The future for the Ostsee is in containers
By Nils Harnack, Team lines GmbH & Co.KG, Hamburg
One of the most notable presentations at the seventh international Transport and Logistics conference in Moscow was this analysis on maritime container shipments on the Baltic Sea region. We have published this speech in shortened version for our readers
Germans call the Baltic Sea the Ostsee, Swedes call it Ostersjon, and both in translation mean the Eastern Sea. The Finns also call it the Eastern Sea by naming it Itameri, Estonians call it the Western Sea, While Russians, Poles and Balts call it the Baltic Sea. All these nations were thinking of the very same, rather small waters in the center of the Baltic region. Despite the different names for one and the same sea, the region is a trading potential of more than 300 million People. During past centuries the influence has primarily come from the west, nowadays both Russia and the Baltic countries play as well an important role in the Baltic Sea Trade, may be even the most important role. The share of exports to other Baltic Sea countries ranges between 10 and 75 %, with an average at about 30 to 50%. Furthermore a very considerable proportion of the overall export and import volumes of all of the Baltic Sea Region is delivered via the Baltic Sea. Although the overall trade situation is at this time quite stable, some problems continue to exist. The Russian customs procedures are not in line with the WTO regulations, which may delay the Russian membership. The main issue seems to be a rather short sighted ideology by the customs officials, who like to collect some extra fees from western exporters, truck companies and forwarders. We also should remember that St. Petersburg's port is overloaded at the moment, but we will talk about it a bit later.
As economic growth has slowed down in the EU and the US, the Scandinavian countries have also slipped closer to recession. Especially Finland, one of the best performing European economies during the latter half of the nineties, has witnessed its GDP growth come to a virtual stop. None of the Nordic countries achieved a GDP growth of more than 1,5% in 2001. The Scandinavian countries are all extremely dependant on foreign trade and the EU is their major export market. In addition the Scandinavian countries have experienced a range of unique shocks, which have also effected economic growth. In Finland the telecommunication sector has slowed down considerably; in Norway oil prices decreased tremendously and in Sweden people have difficulties to promote exports, even with a weak currency.
On the eastern side of the Baltic Sea however economic growth has continued with a significantly higher pace than in the Nordic countries. In the Baltic countries economic growth has only begun to decelerate towards the end of 2001. The export growth of the Baltic countries has also suffered from the slowdown occurring within the EU, however the domestic demand of the Baltic countries has remained strong. Moreover the Baltic countries have benefited from increasing demand from Russia. The steady growth taking place in Russia has raised household incomes ultimately leading to higher import volumes. Furthermore the real appreciation of the rouble has increased the purchasing power of Russians abroad. Russia has clearly benefited from the long period of high oil prices. In my view it is however rather likely that Russia is slowly entering a period of more modest growth.
Inflation rates in all countries around the Baltic Sea have decreased to a very acceptable level, they are however accelerating somewhat in the Baltic countries. Interest rates are low, oil prices seem to stabilize at around USD 20 / barrel, and under the present economic uncertainties wage demands will hopefully also remain quite modest.
Now if we summarize, the situation in all countries framing the Baltic Sea gives no reason for concern. The economies especially on the eastern side will further stabilize and serve as a good base for increased shipments in the Baltic Sea. Russia will be the backbone of this development. 2002 might see a somewhat slower growth than 2001 but still at a very acceptable level when comparing this to West Europe.
Maritime cargo rising
It's sure that the situation as described above will induce more and more cargo moving from landbased transport modes to short sea, because infrastructure cannot be adjusted quickly enough to serve these additional volumes. Just imagine that about one million TEU currently transhipped in Hamburg would be on the roads or railroads instead of being loaded on container feeder ships. With a predicted annual growth of close to 10% this volume is doubling in ten to twelve years and nobody is able to construct respective roads or trains in such a short period. Moreover the green parties at least in West Europe will certainly not like this. People also have to understand that we as shipping companies are not fighting against the truck, we are just offering supplementary services and alternatives.
