The news that China Shipping Terminal Development (CSTD) is planning to sell its stake in the two million teu p.a. design capacity Lianyungang New Oriental Container Terminal (LNOCT) is a reflection of significant micro and macro level issues in the liner industry – but also highlights a dilemma for carriers.

LNOCT is a large, newly constructed deep sea terminal located roughly half way between Shanghai and Qingdao in Jiangsu province, northern China,. Developed jointly by CSTD (the terminals arm of China Shipping) and the local port operator, the facility has five berths and is already in trial operation, expected to obtain official authorisation this year. CSTD holds a 55% stake and plans to sell this for a sum in excess of $124 million.

What has prompted this move by CSTD? The official explanation by the company does not provide much insight: “The purpose of the transaction is to increase asset utilisation and optimise the asset structure of China Shipping Terminal and to fulfil the overall strategic need of the company”.

Drewry’s view is that at the company level, there are two factors at work: firstly, opportunism. Terminals remain attractive assets for investors and profit can be made from sales. In this instance, CSTD invested the equivalent of $90 million in the project and expects to obtain over $124 million, generating at least $34 million profit on the deal, a healthy return on investment as well as a tidy cash sum. This leads to the second factor: the pressing need that parent company China Shipping faces to stem losses (before exceptional items) for a second year running and so avoid raising eyebrows in the Shanghai bourse. Asset sales are a tried and tested tactic in this respect. China Shipping’s first half 2013 net loss was around $200 million (similar to the same period last year) so the LNOCT stake sale will help fill this hole – although clearly more needs to be done.

However, besides the company-level drivers of the move, the strategy may well be indicative of a wider liner industry pressure. Carriers will undoubtedly face a tough year in 2014, with volumes on the main trade routes settling at the “new normal”, more modest growth levels, and substantial vessel capacity still to come on stream. On top of this there is the as yet unclear impact of the P3 Alliance. It may well be that CSTD’s move reflects a fear by carriers of continuing severe financial pressures – and so more sales of terminal assets by carriers seems likely as the hatches are battened down.

This though illustrates the quandary that the liner industry faces. The ownership of terminals is more often than not a stable source of profits and an attractive business to be in. The pressure is to sell terminal assets but at the same time, these assets may be a vital source of profit for carriers. CSTD’s dilemma is illustrated by the fact that, besides seeking to sell its stake in LNOCT, it also earlier this year announced its intention to buy a 24% stake in APMT’s Zeebrugge terminal. In addition, this year has seen CSTD taking a 10% stake in Yang Ming’s Kao Ming Container Terminal in Kaohsiung. Plus on a more general note, CSTD has clearly indicated its desire to develop and enhance its terminal portfolio, and so in this respect can be seen as more or a buyer than a seller. The company ranks seventh in Drewry’s 2012 league table of global/international container terminal operators. Parent company China Shipping clearly faces a balancing act going forwards.

Top 10 Global/International Terminal Operators’ Equity Based Throughput, 2012

Our View

CSTD’s planned sale of its stake in LNOCT reflects both opportunism and company pressures, but is also indicative of wider industry financial challenges to come in 2014. However, when it comes to terminals, carriers face a dilemma of whether to sell or not. Holding or even expanding the portfolio may be the best bet.
Source: Drewry Maritime Research