By Fritz Pinnock, PhD and Ibrahim Ajagunna, Ph.D
The global container shipping industry is the backbone of intercontinental supply chains, accounting for some 98 per cent of intercontinental containerised trade volume and 60 per cent of trade value.
In addition, the global shipping industry is driven by two forces of scale and technology and the Caribbean, comprising a group of small islands sharing space, is challenged to find relevance within this paradigm.
It is true that sustained globalisation and global logistics would not be possible without a dense and efficient transport network. It is equally true that both the concept of globalisation and global logistics and their enabling tools such as information technology and intermodal transport have had a tremendous impact on maritime transport. Both globalisation and global logistics trends beg the question: how does the Caribbean fit into this picture?
Given the poor performance of most container terminals in the Caribbean, it is not surprising that handling charges are two or three times as high as in similar ports in other regions and that the overall cost of transport and insurance in the Caribbean basin is some 30 per cent higher than the world average.
For example, the route from Shanghai (China) to Los Angeles (USA), a distance of 19,270 nautical miles, attracts a freight rate of approximately US$ 700. By contrast, the distance between Kingston (Jamaica) and Orangestad, Aruba, a distance of 513 nautical miles, attracts an average freight rate of US$ 2,800.
However, for shipping lines specialising in container cargoes, the news has been especially bright for the anticipated increase in the size of ship equipped with modern technology. At least one shipping line, Maersk, believes the future looks bright. This news has led Maersk to order 10 of the world’s largest-ever ships, with the first due for delivery in 2013 in anticipation of the opening of the Panama Canal.
Bigger ships also mean greater efficiency, but only if they can be filled to capacity. Industry analysts believe that more and more companies will try to reduce their carbon footprint for both public relations and profitability reasons. Industry analysts also point out that the vessel’s enormous capacity will enable Maersk Line to move the greatest number of containers possible for its customers in the most energy-efficient way and with the smallest carbon dioxide footprint.
The Caribbean case scenario
The Panama Canal is a major gateway for cargo moving from the Far East to the US West Coast and on to the US East Coast via the intermodal transportation network. In fact, the prospect for Caribbean transshipment involvement is integrally tied to the efficiency and competitiveness of the expanded Panama Canal. The following key drivers to transshipment will influence the highly coveted Caribbean hub port status:
• Port must be located at the crossroads of principal maritime trade routes
• Productivity of stevedoring operations
• Guarantee of berths
• Competitive tariff
• Control of operations
• Safety and security
• Dedicated feeder services
Major competing hubs within the Caribbean are Kingston, Jamaica; Freeport, Bahamas; Port of Spain, Trinidad and Tobago; Caucedo, Dominican Republic; Panama; and Colombia.
Sánchez and Wilmsmeier point out that the number of services and the number of directly connected ports describe well the embeddedness of terminals in the global network and simultaneously the potential for import and export development of the respective hinterland.
But connectivity alone is not sufficient to explain port throughput. While there is no doubt that containerisation is a necessary condition to increase trade in the Caribbean, its very presence does not guarantee that such development will occur. The reach of shipping networks from a country or port, however, shows potential trade opportunities. This is particularly true for smaller ports that rely on feeder and small vessel services. According to Sánchez and Wilmsmeier, these ports depend not on their direct connectivity but on the connectivity to a transshipment hub, which defines their integration in the global liner shipping network.
Caribbean transshipment triangle with hub ports
Industry experts believe that the expansion of the Panama Canal is opening a new phase for transshipment in the Caribbean. According to Rodrigue and Notteboom, it is important to underline that, at global level, only 17 per cent of commercial relations involve direct connections between ports, so transshipment is a fundamental aspect of maritime shipping networks.
In recent years, an active transshipment market has emerged in Panama and the Caribbean, particularly within what has been dubbed the ‘transshipment triangle’ (see figure below).
The growth in Caribbean transshipment activities is related to issues such as economic growth in Latin America – being at the crossroads of transatlantic and north-south trade flows – and the need for shippers to reconcile, within their shipping networks, these many inbound and outbound trade flows.
Transshipment activities are thus a mix of hub-and-spoke network configurations as well as interlining between long-distance shipping routes. The advantages gained in terms of network interconnectivity and better use of ship assets outweigh the additional handling costs that transshipment entails. According to Rodrigue and Notteboom, the expansion of the Panama Canal comes at a time in world trade developments that is prone to uncertainties, since the main trade drivers, such as North American import-based consumption, are being questioned while new trade relations are not firmly established. In addition, South America represents a remarkable potential for additional volumes and transshipment activities.
In the triangular transshipment hubs, local and regional carriers continue to play a major role in local trade, but are threatened by loss of global and some regional trade to alliances between operators. These global operators can offer more competitive prices when exploiting economies of scale. Local and regional carriers can only compete in service and not in price, as their advantages lie in close customer relations with preferences and flexibility in payments. Regional carriers, for example, are largely niche carriers specialising in LCL (less than container load) and mixed container loads and non-containerised goods, especially in the inter-island trade. Such services are specialised in handling cargo such as three boxes, three pallets or three containers. These types of handlings are very difficult for big operators as they do not fit in their rationale for cargo handling.
