Could Sydney Really Be a Transshipment Hub?

I have to thank a Spectator reader (he knows who he is) for pointing me toward port development issues in the province of Quebec (and my sister for reminding me that such issues are also discussed in that province’s French-language media).

Things began bubbling there last December when the port of Quebec City announced it would develop a container terminal capable of handling the world’s biggest container ships. As Brian Slack, a distinguished professor emeritus of geography at Concordia University who specializes in maritime transport, explained in a January 5 Montreal Gazette op-ed piece:

This would exploit a water depth of up to 15 metres at high tide that could provide shipping lines superior scale economies over Montreal. The port authority sees this as an opportunity to diversify its service base, which at present is dominated by bulk commodities.

The same drive to accommodate bigger ships has prompted the Maritime Forum, which Slack describes as a “committee of industry stakeholders,” to consider deepening the St. Lawrence Ship Channel “to enhance accessibility at Trois-Rivières, Bécancour and Sorel as well as Montreal.”

The port of Montreal, which handles 1.5 million TEU (twenty-foot-equivalent units) annually (far more than either Halifax, which as of Q3 2017 had handled 419,426 TEU, or Saint John, which handled 90,465 TEU in 2016), can handle vessels up to 4,400 TEU (the largest vessels now sailing have a capacity of 20,000 TEU).

Slack’s op-ed warns that allowing both of these expensive projects to proceed “could enable a shipping line to play one port off against the other, without improving the market share of the St. Lawrence Gateway.” And as politically difficult as choosing one project over the other would be, Slack advises the government to do so. He also provides a hint as to which one it should choose:

The challenge for the port of Quebec would be the issue of markets. The local market is relatively small, and most containers would have to be transported elsewhere. Rail connection to the proposed site would require major upgrades and investment. Alternatives include transferring the containers to small coastal ships and barges to connect with ports elsewhere along the river and through the St. Lawrence Seaway to Ontario and U.S. Great Lakes ports. This is unrealistic, because the Seaway is closed for three months a year and transit times would be considerably longer than present Montreal-based rail services to these markets. It may be assumed that most of the potential traffic at the port of Quebec would be trucked, which would raise total door-to-door delivery costs and represent significant environmental impacts at Quebec City in terms of congestion and air pollution.

 

Stakeholders

The Maritime Employers Association (MEA), a not-for-profit organization representing “all maritime stakeholders in the Ports of Montréal, Trois-Rivières/Bécancour, Hamilton and Toronto,” went a step further than Slack. In a letter addressed to Quebec Premier Philippe Couillard and Federal Transport Minister Marc Garneau, it actively opposed the port of Quebec project.

To understand the weight of that opposition, you should probably take a look at the list of MEA member companies (click to enlarge):

 

 

Quebec City’s Le Soleil obtained a copy of the letter which it quoted in a January 7 article. The MEA wrote:

Water depth is only one of the many components that constitute the competitive advantages of a port, which, unfortunately, the Port of Québec has failed to comprehend.

MEA’s shippers and operators expressed a preference for the dredging plan, pointing to Montreal’s superior rail and road links and proximity to large markets. The group also argued that the size of the vessels they deploy in the St. Lawrence is dictated by market realities. All the shippers have larger vessels, it said, but they are used on sea routes involving multiple ports of call:

These are routes that do not include and will never include the Port of Montreal nor any other port on the St. Lawrence River…

Echoing Slack, the MEA said that shippers unloading containers in Quebec City “would have to move their goods over longer distances, by truck or train, increasing operating costs, transit times, energy consumption and greenhouse gas emissions.”

 

East Coast

Reading that the shippers of MEA have no plans to send their biggest vessels up the St. Lawrence reminded me of something Neil Davidson, a senior Ports & Terminals analyst with Drewry, told me in an email earlier this year:

Ships of 18,000 plus teu are only deployed on the Asia-Europe route via Suez at the moment, and there is no sign of deployment onto ECNA [East Coast North America] routes via Suez (they couldn’t go via Panama as the maximum size is 14,000 teu). So yes, these large ships are vital to the industry, but none of them come near the ECNA, and at present there is no indication that they will do so.