Now let us have a look to the present status of container shipping in the Baltic Sea. As a matter of fact you can very generally say volumes in the Baltic Sea are steadily increasing - and I am only talking container shipments. The shipping industry is certainly able to cope with this growth since we do not have road blockages, traffic jams or accidents that hamper the traffic on the sea. Capacity and demand are not too far off each other, there are not too many ships like we see in many overseas trades exercising strong pressure on rates. Nevertheless our freight rates are at a ridiculously low level.
We must also look at the deep sea shipping companies maintaining their own feeder network throughout the Baltic Sea. They have increased their coverage tremendously; today you have a number of big shipping companies with own feeders like for example Maersk Sealand, MISC OOCL in Joint Venture, MSC, K Line and CMA/CGM. Such volumes are lost to the commercial feeder, however they do of course also count when evaluating the market. Overseas shipping companies take a lot of their growth from countries in the Baltic Sea, just remember the economic situation we were describing above.
However we should not paint a too rosy picture since container shipping in the Baltic Sea also faces some challenges and these are connected to costs. If you consider a normal sized feeder container ship of say 120 m length like the one I showed you in the beginning you face tremendous cost increases. Charter rates have not come down like with big ships where they are now less than half of what they were a year ago. Our rates have increased by about 6%. Freight rates are under strong pressure, our average income per TEU has fallen continuously. Bunker costs are on the high side, everybody can see this at a gasoline station. Port dues including pilotage and icedues especially in Russia and the Baltic countries, but also in Finland and Sweden are unacceptable expensive compared to continental ports. This is hard to understand.
Our customers that are the ocean carriers, do not want to listen to all those arguments, they do only see competition and demand lower freight rates. For them, it is rather difficult to differentiate short sea feeder operators by their service quality, you have to take a very detailed look at schedules and sailing times. Therefore the easiest argument is always the price.
The traffic pattern hasn't changed much; feeder ships must match the sailing date of the ocean vessel in the transhipment port, flexible and weekly schedules are a must as well. Apart from some small ports you have several sailings per day from all relevant areas in the Baltic Sea. Ship sizes have continuously grown over the past ten years, but nothing spectacular; I would even say, it has changed much slower than in deep sea shipping.
More and more lines open up their own feeder service, they chose the main stream routes , where big volumes enable them to employ larger ships thereby achieving a certain economy of scale. The commercial feeder operator however is forced to offer the whole range of ports and also call at niche areas with low volumes and less attractive rates.
Containers boosting ports
Hamburg handled more than one million TEU transhipment cargo for the first time ever. The growth over last year is rather impressive with 17%. Just the figures for the Baltic States and Russia show slightly lower growth, but still far above the average. Russia is not the biggest trading partner, but the increase is really dramatic. Now No 3 from last three years ago. Now what does this mean for the technical facilities in the ports? And mind you we do only discuss Container shipments not any oil, grain or coal loads.
Hamburg is well equipped with the opening of the new Terminal Altenwerder in about one month. There are no capacity constraints for the next 7 to 10 years. Hamburg is now applying for a further deepening of the river Elbe for another 1,5m, which will hopefully be accomplished in 5 years, thus making Hamburg even more competitive.
Most Baltic Sea ports in Scandinavia including Finland do not have major problems. They can manage the expected increase in volumes provided they do normal sized investments in cranes and piers plus some dredging in their ports. As a general rule you can say, containerships in the Baltic Sea need 8,5m depth. It does however look a little different in the eastern side of the Baltic Sea.
We foresee no problems in Tallinn . We say only a very slight growth of 1,8% to 78.000 units last year. Recently new facilities went into operation in Muuga Port, enabling Estonia to drastically increase their container throughput in Tallinn without any difficulties.
Riga experienced a considerable growth after the Russian crisis with about 20% last year to close to another 23% this year so far. The terminals - mainly BCT the Baltic Container Terminal - are well in a position to handle further increased volumes without any headache.