Port sector bottlenecks
Port costs ripple right through national economies, especially those of small island-states. In fact, port costs affect the price of goods and services in nearly every sector of the economy. Competitiveness requires a modern, well-managed, cost-effective port system. While the standards of infrastructure in some Caribbean countries can be considered as acceptable, a major problem has been its maintenance. Other problems of infrastructure in Caribbean are: inadequate management; tariffs that are too low to support the services; accumulated debt; and discontented customers. The state of the infrastructure is also affected by the region’s vulnerability to natural disasters and the tendency of governments to make decisions concerning major investment projects without appropriate hazard assessment and information on mitigation measures.
Another challenge for infrastructure development in the Caribbean is government interference in the operation of public providers. The principle of institutional independence has been proposed to create creditworthy Caribbean public utilities, capable of financing themselves. This would entail legislative reform requiring, for example, rules for the naming of independent boards of directors; financial disclosure obligations; clear hiring practices; efficient and transparent public markets; and price-setting freedom for utilities, subject to compliance with the price review mechanism. It would also require the strengthening of local government through management training and enhancing the capacity of local governments to raise revenue. Another prerequisite is adequately trained staff to ensure effective compliance and enforcement of regulations.
The presence of an Appropriate Regulatory Framework is essential for private-sector participation in infrastructure projects. This would require the rewriting of national legislation and the upgrading of staff and their ability to enforce compliance with these regulations. For example, to manage infrastructure costs, human settlements should not be allowed to develop haphazardly without proper land-use planning. These settlements should be planned efficiently. Such polices have to be coordinated with other measures such as green taxes and development charges directed at major land users.
In port development, the importance of local and regional factors has to be considered and in various cases has produced unique frameworks which, in the worst case, impede strong collaboration with the maritime sector. The most important regional and local factors are the institutional operating and regulating framework and the financial environment for investments. A restriction on the development of maritime transport and port development, mentioned by several interviewees, is the lack of national infrastructure development plans and export facilitation policies. This impedes the functioning of ‘port communities’, mixed consultative and deliberate entities, as in Montevideo, Hamburg and Barcelona.
The Caribbean needs to focus on training facilities not only in the maritime and port sector but also in the logistics sector. The lack of infrastructure development plans is also reflected in rising congestion in port-related automotive transport. The current situation in the bigger islands - Barbados, Jamaica and Trinidad and Tobago – reveals the need to integrate national port policies in national transport and infrastructure development policies.
According to industry analysis, other trends affecting Caribbean ports that have had a significant influence on the way port operations are planned, developed, operated, positioned and marketed include:
• Changing trends in production and consumption of goods and materials
• Changing patterns in distribution and trade transport
• Joint investment by port operators and private companies in various maritime activities, as is the case in Suriname
• Increasing cooperation among ports to share resources in capacity building
• Enhanced focus on security and safety
• Changing composition of port ownership
• Greater involvement of shipping companies in container port development
• Greater attention to handling bigger, more sophisticated ships carrying larger volumes of cargo
• Intense use of technology and IT applications to assist port operations
• More focus on improving tariff structure as a competitive strategy
• Introduction of value-added services and infrastructures
• More focus on intermodal linkages.
Experts have argued that these trends will continue to shape the planning, organisation, development, management and operation of seaports in the years to come. Port authorities and terminal operators will have to adjust their strategies, development and operations to suit the dynamics and realities of the port business and trade environment. They must pull all the stops to keep pace with trends and developments affecting the maritime sector, especially in areas such as shipping, intermodal transport, production, economics and trade.
In addition, port operators must gear themselves to accommodate the trend towards ship upsizing, which will require deeper draught, higher crane productivity to minimise berthing time and enable vessels to maintain their voyage schedule. Even the smaller ports should have plans in place to expand their capacity for the upsizing trend in ships.
Given the signs of global economic recovery, the expanded capability of the Panama Canal will have a great positive impact on the Caribbean shipping industry. The Caribbean region is positioned to take advantage of this development. What will become necessary are the infrastructural and logistical components, all essential if the region is to reap rich benefits. Key developments (along with the Panama Canal expansion) which will shape the future of the regional shipping industry are: the emergence of ultra large container ships; declining freight rates; overcapacity in the global shipping industry; and carrier consolidations.
According to Noel Hylton, both large containerships, declining freight rates, overcapacity in the global shipping industry and carrier consolidations will have tremendous impact on the industry going forward. In the short to medium term, however, the global economic climate remains highly volatile and uncertain.
The Panama Canal Authority equally points out that the containership sector is the main driver of growth in canal traffic. Trade between North East Asia and the US East Coast reflects the highest canal transit growth rate and will become an important driver of canal growth.
Finally, the canal expansion will impact the regional shipping industry because of the increase in the size of ships it handles. Ships in the 4,000 to 8,000 teu range will be plying the north-south trade routes with more vessel-sharing agreements being formulated to pull service volumes together; and continued growth and expansion of transshipment ports across the Caribbean.