Ports' fate in Fonterra hands

By PAM GRAHAM

Fonterra's review of logistics is the largest and most thorough by a producer in this country and has service providers quaking.

News this month that the dairy giant will move dry goods produced around the Waikato through a new storage-and-handling site in Hamilton, mostly by train, is just a part of the picture.

It reduces truck movements by 45,000 a year.

Nigel Jones, the group's logistics sales and operations planning general manager, said once the new Hamilton facility was operational, Fonterra would save between 10 per cent and 15 per cent of its land-based logistics costs.

Now the producer of one-fifth of this country's exports is talking to the world's biggest shipping lines.

The goal is efficient networks for both and cost savings for Fonterra from an ocean freight budget of hundreds of millions of dollars a year.

To put it in context, land-based logistics costs are estimated by analysts to be $100 million a year. The review of ocean freight will be the big hit.

"We're looking to see further efficiencies from shipping companies and if that is a catalyst for port rationalisation, so be it," said Jones.

When Tony Gibson, managing director of P&O Nedlloyd NZ, told a freight conference last month to watch this space, he meant it. P&O Nedlloyd and Maersk Sealand are Fonterra's two biggest shippers.

"A rationalisation in the ports sector is overdue," Gibson said.

Investors are waiting to see whether goods from the new site in Hamilton move through Ports of Auckland, Port of Tauranga, or both. It is midway between the two.

Gibson said the Fonterra logistics initiative had been created from the perspective of being port-neutral and no positions had been pre-determined.

When Fonterra was formed in 2001 from the merger of Kiwi Co-operative Dairies, the New Zealand Co-operative Dairy Co and the Dairy Board, the goal was gains of $310 million in the third year.

Jones, who worked for P&O Nedlloyd for 18 years, joined the Dairy Board in 1999. His first task was to seek strategic relationships, rather than just transactions, with ocean carriers.

Fonterra, which exports to 140 different countries, used 20 different shipping firms. After a rationalisation, the top three carried 85 per cent of its exports, up from 55 per cent.

Shipping relationships were reviewed pre-Fonterra because the Dairy Board controlled them. Once Fonterra came into being, the land and sea strategies could be brought together.

For the first time, there could be one plan. "It could not have been done without the creation of Fonterra," Jones said.

He points to two tall piles of papers on his desk. "That's the strategy for the South Island and that's the strategy for the North Island. You can't have them."

His point: much work has gone into a plan only now starting to come to public attention.

About one-third of Fonterra's exports are refrigerated and two-thirds are dry goods.

Planning for their movement involved running mathematical models and then a second analysis that asked "does it make sense?"

Cool stores have been redesigned and the goods stored in them changed. A huge new dry store at Timaru's port is being built.

Then the project identified potential for a simplification of dry storage in the Waikato. It was fragmented.

"We identified that value could be created by having flexibility between ports, one big store between two ports," said Jones.

It worked if goods were moved by rail. Among other things, a shortage of truck drivers was an issue.

Fonterra started discussing consolidating dry goods in Hamilton with Tranz Rail late in 2002 but the plan was "parked" until it had confidence in the rail network and its operator.

That came after the Government bought back the track and agreed to invest $200 million in it and Toll NZ, the rebranded Tranz Rail, controlled by Toll Holdings of Australia, agreed to invest $100 million in rolling stock.

The new Hamilton site on Crawford St is adjacent to the main trunk line, near Fonterra's canning operation and Te Rapa plant. Waitoa is being reconnected to rail.

Toll will have its own freight facility at the Hamilton "freight village" and an area for storing and cleaning empty containers is a key part of the concept.

Empty containers will no longer move all the way from Auckland, where most empty containers are, to Tauranga. They can be loaded in Hamilton.

The exercise is capable of being replicated elsewhere but Jones will not say where.

The focus is now on ocean freight.

It is cheaper for ocean carriers to run bigger ships to fewer ports.

Gibson has made is clear that he, too, believes in strategic relationships, rather than just transactions, and in supply chains of scale.

One of New Zealand's biggest logistic challenges is that most imports go into Auckland while exports leave from many points. There is a costly movement of fresh air - empty containers - around the country.

Gibson has talked of better feeder services to hub ports, without identifying hubs.

"Nowhere in New Zealand have we developed scale sufficient to get the greatest return from our land holdings," he said in the speech last month.

Auckland considers itself to be New Zealand's natural hub but Port of Tauranga has been punching above its weight by using rail to get imports to Auckland. The rail link to Auckland's port has been under-used.

Industry observers think it unlikely that Fonterra's review will be a catalyst for one super port in the North Island, but they think Auckland needs a better rail connection.

Jones is not saying anything about port choice, except that it was not central to the exercise. "This is not being done to annoy ports."

He can't yet say what savings will be achieved by the ocean freight review, nor when decisions are due.