Other Latvian container ports like Liepaja or Ventspils do have state of the art equipment, brand new and absolutely up to western standard. However there is only one problem; they do not have sufficient container cargo. It is not the feeder carrier like TEAM LINES routing cargo through this or that port, it is the ocean carrier who decides which port to use. And that depends on many factors.
Klaipeda is growing fast with more than 30% over the last year (51.000 TEUs 2001 ), but has taken precautionary measures and invested into a new terminal . This will safeguard a competitive position for the foreseeable future.
Gdynia is not expanding too much, but Poland has big plans for a huge Container yard close to Gdansk to be completed within the next five years. Until then present possibilities should be sufficient.
And back to Russia
So far our view on the Baltic States. The majority of their container traffic is Russian transit cargo - apart from Poland - or merchandise destined to other former CIS countries. Thus their development depends much on what happens in this country.
This leaves us with Russia. In our analysis we limit ourselves to Kaliningrad and St.Petersburg, because those are the only ports handling containers today.
Interestingly enough both are hampered by a difficult access. There is a sea channel in both ports, limited to one way traffic and mandatory pilotage. Kaliningrad has small and rather old terminal facilities, which do not stand any comparison with modern container terminals. Port costs are exorbitant high and the service ships receive at Kaliningrad does not justify such high costs. 21.000 TEUs were handled last year and right now there is no possibility for big increases, although investments are planned and endeavors can be seen. But Kaliningrad faces the transit corridor problem
We all know there will be another increase in container volumes in ST. Petersburg this year. The port - by far the biggest in the whole Baltic Sea already - handled 448.000 TEUs last year, up 78% from 2000. Reliable projections by Russian authorities themselves forecast more than 600.000 TEUs this year. How will that be possible? I don't think it will.
This may sound too harsh and impolite and I apologize for that, but it is simply fact if compared to other regions around the Baltic Sea. Things have improved though but definitely not enough and the worst part is the growing volumes. On average a container needs 5 days to leave the port area, in Hamburg or Riga for example you can take delivery within 5 hours.
I know about the difficulties, Russian authorities face when talking investments in St. Petersburg's port infrastructure, but there are some positive signs like HHLA's interest in Petroles port and other plans for ports around the bay like Ust Luga. However it is not only 5 minutes to twelve, it is 12:00 clock already and St. Petersburg must hurry up not to face even more bottlenecks than today. The container port investment agency Rosmorport has an annual budget of Mio USD 40, that may help. But right now there is no definite construction going on. We as a shipping company must be sure to be served on the same level as in other Eastern Baltic ports and that includes a guaranteed berthing time. We must be able to preplan our port stays in order to safeguard a fixed day schedule, which our customers demand.
A lot could be achieved by advancing customs procedures; shipping lines could for example send Manifests in advance in order to enable the customs authorities in St.Petersburg to select containers for inspection prior to the ships arrival. Terminals could be used more productive by installing improved handling equipment.
In my opinion the cargo will always find its way, and if a port has difficulties to handle the volumes offered to the port, then the cargo will simply move through different transit ports.
Finally a word on bigger Containerships in the Baltic Sea. Big vessels do actually exist. There are ships that carry about 8.500 TEUs, but will of course never come to St. Petersburg. Will we see bigger ships in the Baltic Sea?
Technically one can enter the Baltic Sea with large vessels over 3000 TEUs, however it does not make any commercial sense. There are only two areas, where volumes could be big enough to justify ships of say max 1200 TEUs that is Helsinki and St. Petersburg. Those vessels do not make sense for commercial feeder operators like we are, but only for Ocean Lines, who run their own feeder network, and they can influence their own cargo flow. We would have to turn them around within one week to match all the connections in Hamburg and this is not possible due to necessary longer port stays. Imagine the problems in St. Petersburg with a vessel, double the size of today's biggest ships. Furthermore you lose a lot of flexibility and frequency since these ships can only sail once a week, but the customers demand two or more departures.
If volumes further grow - and we all believe they will - Ventspils might be a port to attract 2500 / 3000 TEU ships directly from overseas origins for further distribution / feedering from there, but that is a while to go.