are extremely healthy. That indicates the terminal-operating business is an extremely good one to be in, albeit one that takes long-term vision and asset investment.
The ocean freight rate drops that decimated the liner shipping industry never extended to the terminal operating industry. So terminal operators only had to account for a loss of volume, not the double whammy of lower volume and lower rates.
Operators' revenue held firm because global operators work on long-term leases and concessions with local ports (providing stability and clear goals for volume), and often enjoy a competitive advantage that lines don't. In many cases, a terminal operator might be the only game in town. For instance, PSA International (whose 2009 financials weren't available at the time of writing), controls the game in Singapore, setting the market rate for calls at the world's busiest port.
Likewise for DP World at its flagship Jebel Ali port in Dubai. Hutchison has dominant positions in a host of ports around the world.
Now we've focused on the top five operators in this column (and in a story on pages 56-59) because they enjoy such a dominant share of the world's container trade.
When the handful of companies that handle half of global container volume have such robust profit margins, while the rest of the industry scrounges for pennies, it should make news.
Oh, the irony
If it seems as though this column has been harsh on carriers the past few months, cast your mind back to last year, when we consistently urged shippers to avoid using the demand downturn to squeeze carriers out of business and instead press them to improve service.
Not to keep browbeating carriers, but their position isn't helped when representatives from certain lines blame shippers for low rates last year or engage in somewhat hypocritical stances about port charges.
First, Mediterranean Shipping Co. Chief Executive Luigi Aponte told the Financial Times in early March that shippers were to blame for the nosedive in freight rates in 2009 (see 'MSC in the news surprisingly,' www.AmericanShipper.com/links).
'Shippers are not that deep,' Aponte said, accusing shippers of taking advantage of the overcapacity situation in market in 2009. 'They worry always who will ship for $50 less. The shippers are concerned solely by the price.'
Then, at the end of March, Wolfgang Freese, president of Hapag-Lloyd America, told the audience at a port forecast event in Long Beach that ports that implement container fees one day and pull them another are not helping their customers become productive.
'A port has to be predictable to its customers,' he said. 'These are the things that affect the bottom line.'
It's not clear whether others picked up on the irony, but the first thought to run through my head was, 'don't carriers do much the same thing in assessing peak season or terminal congestion fees and assorted other surcharges?'
Now in calling for cost predictability from ports, Freese was standing up not just for container lines, but also for shippers. But carriers have been guilty of the same behavior, in terms of the yo-yo effect of accessorial charges they tack on to shippers' base rates. If Freese was arguing the whole supply chain should be more consistent in assessing fees on cargo, then kudos. But if he meant ports alone need to be more consistent, then it's a bit hypocritical.
