ANNUAL REPORT 2006-2007
7. Key implications of market developments for European ports
7.1. The changing nature of port competition in Europe
Europe is blessed with a long coastline reaching from the Baltic all the way to the Mediterranean and Black Seas. The European port system cannot be considered as a homogenous set of ports. It features established large gateway ports, hub ports as well as a whole series of medium-sized to smaller ports each with specific characteristics in terms of hinterland markets served, commodities handled and location qualities. This unique blend of different port types and sizes combined with a vast economic hinterland shapes port competition in the region.
Port competition in Europe is highly complex and dynamic. It is clear that the factors determining the underlying competitiveness of ports are as diverse as they are numerous. The institutional environment within which economic actors operate is one of the determining factors. The organizational and institutional environment in which ports operate has changed dramatically in the last decades. WTO�s impact on free trade, deregulation and privatization in ports and inland transportation are among the main institutional factors affecting port hierarchy. Logistics integration, scale increases in vessel size, the emergence of global terminal operators and structural changes in logistics and distribution networks are just some of the key organizational trends affecting port operations and spatial characteristics within Europe. These developments have not only made port competition more intense, but have even affected the core object of port competition. The factors that are critical for improving port competitiveness are evolving over time, given the rapid pace of change in the global economy and the increased focus on supply chain management. Today we focus on the growing importance of the latest technologies in enhancing processes and management practices related to port productivity, logistics performance and environmental performance, in contrast to past decades when the expansion of resource endowments seemed to be the main driver.
There is no lack of port competition in Europe. Battles are fought on many fronts: maritime and hinterland access, terminal capacity, but above all the accommodation of supply chains. An increasing number of European ports is present on the competitive scene. This is in sharp contrast to North America where more and more cargo is being channeled through only a few ports. The European port scene is therefore becoming more diverse in terms of the number of ports involved and the scope of port functions and services, leading to more routing options to shippers.
European ports are increasingly competing not as individual places that handle ships but as crucial links within supply chains. Market consolidation has resulted in large port clients who possess a strong bargaining power vis-à-vis terminal operations and inland transport operations. The loyalty to the home port tends to fade as large players are expanding their reach over more than one port. The network focus allows market players to engage in extensive port/terminal benchmarking exercises on issues related to productivity and supply chain compliance. As such, individual terminals are more than ever forced to strive for a high position in the efficiency rankings. The stakes are high as the loss or the acquirement of a large customer can have a significant impact on overall port throughput and associated valueadded services.
Ports are engaged in a competitive battle to bind shippers and carriers who control huge cargo flows and who are in a good position to generate value-added for the port region. Vertical integration in the market has complicated the identification of the real supply chain managers. In some cases, the supply chain manager is situated at the end of the chain. For instance, supermarket chains like Carrefour exert strong power on the supply lines of food products. In these high-volume supply chains, a seaport is seen as a bundling point, a buffer within the scope of inventory management and/or a fast transit point. In other supply chains, commodity traders have a large impact on the routing of cargo. Large forwarding agencies negotiate rates with shipping lines and route the cargo they manage according to a combination of determinants such as price, transit time and reliability. Differences may also be observed depending on the type of cargo involved, the cargo generating power of the shipper, the characteristics related to specific trade routes and the terms of trade and terms of sale. Some markets witness a power play between shipping lines and shippers when it comes to cargo routing through ports. The higher the bargaining power of shippers vis-à-vis shipping lines the more pressure for direct calls in ports close to the markets as this will shift the �cargo follows ship� principle to the �ship follows cargo� principle.
Supply chain managers are facing a market environment in which freight transportation has become the most volatile and costly component of many firms� supply chain and logistics operations. Managers have to deal with delays in the transport system, with rising oil prices, complex security issues, and with labour and equipment shortages and imbalances. Each of these problems adds risk to the supply chain, and the problems are likely to get worse before they improve. Managers in the logistics industry are already spending a growing share of their time handling freight transport missteps and crises. Growing concerns on capacity shortages in ports has made supply chain managers base their port choice decisions increasingly on reliability and capacity considerations next to pure cost considerations. To be successful, ports have to think along with the customer, try to figure out what his needs are, not only in the port but throughout the supply chains and networks. This demands the creation of a platform in which the port is working together with relevant stakeholders to identify and address issues affecting logistics performance. Port authorities can be a catalyst in this process, even though their direct impact on the routing of cargo flows is limited. The adoption of a catalyst role requires a supply chain focus of port authorities and an institutional and governance framework that encourages collective actions in the port community.