Servicing 18,000-plus TEU vessels traveling via the Suez canal to the east coast of North America is, you may recall, the business plan for the Port of Sydney. Said Davidson:

[F]or the Sydney project to go ahead, it would almost certainly require the backing of at least one major shipping line, and as part of this, a decision by this/these line(s) to change quite radically the way that the ECNA is served in terms of liner networks.

(This, by the way, shouldn’t come as a surprise to us: before their recent website revamp, our port promoters, Sydney Harbour Investment Partners or SHIP, had clearly stated their goal on their home page as “nothing short of making transportation history.”)

I was curious as to what Professor Slack made of the Melford and Sydney projects, so I emailed him to ask for an interview. He responded promptly, telling me in an email that he was familiar with both projects (not to mention a similar project proposed for St. Pierre and Miquelon), before adding that Drewry’s Davidson was right:

Most US East Coast ports now have the ability to handle 15k TEU ships and above, but market realities are such that 9k-11k ships are the biggest their markets can justify.

Slack and I had a really interesting discussion on Tuesday, which began with him saying that he was also familiar with the economic situation of Cape Breton and understood why people would be excited about the prospect of a container port that could turn that situation around, but that the market realities of the shipping industry are such that a transshipment hub in the western North Atlantic makes little sense.

What follows are some of the highlights from our discussion.

 

China

I will begin with the most hopeful note struck, at least in terms of the Sydney proposal, which was that it’s hard to know what the Chinese might be thinking:

The Chinese have a very different perspective on things, they’re looking at geo-politics. At the moment, the Chinese shipping lines are significantly absent from the trans-Atlantic. Now, they may have an intention (who knows?) to exploit the North Atlantic in some way or other, but if they’re going to exploit it I would not think that economically [Sydney/Melford] would make sense…although I’m willing to admit, the Chinese think very, very long term and they have money.

Without knowing any detail of the meetings our port promoters (and mayor and provincial business minister and CBRM officials) are taking in China, or what’s being said at those meetings or who else is attending those meetings, it’s impossible to evaluate the potential for a Chinese transshipment port serving a Chinese shipping line in Sydney. (It is also hard to fit the existing pieces together: like, would the Chinese want Ports America to operate their transshipment port? China has its own terminal operators, after all. So many questions.)

That it is impossible to have a clear discussion about China’s role in the Port of Sydney project is a problem that only greater transparency from our elected representatives can solve.

 

Location, location, location

So let’s put aside the possibility that China is playing some sort of mysterious long game that will involve the Port of Sydney and evaluate the Sydney and Melford projects in light of existing shipping industry realities.

I asked Slack what he made of the Nova Scotia port proposals and he said:

By far the most important factor is market. You’ve got to get the stuff to the market and the market has got to generate enough containers, and in the case of Sydney/Melford (and I would add St. Pierre Miquelon, which I’m also familiar with) there’s no market. There is a very small amount of containers going to be generated locally, so the result is, most of the containers are either going to have to be transshipped to somewhere else, which takes time and is a delay factor and is a cost factor, as efficient as they are. And also, the cost of shipping most of the containers — if they’re going to be shipped to market by land — [is] a much higher cost than by ship. So, as much as I can appreciate how local people can see, ‘Oh my god, we’ve got to do something,’ in terms of the situation of global [container] shipping, why would you put a transshipment port in the Northwest Atlantic?

That to me is the fundamental issue: the notion that these very large container carriers…and we’re talking about 20,000 TEUs, you know, you have to fill them…And the only way you can fill that is if you’ve got guaranteed markets that can justify a weekly service.

Our Sydney port promoters argue that a transshipment port in the Northwest Atlantic is necessary because a) the big ships are coming and b) no east coast US port can handle them. Here’s an excerpt from the Novaporte website:

• At present no port on the East Coast of North America is readily able to accommodate the next generation of Ultra Large Container Vessels (ULCV’s 18,000+ TEUs), despite the fact that these large ships are vital to the industry.

