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The Financialization of the Terminal and Port Industry: Rediscovering Risk Paper no. 2.09.02

The Financialization of the Terminal and Port Industry: Rediscovering Risk Paper no. 2.09.02. Jean-Paul Rodrigue Department of Global Studies & Geography, Hofstra University, New York, USA Theo Notteboom ITMMA - University of Antwerp and Antwerp Maritime Academy, Belgium Athanasios Pallis

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The Financialization of the Terminal and Port Industry: Rediscovering Risk Paper no. 2.09.02

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  1. The Financialization of the Terminal and Port Industry:Rediscovering RiskPaper no. 2.09.02 Jean-Paul RodrigueDepartment of Global Studies & Geography, Hofstra University, New York, USA Theo NotteboomITMMA - University of Antwerp and Antwerp Maritime Academy, Belgium AthanasiosPallis Department of Shipping, Trade & TransportUniversity of the Aegean, Chios, Greece

  2. The Financialization of the Terminal and Port Industry: Rediscovering Risk 1) Embeddedness, Spatial disconnection and Financialization 2) Finance and Leverage Upside-Down 3) Rediscovering Risk 4) Re-embedding Finance and the Port Terminal Industry 5) Conclusions: Rebalancing Trade and the Balance Sheet

  3. Finance and the Maritime Industry: An Embedded History • An old relationship: • Joint stock companies (17th century; VOC). • Insurance industry (e.g. Lloyd 1871). • Finance used to leverage the opportunities of international transportation. • Providing capital and mitigating risk when needed. • Local embeddedness: • Financial district in view of the wharves. • Industrial revolution and globalization • Better growth opportunities outside trade. • Separated the financial from the industry and the geography => cf. literature on port-city relations, global city networks, etc..

  4. The Age of Discovery … of Risk: Dutch East India Company, Trade Network, 17th Century

  5. Historic Proximity of the Port / Financial District London Docklands - 1934 Manhattan, New York Speicherstadt, Hamburg

  6. Port and Maritime Industry Finance: Who is Leveraging Whom? Investors Financial Markets Brokers Corporations Money Markets Commercial Banks Shipping Companies Private Investors Capital Markets Mortgage Banks Port Operators Investments Managers Equity Markets Merchant Banks • Insurance Companies • Pension Funds • Banks • Trust Funds • Finance Houses Private Placement Finance Houses Earnings Leasing Companies

  7. Value Propositions behind the Interest of Equity Firms in Transport Terminals Diversification (Risk mitigation value) Sectorial and geographical asset diversification. Mitigate risks linked with a specific regional or national market. Source of income (Operational value) Asset (Intrinsic value) Terminals occupy premium locations (waterfront). Globalization made terminal assets more valuable. Traffic growth linked with valuation. Same amount of land generates a higher income. Terminals as fairly liquid assets. Income (rent) linked with the traffic volume. Constant revenue stream with limited, or predictable, seasonality. Traffic growth expectations result in income growth expectations. High Value! No risk!

  8. Container Terminal Surface of the World's Major Port Holdings, 2009 N = 405

  9. Container Terminals of the World's Four Major Port Holdings, 2009

  10. The Financial Playground (1997-2008)

  11. Reviewing Assumptions: The Impacts of “Financialization” Physical assets seen as financial assets. Assets perceived simply from their expected level of return. Rent-seeking strategies Disconnection From market knowledge Focus on short-term results Asset inflation High amortization Expectations of quick capital amortization. Expectations about future growth and the corresponding volumes. From long-term business cycles From outcome of actions Lack of accountability From local/ regional dynamics Lack of regional embeddedness Lower contestability Perceived liquidity. Capacity to quickly enter and exit the market. Loss of embeddedness

  12. Consolidation and Scale Increases: Major Port Terminal Acquisitions since 2005 EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization

  13. Additional Factors of “Recklessness” in pre-crisis “bubble” (2002-2008) • Supply lagging behind demand • Capacity shortages in terminals and ships increasing their “market value”. • Sense of “urgency” in terminal and shipping investments. • Emerging terminal management model • Concessions agreements to maximize returns. • Over-bidding related to availability of finance; OPM. • “Right price’ replaced by “any price”. • Existing actors being “financialized” • Equity related offerings on financial markets.

  14. Shipping Equity and Equity-linked Offerings in Public Markets (2000-2007)

  15. The Financial Playground:Private Equity Funds and Ferries (1995-2004) Sources: Baird (2009); Cruise & Ferry Info: ShipPax, Halmstad, Sweden.

  16. The Financial Playground:Private Equity Funds and Ferries (2004-8) Sources: Baird (2009); Cruise & Ferry Info: ShipPax, Halmstad, Sweden.

  17. The Double Squeeze on Ports and Maritime Shipping in the “Post-Bubble” Period Maritime Shipping Overcapacity New terminals coming online New ships coming online (+ cancellations) • Contestability for gateways • Contestability for hubs Rebalancing Supply Demand Port Operations Lower profitability Less pressures on terminal resources Less financial appeal

  18. Re-Discovering Risk: Relations between Risk and Embeddedness Trust High FINANCE Recklessness Risk Level SHIPPING Information Caution Low Low High Embeddedness Level

  19. Risk Typology in Ports, Terminals and Shipping

  20. Re-embedding Finance and the Port Terminal Industry

  21. Re-embedding Finance and the Port Terminal Industry

  22. The New Normal • Trend 1: Rebalancing short-term and long-term benefits • Short-term investor gains against long-term performance improvements. • Trend 2: Redefining public involvement • New forms of Public-Private Partnerships (PPP). • Towards a revision of conventional concession models of a landlord port authority (i.e. awarding system, performance, concession fee system, etc..) ? • Private sector has a lower tolerance to risk. • Trend 3: Refocus on resource management • Operations, and resources and asset optimization.

  23. The New Normal • Trend 4: Reassessing portfolios, vertical disintegration and consolidation • Low valuations could offer potential for mergers or acquisitions. • Shipowners’interest in investing in terminals? • Trend 5: Restrictions in getting finance • Ports should be considered as long-term investments. • Trend 6: Dealing with mature markets • Low to moderate long-term growth perspectives. • Shift towards quality of service instead of growth.

  24. Conclusions: Rebalancing Trade and the Balance Sheet • Paradigm shift • Risk that was traditionally highly embedded within the industry has been obfuscated. • Port terminals as abstracted bundles of financial assets and liabilities: “Financialization”. • Better understanding: • Global trade dynamics • Financial and monetary cycles. • Capital misallocations. • Recreation of embeddedness: • Through intermodalism and supply chain integration. • Cluster formation and governance.

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