Shipping line costs fall as charges on trucking rise: ACCC

By: Rob McKay

DP World highlights pressures as Sims confirms competition law gap on charges to non-commercial third parties

Shipping line costs fall as charges on trucking rise: ACCC
The ACCC’s latest report details port-related business winners and losers


Stevedoring costs for international shipping lines are falling even as local port haulage firms are shouldering extra unavoidable costs of perhaps $70 million, an Australian Competition and Consumer Commission (ACCC) report shows.

The ACCC’s annual Container Stevedoring Monitoring Report also states that stevedores reported unit revenues in 2016-17 fell.

However, stevedoring operating profits per 20-foot equivalent unit (TEU) have risen by more than 25 per cent in the same time

"Revenue per TEU, a proxy for price, continued to fall across the industry in 2016-17. Total revenue fell 2 per cent to $169.7 per TEU, while stevedoring revenue fell 4.5 per cent to $138.8 per TEU," the report says.

"This has continued a very consistent trend as unit stevedoring revenue is about a quarter less than a decade ago in real terms."

Some of this was down to competition and the accompanying expansion in capacity at some ports, the report notes.

"However, this also reflects newly merged shipping lines wielding greater bargaining power, the increasing use of the larger 40 foot containers, and falling unit costs over time due to higher productivity."

Profit margins up

The stevedoring industry’s profit margins, as measured by earnings before interest, tax and amortisation (EBITA) over total revenue, increased by 4 percentage points to 17.1 per cent in 2016-17 due to a 6.3 per cent fall in overall costs.

Reductions in costs were largely driven by increased economies of scale and reduced overhead expenses by stevedores, particularly Hutchison Ports Australia (HPA).

Meanwhile, DP World and Patrick either introduced or substantially increased ‘infrastructure charges’ at a number of container terminals this year. The charges apply to truck or rail operators dropping off or collecting laden containers.  

"It is estimated that they could earn DP World and Patrick a combined $70 million in revenues, which would be equivalent to a 5-6 per cent increase in unit revenues," the ACCC says.

"However, the ACCC is currently unable to fully quantify the increase in revenues given that the charges have not been in place for the full year.

"The ACCC will more fully examine the impact of the infrastructure charges in the 2017-18 monitoring report."

There has been a lot of controversy with different views on whether the charges are justified and how they will impact on the sector. The stevedores have said that the charges are required in response to increasing costs and in order to fund investment in infrastructure.

"There is merit to the stevedores’ claims that property costs are increasing. However, overall unit costs for both stevedores remain stable.

"The ACCC will be interested to see what benefits will flow to truck and rail operators as a result of the associated investment."

It sees a key reason for the charges is for the stevedores to restructure their revenues away from their shipping line customers, and towards the transport sector.

"It remains to be seen how this may impact transport operators, although it is concerning that the nature of the port supply chain means they are limited in being able to switch stevedores in response to higher prices," it comments.

Competition dynamic

The ACCC expects this decade’s entrants, HPA and more recently Victoria International Container Terminal (VICT), to drive competitive pressure, however the business pick-up rates of the pair are yet to make much impression

"Competition has significantly increased in recent years with the introduction of a third stevedore in Sydney and Brisbane, and now we can add Melbourne to that list," ACCC chairman Rod Sims says.

"As such, we expect to see greater levels of price competition as new entrants and incumbents compete for market share.

"Stevedores will need to work harder to win or retain their customers, with benefits flowing through to shipping lines, importers, and exporters.

"However, this remains a critical period for competition.

"For sustainable competition to develop, these new entrants will need to win a commercially viable share of the market."

Infrastructure charges

Both DP World and Patrick recently either introduced or substantially increased ‘infrastructure charges’ at a number of ports for transport companies collecting or dropping off containers.

The stevedores claim that the higher charges are necessary because of rising property costs and the need to fund new investment. While there is merit to the stevedores’ claims about higher property costs, their overall costs remain stable.

"While it is true that the stevedores are facing higher property costs, the ACCC will be interested to see whether these infrastructure charges are used to improve landside facilities beyond business as usual levels," Sims says.

"It is concerning that truck and rail operators face these higher charges but are limited in their ability to take their business elsewhere."

Haulage and trade organisations approached the ACCC with allegations that the new infrastructure charges may have been in contravention of provisions of the Competition and Consumer Act 2010.

"Most of the concerns were that the price increases were excessive, but there are no provisions in the Act to deal with excessive pricing," the report says.

The volume of containers passing through Australia’s ports is the highest ever recorded. In 2016-17 Australian stevedores handled 7.2 million TEU, an increase of 3.7 per cent.  

The report also found that quayside productivity remains close to record levels. However, both capital and labour productivity fell slightly.

"The stevedoring industry is not reporting the same level of productivity improvements that we have seen in previous years. With the new stevedores now in place along the east coast ports, we will be looking for this productivity growth to return in future," Sims says.

DP World Australia

Stevedore DP World Australia’s (DPWA) take varies significantly from the competition watchdog’s view, however.

For DPWA, the report only partially explains the cost pressures in the industry and the nature of the highly competitive market the company operates in.

It underlines that it faces one of the most difficult markets in decades, led by the consolidation of shipping lines, over-capacity in the local stevedoring market, as well as increased costs — including property and property-related costs, and significant energy cost imposts.

DPWA is "meeting all of these challenges with a determination to continue to innovate as well as adjusting our tariff structures".

"Despite the market and cost pressures, DP World Australia is continuing to invest," MD and CEO Paul Scurrah says.

"But the simple fact is that the stevedores’ collective investment of more than $2 billion in more efficient cargo handling quayside and landside, combined with improved work practices and vastly improved truck turnaround times, have all but been negated by punishing increases in occupancy and energy costs at our terminals and sustained pressure on volumes and pricing resulting from the global downturn in shipping.

"Given the significant investment in state-of-the-art equipment, to have all cost efficiency benefits wiped out by these pressures is a poor outcome for our industry and our investors.

"Clearly there is a limit to what can be absorbed if the stevedores are to be able to continue a program of capital expenditure and innovation for a service that is at the heart of the Australian economy.

"We note that some in our industry will continue to expect us to absorb what are extremely unreasonable cost increases.

"In any industry, businesses refine and rebalance their prices as a normal part of responding to changing market conditions. 

"We do not think it is reasonable for any one company to absorb these costs, and to this point we are pleased that transport companies have had a relatively smooth transition in passing these costs through the supply chain."

The full report can be found here.


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