Both Drewry’s Davidson and Slack, as mentioned, say the big ships are not coming to the east coast of North America. In fact, Slack says the 15,000+ TEU ships are not even coming to the west coast of North America because the market “doesn’t demand it.”

As for the contention that “no port on the East Coast of North America is readily able to accommodate” the biggest ships, Slack says that may have been true four or five years ago, but it is no longer the case:

The Americans have been throwing money at dredging. The one advantage the American ports have, and it’s been a disadvantage up to now, there is the harbor maintenance tax. Every time a ship goes into an American port it has to pay a tax, which we don’t have in Canada, and that’s a kitty that is now being used to dredge…There’s now 15-meter channel to many east coast American ports.

But, our port promoters would say:

• Insufficient investment in transportation infrastructure behind existing ports contributes to chronic congestion and lagging port productivity in North America.

To which Slack replies:

That is an issue that the American ports face,…that the…distribution of containers from the ports is getting more and more problematic because of the number of containers that are coming in on any ship. But that, in a sense, is a constraint — the shipping lines know that. And…at the moment, the typical vessel going into a United States east coast port, the biggest are around 10,000 [TEU]. And it’s enough, the market would otherwise be saturated.

And…there are these other routes. Up until recently, most Chinese traffic going to the United States…came via the west coast. Something like 70-80%. That has changed. [The] Suez Canal has changed quite a bit and there are now services through Suez into the east coast United States and there is now also the alternative…[of shipping via] Panama because Panama has been deepened.

 

Transshipment

Slack also sent me a copy of a paper he had written with Elisabeth Gouvernal, a director of the Department of Transport Mobility at Paris’ Institut d’Amenagement et d’Urbanisme, which was published in 2016 in Growth and Change.

The paper is entitled “Container Transshipment and Logistics in the Context of Urban Economic Development,” but before we dive into it, a word about transshipment ports.

Slack and Gouvernal distinguish between transshipment ports and “gateway” ports. Slack explained the difference to me this way:

[A gateway port is] a port that is dependent on a market that is…regional or local. In other words, the stuff that is shipped from it is coming from its own market, which is predictable, which is there. It’s going to be able to guarantee that. Whereas…[with] the typical transshipment port, and it would certainly be the case for either Sydney or Melford, there’s no local market. So in other words, the shipping lines have got nothing to fall back on…

Some ports, of course, serve as both gateways and transshipment ports (and just to add to the confusion, the paper notes the term “hub” is often used interchangeably for both). So could a transshipment port survive in a place with no local or regional market? Said Slack:

[O]ne way you can do it is to be ultra efficient, ultra low-cost…But…if you’re going to transship the stuff to other ports, there’s a time factor there, and once you start to consider that and consider the chances that some transshipments will not…be coordinated sufficiently — in other words, the feeder services have to come in to ensure that the ships are going to be filled when they arrive in Sydney/Melford, there’s always a chance, through weather and through other issues, that they’re not going to be there on time. And the result is that it’s a very chancy operation for a shipping line, and especially when you throw in the lack of a market — I mean, that is the major problem.

The world does, of course, have some very successful transshipment ports — Singapore being the standout — but Slack says Singapore’s incredible success is due to a number of very complicated (and hard to replicate) factors. As for other successful hubs, like Algeciras in Spain, Gioia Tauro in Italy, Tangiers and Malta, there’s a common theme to that success:

[T]hey’re all predicated on the use and exploitation of ships that are going essentially around the equator — or just north of the equator. Around the world. And…the shipping lines are now using these bases for these 15,000 TEU vessels that will offload stuff that isn’t going to South America,…some of it will be going to Europe, some of it will be going to…the United States or to Africa or to other Mediterranean ports. They are in the heart of the major corridor of shipping, the Mediterranean. All the stuff going to Europe and North America, crossing through the Suez Canal, passes through the Mediterranean. You can’t compare that with the North Atlantic, the North Atlantic is a small corridor.

