Entering the ‘Belt and Road’ era

Head of Global Ports & Maritime Infrastructure | Ince & Co

The forces shaping global port infrastructure are the same forces shaping all of our lives. Economic trends, geopolitical imperatives, demographic shifts, technological innovation and the natural environment; what is true for our ports is also true for the world around us. 
 
Some of the most interesting and impactful changes in the ports world aren’t taking place in the West, but in emerging markets, particularly in Africa and Asia. This reflects the reorientation of global trade towards the east and of course, China’s Belt and Road initiative. The importance of this project to UK port operators, the supply chain and freight sector may not yet be apparent, but is sure to be felt in the years ahead, both through the opportunities created and - in some cases - the challenges posed.
 
21st Century Maritime Silk Road
Despite it being common knowledge in Asia for several years, the Belt and Road has only recently - and rather suddenly - achieved a higher profile in the UK.
 
The past year has seen a proliferation of articles, presentations and debates about the Belt and Road; not just in the maritime world but also in the financial and business pages, with searching questions asked about what it is, what it means and why it matters. 
 
The Belt and Road initiative has two prongs: the ‘Silk Road Economic Belt’ (the Belt) and the ‘21st Century Maritime Silk Road’ (the ‘Road’ somewhat confusingly refers to the shipping lanes). This initiative is investing huge sums in new infrastructure to improve the security of energy supply, connectivity and trade routes, linking China with countries and markets in Asia, Africa and Europe. The numbers speak for themselves. Estimates vary, but the value of the sums invested has been measured by some at around $150bn (£112bn) a year, covering roads, railways, pipelines and more, including, of course, ports.
 
In the maritime world, the ‘Road’ is having a transformative impact on port infrastructure and seaborne trade. According to the Financial Times, China has invested $20bn (£15bn) in ports and terminals in the past 12 months. These investments are clustered along what China has identified as three distinct ‘blue economic passages’ and include the acquisition of the Port of Piraeus, multiple investments by Chinese companies in Malaysia and Indonesia and recent acquisitions of terminal interests in Sri Lanka, Spain and Brazil. COSCO Shipping Ports, Shanghai International Port Group and China Merchants Port Holdings have now invested in nearly 40 overseas port locations.
 
Why does this matter to the UK? The relevance of the Belt and Road initiative is evidenced by the recent announcement that former British Prime Minister David Cameron is to lead a new British-Chinese investment fund. Endorsed by the UK Government, this $1bn (£750m) fund is expected to invest in port, road and rail networks between China and its other trading partners. The announcement immediately followed a visit to China in December 2017 by Philip Hammond, the Chancellor of the Exchequer, at which he participated in a Belt and Road forum and spoke of the jobs and trading opportunities for the UK through closer co-operation with the programme. 
 
Reshaping global trade
There is more to ports than the Belt and Road, but it is hard to look beyond this as a game-changer for the industry. For example, it is already having an impact on trade routes, including to and from Europe. In the Mediterranean, there has been a significant shift to Piraeus, now the third busiest terminal in the Mediterranean. Elsewhere, we see a shift in US-bound traffic, with more cargo now sailing to the East Coast of the United States via the Suez Canal, instead of crossing the Pacific.
 
An important trend linked to the Belt and Road is consolidation in port ownership. Drewry Maritime Research figures show that, following the merger between COSCO and China Shipping, the combined entity is poised to become the biggest global container terminal operator by capacity by 2020, climbing from fourth and eighth, with the current leader, Hutchison Ports, slipping to fourth place. In this sense, the gauntlet has been thrown down to other port operators - and although Chinese investment dominates the headlines, independent operators are not standing still.
 
Port investment around the globe
China has invested heavily in emerging and frontier markets, such as its projects in Djibouti and Gwadar, Pakistan, but it is far from being the only party to recognise these opportunities. For example, DP World has announced plans to build an integrated port, logistics and economic zone in Dakar, Senegal, and ICTSI plans to invest in Port of Motukea and Port Lae in Papua New Guinea.
 
Given the sheer scale of the planned projects, it is tempting to ask who the likely winners and losers will be. Although some ‘white elephants’ are inevitable, it is too soon to make predictions. In addition, although market share may change and individual ports will rise and fall in global rankings, there are opportunities for all, so long as the market continues to grow in absolute terms. 
 
Nevertheless, it is understandable that port operators will be questioning the steps to take in order to position themselves as an attractive proposition to shareholders and customers; particularly those operators that face greater competition. This is exacerbated by concerns that the port calls of some vessels may be in part guided by wider Chinese policy considerations, not just cold commercial logic.
 
The challenges also differ between transhipment and gateway ports. The more successful ventures may well be those that focus on serving as gateway terminals, such as Bolloré’s terminal at Tibar Bay in Timor-Leste, with captive markets for their services. By contrast, transhipment hubs are more exposed to the risk that a carrier can switch ports. Some have suggested that the East Coast Rail Line and new ports in Malaysia could threaten Singapore’s status as a world-leading transhipment hub, although this is unlikely in the short term. To compete, transhipment hubs need to upgrade their facilities or risk losing business if liners can choose where they tranship their cargo. 
 
Closer to home, we have seen ongoing investment in the UK ports in the past year. Leading the way was the £1bn investment plans unveiled by Forth Ports for Tilbury, the UK’s third largest container terminal. In the face of competition from the likes of DP World London Gateway, this includes a new deep-sea jetty to accommodate larger ships calling from Africa, India and Far East, as well as Europe, plus an expansion of its logistics capabilities to aid the speedy movements of cargo through the port. In addition, multi-million investments have been announced at the likes of the ports of Tyne, Great Yarmouth, Cardiff, Dundee, Humber, Grangemouth and elsewhere.
 
The changing ports world 
Of course, global trade patterns are not the only issue facing port operators. The emergence of new technology offers significant benefits, but also raises cyber security threats, as more port functions go digital. New port regulations are increasing the complexities of compliance. The environmental spotlight continues to be placed on port operations, and in a tough commercial environment, finding the funding for port modernisation and growth remains a challenge. In the UK, we have also seen ports investing to re-orientate away from traditional industries and embracing new opportunities created by the growth in renewable energy.
 
All of these factors and more are having a significant impact on the way that ports are built, financed and operated in the 21st Century.
 
Ince & Co is heavily involved in the global ports and terminals sector, working with operators, contractors, investors and banks. Whether advising on concession agreements, joint ventures, acquisitions, financing and commercial contracts, or assisting with dispute resolution and compliance, we pride ourselves on helping to negotiate the challenges that can arise at any stage of a project; whether for a greenfield terminal in a frontier economy or an established port in a mature market.
 
We live at an exciting time in the ports industry, both in the UK and around the globe. It may take a little time for the ripples of the Belt and Road initiative to be felt on British shores, but they are coming. For those ready to take advantage, these changes will bring new opportunities for global commerce.