7.2. The need for securing port capacity
The development of additional container handling capacity to meet growing demand has clearly lagged behind in some parts of the world, including some parts of Europe. Terminal projects around Europe have witnessed severe delays or were even cancelled. The causes range from internal politics within the port, environmental objections, legal technicalities and objections, investigations by the European Commission into market share implications, to political wrangling over funding, court cases, or to public enquiries and subsequent government considerations of their findings. Terminal operators have been witnessing increasing utilization levels of their facilities in recent years and this has often resulted in port congestion. The growing mismatch between the demand for (container) shipping services and the supply of terminal capacity continues to be the main reason for observed schedule unreliability in liner services. More than 40% of vessels deployed on worldwide container services nowadays arrive one or more days behind schedule. On the Europe - Far East route this figure even amounts to 54%. Port congestion and associated decreasing schedule integrity have profound implications for all players throughout the entire supply chain: increased operating costs for shipping lines, negative effects on terminal planning and inland transport planning and increased logistics costs for shippers due to late arrivals. As such, the integrity of entire supply chains is affected.
Accepting high risks for capacity shortages in ports as the �new normal� might in the longer term have adverse effects on the whole European logistics system and eventually also on Europe�s position in global production and consumption networks. Therefore, it is a joint responsibility of port managers, policy makers and other stakeholders to foster seaports and the broader networks of which they are part, to look after their well-being and to safeguard their future development potential.
As governments are curbing their financial participation in terminal development projects and port authorities are adopting full liability, it has become crucial to have an institutional and procedural framework in place that is conducive to potential investors.
7.3. Terminal networks as driving forces in European port efficiency
More than ever, terminals are not an end in themselves: efficient cargo handling facilities contribute to the industrial and logistics development in the port area and the hinterland. Against the background of supply chains, competitive forces are shifted to groups of spatially-dispersed but functionally-integrated terminals in different ports. Large terminal operators have emerged in container handling, dry bulk handling and segments of the conventional cargo market in order to offer the customers a more differentiated service range. The extensive terminal networks can also be considered as an effective means to counterbalance the power of carrier combinations, to realize economies of scale and to optimize the terminal function within supply chains.
New entrants in the terminal market typically meet the requirements for maritime accessibility and terminal layout. However, they often have to tackle major issues such as securing hinterland services, dealing with stakeholder-related procedures linked to large terminal projects and improving their cargo-generating and cargo-binding potential (typically as a result of a lack of associated forwarders� and agents� networks).
7.4. Serving an expanding European hinterland
Port hinterlands have become a key component for linking more efficiently elements of the supply chain, namely to ensure that the needs of consignees are closely met by the suppliers in terms of costs, availability and time in freight distribution. European seaports are competing fiercely to extend their hinterlands across frontiers. This has opened new routing options to shippers and shipping lines and has intensified the battle for contestable cargo. Major shared hinterlands characterized by intense port rivalry are found in the Rhine-axis, northern France, northern Italy, the east-west corridors from the Benelux ports to the hinterland, the Alpine countries, the central part of Spain, the southeast of the UK and parts of Eastern and Central Europe. Even regions close to a port are often not captive to that specific port.
The Le Havre - Hamburg range remains the dominant port range in Europe. The traditional �blue banana� is now approaching the shape of a boomerang. As a result of extensions to Central and Eastern Europe and significant growth on the Iberian Peninsula, an increasing number of ports gain direct hinterland access to the �blue banana� area. On the one hand, this development has broadened container port competition and altered spatial hierarchy, in the sense that the ports in the Hamburg - Le Havre range are increasingly facing competition from container ports in other European port ranges (Baltic, Black Sea and Med), primarily for serving hinterland regions in the periphery of the core of the EU. On the other hand, the rise of economic centers in Eastern and Central Europe creates opportunities for all ports to develop shortsea shipping services and water- and land-based hub-feeder networks to these areas.
