Anchored in the new reality Ports perspectives March 2021 kpmg.ae Foreword Accounting for more than 90% of the Through this publication, based on world’s commerce, maritime trade our research and our experience with is one of the most cost-effective clients in the industry, we examine and efficient ways of moving large the global and regional port industry volume of goods around the world.i outlook, outline the forces we believe While ocean trade has been driving will shape its future, explore trends global trade over the last few and dig deep into new and emerging centuries, containerization of cargo is growth areas. a comparatively recent phenomenon, We trust you find our first edition of dating from 1956. this report stimulating, informative Over the last couple of decades, an and engaging. We look forward to increasing trend noted for maritime hearing your views and discussing trade has been the growing share of the contents with you. containerization, fueled by growth in Please feel free to get in touch with consumer demand from China and any of the country contacts listed at other emerging economies. With the back of this report. increasing scale and complexities in modern trade over the years, the world’s major shipping lines, as well as the container port operators, have expanded their global footprint and are building presence across the supply chain to enhance their value proposition. Global trade in recent years has been impeded by trade tensions, which poses a major risk to maritime trade, Shahnawaz Nakhoda causing potential disruption to supply Partner chains. The combination of trade Ports and Logistics tensions between global economic KPMG Lower Gulf superpowers such as the US and China and the Covid-19 pandemic has contributed to significant pressure being exerted on the global ports industry. The role of port operators in these challenging times to keep the flow of goods moving is proving to be vital. 2 Anchored in the new reality Anchored in the new reality 3 4 Anchored in the new reality Contents Executive summary 06 Global and regional outlook 10 Areas of focus and risks 20 Embracing technology 26 Current and future state 30 About KPMG 33 Anchored in the new reality 5 Executive summary The spread of the Covid-19 virus, subsequent lockdowns and the economic downturn have disrupted global maritime growth and trade flow, reducing overall port activities in 2020. Global outlook international routes. With the onset In the GCC, there is a trend of The last two decades had witnessed of the pandemic and the US-China increasing throughput capacity significant growth in containerized trade situation, focus on short-sea as the port operators continue to port throughput fueled by an increase trades using smaller ships rather invest heavily in port infrastructure, in global consumer demand. China is than mega vessels is an emerging expansion and technology. Currently, a significant contributor accounting trend resulting in improved port the region’s annual average capacity for 8 out of the top 15 global ports network and connectivity. Port growth is estimated to be 4.2% by throughput volumes.iii China’s operators are becoming trade which is double the global average dominance is however expected to enablers and are investing in capacity growth of 2.1% leading to a gradually slowdown as a result of the technology more than ever. drop in utilization across the ports.iv ongoing US-China trade disputes, Regional outlook GCC ports have higher average resulting in increased tariffs and Gulf Cooperation Council (GCC) vessel sizes due to being ultimately higher cost of trade. Some ports, due to their strategic location, transshipment hubs. However, multinational companies are currently have traditionally been large the average duration of stay for contemplating a manufacturing transshipment hubs. Container vessels in GCC ports is generally exodus from China, seeking penetration in GCC countries is more higher than any of the other major alternative production bases and than six times that of the world maritime geographies even in trade partners to escape potentially average and significantly higher than comparison to transshipment hubs higher tariffs and rising production that of major developed nations in such as Singapore and Hong Kong. costs. As global companies look the west. To improve port productivity, with to realign their supply chains and the help of public authorities, port decentralize their manufacturing To support manufacturing-led operators in the region are actively capacity, China is also focusing more growth and to attract foreign direct seeking solutions by adopting on technology-driven and high-value investment (FDIs), there has been innovation technologies and industries to power their next an emphasis on development of free establishing initiatives designed to growth cycle. trade zones (FTZs). Development overcome trade barriers and of port-linked FTZs has been one of Global trade patterns are gradually logistics