Global trade has come under severe pressure as the COVID-19 pandemic continues to significantly disrupt economic activity across the world. Shipping liners have drastically cut capacity, with a notable rise in the number of canceled departures worldwide to 212 in first week of April. Capacity declined by about 34% on the Asia-EU route and about 25% on the Asia-US route. As a result, almost 11% of ports globally have recorded a more than 25% drop in container vessel calls, according to the May 2020 IAPH-WPSP Port Economic Impact Barometer Report.
In the short term, GCC port operators need to prioritize the physical safety of their employees. They should put in place the requisite emergency response procedures to ensure that ports remain open for business. Some readily available digital solutions can help reduce employee interactions, handling such tasks as document management, customs payments, and even access points such as gate entry. Port operators also need to cut costs, preserve cash, collect outstanding payments, and ensure that they remain sufficiently capitalized.
Port operators also need to analyze variations in trade volumes. For example, gateway ports in the region will likely experience continued volume declines due to limited manufacturing activity and the global drop in demand for crude. Transshipment ports, however, could enjoy a short-term surge in traffic. As a lack of outbound capacity makes shipping calls uneconomical, many ocean liners will seek to off-load cargoes at transshipment hubs.
Longer-term, port operators will need to prepare for a protracted slump in rates and trade volumes. The following five measures will help them strategically reorient themselves for the future.
Improve operational efficiency. GCC ports should focus on reducing costs, improving productivity and asset utilization, and streamlining and automating processes. In doing so, many operators will need to revise their budgets and capital allocation. Over the past decade, GCC ports have invested heavily in physical infrastructure as a key component of national economic diversification programs. The region’s capacity is on track to more than double, from the equivalent of about 45 million standard containers in 2012 to about 100 million by 2022. Yet utilization rates remain low, averaging under 50%. Accordingly, port operators need to shift away from sheer capacity. Instead, they should focus on improving efficiency according to metrics such as asset utilization, revenue per ship, unit profit from cargo handled, and return on invested capital.
Upgrade port capabilities through digital. To improve efficiency, ports must invest in digital, which will give them the capabilities needed to capture cargo, reduce costs, better manage capacity, and improve cross-border trade. There is a wide range of applications, from blockchain to autonomous vehicles, drones, smart sensors, 3-D printing, and cloud platforms. These can help cut costs, improve asset utilization, and significantly improve the customer experience across the value chain.
Expand into inland logistics. Before the pandemic, some terminal operators had already started expansion into inland logistics. The aim was to better connect with owners of cargo, improve transparency, and reduce the friction in trade flows. GCC ports, especially gateway ports, should consider such expansion as a means to secure the inland trade system, improve supply chain resilience, safeguard operational continuity, and deliver more reliable and transparent service to their customers.
Rethink pricing. GCC ports should reassess their traditional pricing structures to help ease pressure on shipping lines, improve productivity, and maximize their return on assets. To achieve this, GCC ports first need to ensure that they have pricing freedom within regulatory regimes. Then they need to explore a shift to value-based pricing, which encourages effectiveness and efficiency among shipping lines, and extracts maximum value from end customers.
Acquire assets at distressed valuations. The pandemic will lead to a shakeout in which some assets come up for sale at attractive prices. GCC ports can take advantage of their strong balance sheets and low-interest rates to make strategic acquisitions. Deals can be particularly beneficial if they help ports pick up assets in high-growth and emerging markets with a healthy commercial outlook and growing volumes.
A sharp decline does not automatically mean a slow and painful recovery. The decisions that GCC ports and operators make today will shape their future. It is critical that they take steps to keep operations and markets open, and develop programs to reorient themselves to succeed in times to come.
Dr. Ulrich Koegler and James Thomas are partners with Strategy& Middle East, part of the PwC network. Shantanu Gautam is the director and Kushal Sinha is a senior manager with Strategy&, India, part of the PwC network.