Jenny Ruth: South keeps its faith in containers

COMMENT

Until late last year, South Port New Zealand's prosperity looked assured.

In mid-1994 when the company was floated by its major shareholder, the Southland Regional Council (now Environment Southland), its port activities accounted for less than half its assets.

It owned a rag-bag of other assets including 35 per cent of Allied Farmers in Taranaki, 45.3 per cent of the Clifton Wool Scour and other rural trading activities.

But then it began to divest almost all its non-port activities - it still owns a central Dunedin property - and began returning large licks of capital to shareholders.

Return on equity went from negative 2.8 per cent in 1999 to positive 6.4 per cent in 2000 to 7.9 per cent the following year and 11.4 per cent in each of the past two years.

The company returned $13 million to shareholders through special dividends and a share buyback over a four-year period when total assets dropped from $41.8 million to $28.7 million.

Then, three years ago, it set out to develop itself as a "niche" container port, exporting and importing some cargo directly through its facilities and acting as a "feeder" for other cargo being carted by ship to the main container ports.

South Port's chief executive for the past five years, Mark O'Connor, says he doesn't disagree with recent comments from shipping line P&O Nedlloyd that it is inappropriate to have container-handling equipment at every regional port.

But, he says, "I think there's a role for transport on water as opposed to rail or road, feeding cargo towards the larger ports."

The container market is highly desirable because of its higher profit margins.

South Port made a similar attempt to enter the container market in the mid-1990s. It failed, partly because expected container cargo didn't eventuate.

Rayonier, for example, had been looking at containerising its fibreboard production, but decided to continue shipping it in break-bulk form. (It later changed its mind and now about 35 per cent of its production is containerised.)

Another reason for the failure was the port's lack of infrastructure. While it did buy a mobile container crane, "we have to be honest and acknowledge that we didn't have the basic services", O'Connor says.


The lessons of that first foray were learned.

South Port had a major disadvantage in that it wasn't chosen by the Government as a container port in the pre-reform days, so the southern ports which were chosen, Port Chalmers near Dunedin and Lyttelton near Christchurch had a head start.

"We have to be pretty smart on the money as far as our infrastructure is concerned," O'Connor says.

Three years ago, it started putting in the services needed to handle containers, including a repair facility - previously damaged containers had to be shipped 30km to the rail yard in Invercargill.

It had also paved large storage areas, necessary to prevent containers getting dirty.

Some markets won't accept grubby containers until they are quarantined and cleaned.

It had also bought a couple of container-capable forklifts.

In August last year, it bought a mobile container crane from Timaru's port. The crane was three years old, but was little-used.

That and buying another container-capable forklift cost the company about $4 million, but it was cheaper than buying new.

Previously, what container trade the Bluff port had handled had been dependent on ships having their own cranes.

"The support we had from cargo providers to direct containers through the port was clearly evident," O'Connor says.

Between July last year and the end of December, the port had an 85 per cent increase in container volumes.

It was aiming for 15,000 TEUs ("twenty foot equivalents") for the full year, and handled about 9000 TEUs in the first six months.

(The country's biggest container port, Ports of Auckland, handled 663,506 TEUs in the 12 months to the end of February.)

P&O Nedlloyd and the Mediterranean Shipping Company had been running a transtasman shipping service which called at Bluff once a fortnight up to October last year, delivering and picking up about 200 containers each time.

Then they introduced a weekly service.

O'Connor says he had expected that would mean smaller shiploads and about the same amount of cargo.

Instead, within months it had build up to 250 containers a visit.

"The cargo was there, the viability was there," he says.

So convinced were O'Connor and South Port's board of the merits of the container strategy that they were prepared to sacrifice short-term profitability by increasing capital spending to provide for gains in the longer term.

That spending, and the decision of the Bluff aluminium smelter - the port's largest customer - to cut production during the electricity crisis, meant although South Port's sales rose 5.5 per cent to $14.6 million in the year ended June 30 last year, net profit fell 3 per cent to $2.6 million.

First-half sales this year rose 4.6 per cent to $7.75 million, but net profit fell 5 per cent to $1.96 million.

Then the blow fell, as chairman John Harrington explained in the company's first-half report:

"Unfortunately, international demand for vessels caused the shipping charter market to overheat. As fixed-hire rates under charter arrangements came up for renewal, shipping companies faced dramatic increases and re-evaluated ongoing use of such vessels."

O'Connor says the charter market "went ballistic" and charges rose 300 per cent or more.

The two shipping lines went from using four ships on the transtasman route to using two, and South Port and Timaru were cut from the schedule.

The containers the Bluff port had been handling for these ships are now carted north by road and rail.

South Port does retain some container business because another shipping line, Tasman Orient Line, is still calling at the port, providing services to all parts of Asia.

O'Connor thinks the down-turn is temporary, and says South Port remains committed to its container strategy.

"At some stage the dynamics of the market will change and make a direct call practical again," he says.

" If a shipping company breaks away from the pack and decided to establish a direct link with Bluff, then it has a competitive advantage."

But the port isn't sitting back waiting for this to happen. It is trying to lure ships, partly using Southland's burgeoning dairy industry as its "carrot".

O'Connor says the nearest dairy factory to the port has gone from producing about 25,000 tonnes of cheese in the early 1990s to making about 230,000 tonnes of dairy products now.

Fonterra's Edendale factory had secured a contract to supply 35,000 tonnes of a product to African countries in the next 12 months.

That production is being taken to other ports at a greater cost than if it could be shipped from Bluff.

Says O'Connor: "If we had the shipping links, we feel we could direct that through Bluff. It makes a lot of sense and that's one of the carrots were out dangling in the market."