 

Novazone

But here’s the real eye-opener: Slack and Gouvernal’s paper contends that even successful transshipment ports don’t necessarily attract logistics operations.

This was news to me — I had accepted our port promoters’ premise that, should we succeed in establishing the Port of Sydney as a transshipment hub for ultra-large container ships, the logistics park would follow as night follows day. In fact, to hear our port promoters talk, it sometimes sounds as if the logistics park (Novazone) will precede the port.

But according to Slack and Gouvernal’s preliminary research, that might not be true — while it is “widely recognised that there are strong relationships between containerisation and supply chains that are giving rise to significant clusters of logistics firms around the large gateway ports,” when it comes to transshipment ports, “logistics firms are reluctant to follow.” The paper goes on to examine a number of possible explanations for this:

…including the long-term uncertainty of shipping services to transshipment hubs, the costs of stripping containers in hub ports with no scale advantages, the distance from major markets, and the limited volume of actual goods available in most hubs. Empirical evidence is presented to demonstrate the weakness of hubs as logistics centres, the major exception being Singapore. The evidence presented suggests that the economic development potential for cities developing as transshipment hubs is much more limited than suggested in the literature.

The authors acknowledge that the “central claim” of the paper is “inordinately difficult to test empirically,” but they compared “a set of case studies of the nine hubs that generated more than 1 million TEUs in 2008” and the results are very interesting.

You can read the report yourselves:

Slack_et_al-2016-Growth_and_Change

 

I’m not going to go into great detail, but I’d like to look at one example: Algeciras, that transshipment port in Spain.

In 2008, the port transshipped 1.6 million TEUs, making it one of the world’s busiest transshipment ports that year. Employment — direct and “port-related” — looked like this:

“Intermediary activities” would cover any logistics jobs and as you can see, there were hardly any — 137 total, direct and indirect.

Now look at the predictions for the Port of Sydney, as cited in the 2016 InterVISTAS report, “Port of Sydney: Estimated Economic Impact of Proposed Container Terminal and Logistics Park:

The Port of Sydney is predicting logistics-related warehousing jobs will generate 2,350 person years’ worth of work. Elsewhere, the report puts employment in the logistics park at 3,640 person years.

And look at the estimates the Port of Sydney gave InterVISTAS for container traffic at the fully built-out facility:

According to the Port of Sydney Development Corporation, after a 2.5 year construction period, traffic volumes at Novaporte are expected to ramp up to 1.2 million TEU using a phased approach between Year 1 to 5. Construction of Phase 2 of the project is planned for Year 5 to 7, increasing terminal capacity to 3.2 million TEU. An additional 1 million TEUs is expected between Year 7 to 10 and an increase of an additional 1 million TEU is planned for Year 10 to 12.

In 10 years, Sydney will be handling 5.2 million TEUs. To put that in perspective, that would make Sydney busier than any of these leading transshipment hubs was in 2015:

Port	Volume (Million TEU)
Colombo, Sri Lanka	5.19
Valencia, Spain	4.62
Algeciras, Spain	4.52
Jeddah, Saudi Arabia	4.19
Port Said, Egypt	3.60
Marsaxxlokk, Malta	3.06

Even InterVISTAS was a little uneasy with these figures, judging by the footnote they added:

Timeframe for full build-out of Novaporte was provided by the Port of Sydney Development Corporation. InterVISTAS Consulting was not asked to review or comment on the magnitude of the forecasted container volumes or their timing. This report merely documents the expected economic impacts should the forecast be achieved.

Read: Don’t look at us, we didn’t calculate these crazy-ass figures.

The point is, even if you believe those container traffic figures (and InterVISTAS clearly doesn’t), there is reason to doubt that a transshipment hub handling that volume of traffic would attract logistics operators.

Do our port promoters know this? Let’s hope so.

 

Featured photo: Port of Colombo, Sri Lanka (cropped) by jgmorard, CC BY 2.0, via Wikimedia Commons