Most ports have achieved a considerable modal shift in hinterland transport, but rail and inland navigation still have not reached their maximum potential. Modal shift policies are implemented throughout Europe and these policies are starting to pay off on some multimodal inland corridors. For example, container transport by barge is slowly becoming more important in navigation areas outside the Rhine and the Benelux countries with positive effects on barge traffic in ports such as Hamburg, Le Havre and Marseilles. Container transport by rail has seen a spectacular development in German ports, while other both small and large ports are implementing strategies (backed up by infrastructure and rail liberalisation) to significantly increase the market share of rail in the modal split in the medium term. Hinterland connections of smaller ports and new terminals in a start-up phase remain rather precarious. Smaller ports and new terminals often find themselves confronted with a vicious circle in the organization of hinterland transportation. The small-scale container volumes do not allow to install frequent block and shuttle trains to the more distant hinterlands. Because of the inability to serve a substantial hinterland, major shipping lines do not include these ports in their liner services. For the time being, the absence of critical mass complicates a further modal shift in many ports around Europe and impedes the development of new multimodal corridors.
7.5. Forging ties with inland ports and inland freight centers
For further information on the concept of port regionalization, we refer to Notteboom and Rodrigue (2005)
The changing logistics environment poses new challenges in the relations between seaports and inland ports. Port authorities and market players are invited to bring the perspective of port development to a higher geographical scale (beyond the port perimeter) through a number of strategies linking the port more closely to inland freight centers. A port regionalization phase41 is emerging characterized by a strong functional interdependency and even joint development of a specific port and selected multimodal logistics platforms in its hinterland. An increasing number of European ports are embracing the concept of port regionalization, while others stay at the sideline. Private market players have already gone far in setting up cooperative networks involving ports and inland centers. Port authorities are often quite reluctant to engaging in advanced forms of strategic partnerships with inland ports, e.g. through strategic alliances, (cross-)participation, joint-ventures or even mergers and acquisitions. More room has been created for forms of indirect co-operation, for example through joint marketing and promotion, which are less binding and require less financial means. Rotterdam, Marseilles (in relation to Lyon), Le Havre (in relation to Rouen and Paris), Antwerp (in relation to Liège), Hamburg and Barcelona are some examples. Large ports generally have a broad financial base to engage in a well-balanced port networking strategy, although substantial differences exist even among the largest ports. Smaller ports tend to rely more on simple co-ordination actions to substantially improve inland freight distribution, with benefits for all parties involved.
The development of multimodal corridors enhances the interaction between seaports and inland locations and as such leads to the development of large logistics poles consisting of several logistics zones. This trend towards geographical concentration of distribution platforms in many cases occurs spontaneously as the result of a slow, market-driven process. Supranational, national, regional and or local authorities have a role to play in facilitating the process toward a further adaptation of the port system to the imperatives of distribution systems.
7.6. Coping with mounting environmental challenges
Environmental issues are having an ever-larger impact on port development and port operations: dredging and dredge disposal, wetlands preservation, emissions into the air (both from ships and from port facilities), water pollution, congestion, light and noise externalities and potential conflicts with commercial fishing and recreational uses of area waters. Port authorities and port companies must demonstrate a high level of environmental performance in order to ensure community support. However, environmental aspects also play an increasing role in attracting trading partners and potential investors. A port with a strong environmental record and a high level of community support is likely to be favoured.
Observed differences among European ports in the implementation and application of environmental objectives and measures can potentially have an impact on the future port hierarchy in Europe. A number of ports are leading the way and went through �learning by doing� experiences in developing stakeholders� relations management and in dealing with EU and national environmental regulations and spatial planning restrictions. Their experiences can also help other ports in learning to cope with the present avalanche of environmental challenges.
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