Drewry has outlined the investment needed to ready Southeast Asian ports for COVID-19 driven supply chain diversification alongside the advantages and challenges that these ports have.
A China -centric procurement model is already out of favour because of the US-China trade war and COVID-19 will be a push factor for manufacturers who have been increasingly seeking alternative locations, said Eleanor Hadland, senior analyst in Drewry’s Ports and Terminals practice.
“South East Asia offers labour cost savings of 20-80% which is a big draw,” said Ms Hadland in the maritime research consultancy’s latest container ports webinar briefing.
Foreign direct investment in SEA has been rising, but opportunity for diversification into the region is limited by the available workforce, China’s workforce is almost two and a half times bigger than the combined workforce of all the major SEA economies combined and this won’t change, pointed out Ms Hadland.
Drewry has looked at how ready are ports in South East Asia to take on extra trade. It noted China has an estimated 267m TEU of port capacity, compared to 159 TEU in South East Asia.
In absolute capacity terms they are behind, but if assessed pro rata to workforce the gap is not as big in some countries. Singapore and Malaysia have significantly more container port capacity per 1000 workforce. Indonesia, Myanmar and Cambodia has significantly less though, said Ms Hadland.
Drewry estimates that to bring South East Asia up to China’s level there would be 24m TEU of existing port capacity that needs upgrading across the region to provide ULCV capability.
Some of this upgrading work is already in progress. Drewry’s research shows there is currently 16.5m TEU of additional capacity due to be operational by the end of 2023. But some of the less advanced projects will be delayed due to COVID-19.
One of the biggest obstacles to diversification is the size of the workforce rather than the capability of the port, stressed Ms Hadland. Additionally, ports in South East Asia aren’t as well connected to deep sea trade as China.
In a positive 2021 GDP scenario, the forecast for world port handling could be as high as +13%, but in a negative GDP scenario this figure could be -6%, concluded Drewry after assessing at COVID-19’s impact on port volumes in 2020 and 2021.
Eleanor Hadland, senior analyst in Drewry’s Ports and Terminals practice, said: “The huge demand side shock by the closure of the main consumption economies is projected to see port volumes fall by around 9% for the remainder of the year.”
Q1 2020 saw world port handling drop by around 4% compared to Q1 2019. But ports in northern Europe didn’t feel the true impact of Chinese lockdown measures until April, she said.
From the second quarter of 2018, global container port throughput growth rates started to fall. In Q1 2020, growth rates dropped to 0.3%.This is now the 8th consecutive quarter of slowing growth.
In contrast to the measures taken by container lines to mitigate volume reductions (blank sailings, service suspensions, reducing capacity to maintain rates), the ports sector is unable to address the volume and revenue shock and therefore there will be a stronger focus on costs and terminal operators, said Ms Hadland.
“We expect that all but essential capital expenditure will be placed on hold and expansion plans are likely to be delayed until there is greater certainty about the demand outlook.”
As the world moves into recession, Drewry expects to see gains from M&A activity continue to outstrip growth from greenfield investments.
The COVID-19 outbreak has been driving cuts in liner services and contributed to port throughput falling by 8% in 2020, summarised Ms Hadland.
On the plus side, “transhipment hubs have maintained connectivity and up until the end of the first quarter were broadly maintaining volumes,” she said, adding that while they are likely to lose volume they are probably going to be the least impacted by COVID-19.
In the medium term, supply chain diversification away from a china-centric model is likely to spur further port investment across South East Asia, noted Ms Hadland.
Source: Port Strategy (https://www.portstrategy.com/news101/port-operations/port-performance/se-asia-ports-face-supply-chain-challenge)