inefficiencies. the success factors for the ports and changing, with regional trade logistics sectors in the region. replacing the traditional east-west 6 Anchored in the new reality Anchored in the new reality 7 Areas of focus and risks The pandemic has introduced uncertainty within the ports industry. We have identified several key points that port operators would do well to consider: Area Focus Port expansion and vertical integration, primarily funded by loans, resulted in Financial impact of a significant rise in net debt levels. Given the pandemic, the long-term sustainability of Covid-19 port operators’ businesses needs to be assessed. Addressing port underutilization and congestion remains a key priority. Whilst Operational and operators continue to strive to find a perfect balance on port utilization which is largely business risks dependent on demand, they are implementing innovative solutions, mostly with the help of technology, to increase trade efficiency. Global trade tensions were front and center in 2019, and with growing political Political environment tensions across the world as the Covid-19 blame game ramps up, this remains a key risk to global container port growth. As the pandemic progresses, the priority of the leading industry players is to make Health and safety sure that the entire workforce is safe by adopting a no-harm approach. For global ports and logistics providers, the security of supply chains is critical in keeping their people and trade operations safe. As hackers are taking advantage of Safety and lowered defenses during the pandemic, which could potentially compromise the cyber security security of the port’s operating technology systems, the role of digital transformation in changing the sector’s cyber risk profile is becoming increasingly crucial. Climate change is emerging as the highest priority risk. Environmental concerns Sustainability dominate the top long-term risks. 8 Anchored in the new reality Embracing technology Adoption of smart port technologies and integration of the port value chain through digital platforms has accelerated due to the ongoing pandemic. Along with several emerging technologies, ports are leveraging trade and logistics platforms to facilitate the creation of a transparent trade ecosystem and access to new routes and services. Current and future state Port operators are evolving from traditionally being confined to landside operations to a broader concept of port- centric logistics, where ports are not seen merely as a thoroughfare for goods but as part of a larger and integrated ecosystem of global trade. Instead of being focused solely on the ports business, vertical integration between port operators and logistics service providers (both inland and by sea), either through alliances and mergers and acquisitions, is picking up pace, increasing overall presence in the trade supply chain. This trend may also encourage logistics service providers to differentiate or improve the services they offer. Anchored in the new reality 9 Global and regional outlook Container volumes have declined by 2.1% in 2020 but is expected to rebound by 8.9% in 2021.ii Global maritime trends Container ports The last two decades witnessed The list of the top 15 container ports significant growth in containerized in 2019 highlights China’s dominance cargo, fueled by an increase in in global container shipping with 8 global consumer demand. A major of the top 15 ports located in China contributor of the global trade growth (Table 1). China contributed 27% of has been China, with the country’s the global manufacturing output in share in global merchandise trade 2019 and most of the containerized increasing from 3.8% in 2000 to volumes from Chinese ports 12.7% in 2019.v represent port-to-port (i.e. origin to destination) cargo. The Covid-19 pandemic resulted in an unprecedented contraction in demand leading to a slowdown in global trade in 2020. The World Bank forecasted a 5% reduction in global GDP and 20% contraction in trade volumes due to government-imposed lockdowns and lack of demand. The global port industry’s earnings before interest, tax, depreciation and amortization (EBITDA) for H1 of 2020 has reduced by 16% as compared to H1 of 2019.vi Container volumes have declined by 2.1% in 2020 but is expected to rebound by 8.9% in 2021.vii 10 Anchored in the new reality Figure 1: 15 container ports in 2019 based on throughput viii TEU* (in millions) * Twenty-foot – measure used for capacity in containerized transport Source: Lloyd’s List With the recent US-China trade to diversify production and supply their supply chains, they will initially situation having been aggravated by lines. Other countries including India, find it difficult to replace China due Covid-19, a number of multinational Bangladesh, Mexico, Vietnam and to the challenges in replicating the companies are contemplating a Taiwan are emerging as suitable scale and quality of infrastructure. As manufacturing exodus from China alternatives.