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This article first appeared in The Edge Malaysia Weekly on December 3, 2018 - December 9, 2018

WHILE pundits say the US-China trade war could lead to higher investments in Southeast Asia, uncertainty over the outcome of the dispute is giving transshipment hubs a headache as they plan ahead. It is no different for Westports Holdings Bhd’s Datuk Ruben Emir Gnanalingam, who manages Malaysia’s busiest gateway port and one of Southeast Asia’s premier transshipment hubs.

“This trade discussion between China and the US has been ongoing for six or seven months. It still hasn’t ended yet, and every day that they continue talking makes people nervous, and as a result, trade slows down,” he tells The Edge.

“We could have a lot of (positive) impact now (in terms of container throughput growth) from that, also because people stock up. They might want to front-load a lot of these cargoes before tariffs go up.

“That is why we might be seeing a sudden big boost from everybody, but actually it is all front-loading. When you front-load, what would happen when there isn’t much demand for the goods later? There would be a slowdown in trade.”

In the third quarter ended Sept 30 (3QFY2018), Westports’ container throughput jumped 14% to 2.45 million 20-foot equivalent units (TEUs) year on year and 9% quarter on quarter, which was the highest level since the fourth quarter of 2016.

While Ruben does not attribute the jump in container throughput fully to businesses front-loading their orders, it does point in that direction, given that the Malaysian and global economies are not in overdrive, and are unlikely to be heating up in the near future.

In fact, some economists have warned of an increased risk of a global economic slowdown, or even a recession, by 2020. The Economist Intelligence Unit (EIU) in its country forecast for December 2018 says the trade war will dampen global economic growth by next year.

The EIU sees China’s economy slowing down to 6.2% next year from an estimated 6.6% this year. Over in the US, a combination of the escalating trade dispute with China and monetary tightening by the Federal Reserve will start to weigh on growth next year with the EIU expecting growth to slow to 2.2% from the projected 2.9% this year.

The chances of the US entering a recession are higher now — at 35% — compared with 30% just a month ago, according to a recent Reuters survey. Larry Summers, a Harvard economist and Treasury member during the Clinton administration, has forecast a nearly 50% chance of recession by 2020.

According to World Bank forecasts, the Malaysian economy will grow at 4.7% next year and 4.6% in 2020 — lower than the 4.9% forecast for this year. The slower growth is attributed to the government’s fiscal consolidation efforts.

Global economic uncertainties due to the trade war have cast a cloud over Westports’ operational and business expansion plans, says Ruben.

“We will never know whether we have seen the effects from the trade war yet until we see what happens in the first quarter of next year, assuming the trade discussion ends before that. If it continues, our clients cannot plan for the long term, which means it will be hard for us to plan for the long term too. They keep saying let’s wait and see, and that they don’t know what’s going to happen in the trade war. There are a lot of uncertainties and it is very hard to make predictions,” he says.

Despite the anxiety, the port operator still sees container throughput growing between 3% and 8% next year. Up to Sept 30, Westports’ container throughput had increased 2% year on year to 6.95 million TEUs.

 

Container volume recovery

The port operator’s 3QFY2018 results show that container throughput at Westports recovered after being affected by changes in global container shipping alliances in April 2017. On a monthly basis, Westports’ container throughput started to recover in July this year, says Ruben.

The reconfiguration of container shipping alliances caused Westports to suffer a drop in container throughput between 2QFY2017 and 1QFY2018.

CMA CGM acquired Neptune Orient Lines from Temasek Holdings in September 2016. Following the acquisition, the French liner reorganised its markets and services globally, re-routing to Singapore some of the services that had been served by Westports.

The acquisition of United Arab Shipping Company, another of Westports’ major clients, by Hapag-Lloyd also affected the port’s container throughput last year as Singapore is the German shipping company’s Asian hub.

In 2QFY2017, Westports handled 2.23 million TEUs — down 11% year on year due to the changes in the shipping alliances. This was followed by a 14% year-on-year drop to 2.14 million TEUs in 3QFY2017.

In the fourth quarter of the year, Westports’ container throughput fell 15% to 2.22 million TEUs while for the whole of 2017, it was down 9% to 9.02 million TEUs. By comparison, container throughput handled in 2016 was 9.9 million TEUs.

The downward trend continued this year with a drop of 7.4% to 2.25 million TEUs handled in the first quarter ended March 31. However, container throughput started to stabilise in the second quarter of the year with the port handling 2.25 million TEUs.

Throughout the five quarters of falling container volume and flat growth in throughput, the local container segment managed to chalk up growth, offsetting some of the decline in the transshipment segment. This resulted in a 35% increase in Westports’ share of throughput in the local container segment in 3QFY2018, up from 25% before the change in global shipping alliances. According to Ruben, higher local container throughput will increase Westports’ revenue.

“In a sense, it is always good from the revenue perspective. Transshipment has always been cut-throat. It is also a good indication for the Malaysian economy, especially the Klang Valley, when local cargo increases,” he says, adding that Westports’ container throughput will continue to grow over the next few quarters as the trend has turned positive for the port.

However, there are still challenges ahead, one of which is the price of crude oil.

In 3QFY2018, Westports’ fuel costs rose 49% year on year to RM28 million — the biggest jump in its cost components during the quarter.

The benchmark Brent crude has been rallying since Jan 20, 2016, from a low of US$29.38 per barrel to US$85.45 per barrel as at Oct 3 this year, representing an increase of 56.07% over the period. Since then, however, crude oil has declined, falling 26.24% to close at US$59.21 per barrel last Wednesday.

According to Ruben, the higher fuel price from last year until the third quarter of this year has put a dampener on Westports’ operating profit. He says he hopes to see more power transmission lines connecting Pulau Indah so that Westports’ operations can be fully electrified.

“We would like to use electric trucks, cranes, everything. We can — without using fossil fuels — but I don’t think there are enough transmission lines to provide us with the energy we need. Right now, there is only one trunk line coming in and I don’t know how much power that can provide.

“We are in discussion with the government about this. It is not that there isn’t enough power but if we decide to electrify everything with the current transmission line, there might not be enough power for the entire island,” he explains.

 

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