Impact of concession costs in the transshipment container market: a case study of the West Med

The Mediterranean is one of the most strategic shipping areas, thanks to its location within East-West trade corridor, which connect the three main trade areas in the world: Asia, America and Europe. The total container traffic in this corridor during the last twenty years has experienced a steady and significant growth following the increase of seaborne global trade.

Within this context, West-Med ports have been implementing new strategies, positioning themselves as key points for transshipment traffic, mainly using a hub and spoke model. Under this scheme, a port concentrate the containers coming from long-range routes in big vessels (Deep Sea) to distribute them afterwards to their final destination in smaller vessels (Feeder). Two types of transshipment ports can be identified:

  • Purely hub ports: Have a clear strategy focused on transshipment. For example, Malta or Gioia Tauro ports
  • Mixed hub ports: Have their own hinterland but also attract substantial volumes of transshipment. For example, Valencia port

Major West-Med ports, 2019 ((Capacity MTEUs/ throughput in MTEUs/ capacity in use in %)
Source: Port Authorities, Port operators, ALG analysis

The transshipment business is in general very volatile, meaning that any shipping line can easily move their volumes to other ports. As a result, there is a fierce competition among port operators in offering the best conditions to the shipping lines.

Main drivers of selection of a transshipment hub

There are several pre-requisites in order to become a transshipment hub:

  • Strategic port location: terminals should be placed geographically in a location that minimizes the deviation from the East-West trade corridor, and provides an exhaustive and efficient network of feeders as well as the possibility of managing the repositioning of empty containers.
  • Service reliability: terminals should provide high berth productivities (+25-30 movements per crane/hour), easy maneuverability and docking on arrival/departure and low percentage of non-operational days due to adverse weather conditions.
  • Optimal infrastructure: operators should build deep and high-performance berths that allow the operation of ultra large modern vessels.

Additionally, there could be other “nice-to-have” factors that increase the attractiveness of a transshipment hub, like for example the location within a strong hinterland, which implies that shipping lines could consider even a route deviation to call there (for example, the case of Valencia port).

However, the most critical driver, under equal conditions between terminals, is the provision of competitive handling tariffs. Shipping lines are looking for flexible and discounted tariffs, as well as competitive prices in other services as bunkering, pilotage, towage, etc. Hence, port operators try to increase their competitiveness, mainly through the optimization of costs.

Competition among port operators: optimization of costs

Key costs in a transshipment hub, apart from those related to investment activities, are stevedoring costs and concession costs. In the specific case of West Med, handling tariff differences tend to correlate to these key costs.

Examples of key costs and tariffs in Mediterranean container hubs (€/box)
Source: ALG analysis

In this context, what are the main levers to optimize costs, and hence increase port competitiveness?

Stevedoring costs depend on the labour costs of the country where the terminal is located. As a result, although several initiatives could be developed to decrease the impact of stevedoring in high labour cost countries (for example, through automation or vertical integration between shipping line and port operators), the scope for action is generally very limited in the short term, as workers are highly unionized.

Concession costs comprises fixed (per m2) and variable (per TEU) fees. Differently to stevedoring costs, which are more rigid, the optimization of concession costs could be more actionable, as it basically depends on the strategic goals of each port. In the West Med, the share of concession to stevedoring costs vary significantly among terminals. Apart from the conditioning of labour costs in each country, some Port Authorities could establish high fixed fees due to monetization-oriented privatization processes (Malta), while other Port Authorities have no fixed fees at all in order to reduce the operator’s risk (Sines).

In summary, lowering concession costs is one of the main levers to increase competitiveness of transshipment hubs in the West-Med. While port operators could work on a reduction of stevedoring costs in the mid/long term, concession costs can be optimized in the short term in collaboration with public institutions in order to maximize the market potential.

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About the authors
Ibai Erdozain holds a MSc in Industrial Engineering and is a Port and Maritime Principal at ALG. ierdozain@alg-global.com
Ignacio Rodríguez de la Rúa is a Port and Maritime Engagement Manager at ALG. irodriguezrua@alg-global.com
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