07 March 2023
The Future of Ports and Terminals in South America
Globalisation is a driver of economic growth, but its trajectory has not been uniform or consistent. It has exacerbated inequality in a world of winners and losers, and presently South America is deemed to be in the latter camp.
Struggling to emerge from the pandemic’s shadow, South America has yet to exploit its supply chain opportunities fully.
Brazil and Argentina are considered two of the most closed economies in the world, with trade only amounting to 30% of GDP. In Colombia and Brazil, the cost of shipping a standard container door-to-door is among the highest in the world. Poor transport links also increase costs and travel times – roughly 70% of roads in South America are unpaved, compared with less than 50% in South Asia and under 30% in East Asia.
With the exception of Panama, South America’s links to major shipping routes are not as strong as they could be. Inter-regional trade is weak, economies are siloed, while free trade agreements are fragile and littered with exceptions. South America’s ports could help to boost its global standing, but many have been slow to upgrade – meaning shipping companies are more likely to sail in and out of the region rather than stop at any ports in between.
Roughly 70% of roads in South America are unpaved, compared with less than 50% in South Asia and under 30% in East Asia
Port development difficulties
The concept of ports and their function in the maritime space have dramatically evolved over the last 300 years. In the 19th and 20th century ports were instruments of the state; there was minimal competition between ports, and their costs were insignificant compared to transportation. Therefore, traditionally there has been a lack of incentive to improve port efficiency. But times have changed, and ports are now aggressively competing on a global stage.
Unfortunately, port development is a tricky business; space in viable locations is increasingly thin on the ground and any plans face full environmental scrutiny. An obvious option is to improve existing logistics networks and many ports are consequently acquiring supply chain specialists. Expanding out to sea is often too expensive or unfeasible; building upwards has limitations – stacking more than six containers can result in significant time wasted shuffling boxes.
One example of innovation in this area is from BOXBAY, a joint venture between SMS Group and DP World, offering high bay storage in individual racks up to 11 storeys high. The pilot has been running at Jebel Ali Terminal 4 for over two years; the venture is now looking to roll out the system, but its capital cost appears to be a stumbling block.
The expansion of San Antonio port is likely to cost USD3.5bn
Complexities within current port expansion plans
Poor port infrastructure has resulted in increased congestion at times of high demand across South America. Most contemporary cities have relocated their commercial ports just outside the city’s boundaries, and developments have been underway across the region. In Argentina, it is anticipated that terminals at La Plata and Dock Sud near Buenos Aires will be capable of supporting the country’s demand in the next two years. However, the project still requires USD361 million to expand capacity for 2025, and it is dependent upon the government closing the main port in the city centre.
In August last year, five industry associations from Chile’s export and import sectors launched a public–private partnership to tackle the country’s logistics crisis that led to higher costs and delays in ocean freight shipments of food products and other goods.
New infrastructure is deemed necessary as stakeholders estimate the three container terminals at Valparaiso and San Antonio will not be able to handle anticipated demand. The expansion of San Antonio port is likely to cost USD3.5bn, with the capacity to handle six million TEUs per year. The project faces significant opposition due to the damage it will cause to local wetlands. The project was admitted for application to Chile's environmental evaluation service SEA in May 2020, but the review has already been suspended twice.
Meanwhile, plans to privatise Brazil's flagship port of Santos were scrapped late last year under new President Luiz Inácio Lula da Silva. Under the old privatisation contract, the company awarded would have been required to make USD250m in mandatory investments and set aside USD550m to finance the construction of the Santos-Guaruja underwater tunnel, designed to ease congestion. The port authority will now remain state-owned, and concessions for private terminals should be available within the port.
The challenge here is scale; investing in expanding and redesigning the existing ports so that they can scale up operations to compete on a global level. To put this in perspective, South America’s busiest port, Colón in Panama, handles 4.3m TEUs. Shanghai, by comparison, handles 40m. Scaling up by a factor of ten will require transformational levels of investment and strategic planning.
Digital ports
Modernising South America's ports starts with digitalisation, and port operators are increasingly looking to technology to overcome obstacles and meet the ever-growing demand. The Inter-American Committee on Ports, which includes all National Port Authorities and 50 private and international members, has a shared goal for paperless ports and creating a Port Community System capable of connecting all port management stakeholders in real-time.
Beyond this objective, the region also looks to smart ports such as Hamburg, Shanghai and Rotterdam, where GPS and blockchain are being advantageously deployed. Hamburg intends to double its operations by next year through time and movement efficiency alone.
Technological advancement will increase the risk of cyber exposure. Therefore, as ports evolve, they must ensure they are embedding cyber security within their strategy, both preventative in terms of cyber security, firewall monitoring and blocking malware, and reactive in terms of purchasing adequate cyber insurance.
Digitalisation is a new arena for South America’s ports, though some are more advanced than others. As ports are generally commercial entities, this regional push will create competition as ports compete for specialised hub positions. The future for mega ports may be driverless vehicles, unmanned cranes and camera-fitted drones, but how will that sit with a highly unionised and vocal labour force?
Strikes can have a considerable impact on productivity in South America. In October and November last year, 6,500 members of Chile’s Union Porturia took part in industrial action, campaigning for better pay. The strikes impacted 23 ports throughout Chile, and San Antonio port operator DP World said it was “causing serious damage to the entire logistics system”.
members of Chile’s Union Porturia took part in industrial action, campaigning for better pay in 2022 seriously impacting logistics
Mega Ports: The pros and cons
As the world economy continues to grow at an exponential rate, South America’s ports and terminals have no choice but to catch up with the speed of change. While the region’s port expansion plans are not straightforward, eventually when operational, they will change the dynamics of the overall port system. But will mega ports harm or support the already struggling ports and terminals?
Larger ports and terminals can adapt to the predictive boom in overall demand. The growing popularity of ultra-large container ships results from cost savings for carriers and decreased maritime transport costs, and is expected to increase so-called 'seaborne' trade.
Higher export volumes from countries will increase demand for other struggling ports in the region, benefitting from the increased traffic. Mega vessels generate a greater reliance on the hub and spoke model, which could benefit both bigger and smaller ports and improve inter-regional supply chains. Volumes destined for smaller ports in the region can be discharged at the larger ports, and feeder vessels can then deliver the cargo to the intended destinations.
Another advantage relates to economies of scale – larger capacity means more containers are being carried on fewer vessels. This obvious knock-on effect decreases carbon omissions and reduces shipping's environmental impact in the region.
Nevertheless, port limitations are one of the most immediate challenges that these mega ports will encounter. As ultra-large container ships increase in size and capacity, it may lead to longer wait times at loading, trans-loading, or discharge ports. Operational processes (placement, distribution, and handling of the containers) will also become more complex.
Mega vessels create peaks and troughs in cargo movement; ports are under pressure to employ vast amounts of labour and equipment at increasingly sporadic intervals. The downtime between vessels creates understandable problems with resource planning. The further deployment of AI and technology is inevitable but, as mentioned above, may come at the cost of job losses and consequent strikes. This operational landscape increases the risk of business interruption for operators and owners.
Undertaking vast improvements to infrastructure is also no guarantee of winning mega vessel calls. Ports that lose out face lower returns on investment and intense competition to capture other services, most likely to the detriment of neighbouring ports.
Work in Progress
The delicate balance between public and private ownership will likely play a significant role in the future shape of ports and terminals in South America. In November last year, the Brazilian Association of Port terminals called for an investigation into Maersk and MSC’s impact on the port market, accusing them of abusing their position – favouring their own terminals, increasing costs and limiting options for cargo flow.
Chinese investment in South America’s port infrastructure has also not gone unnoticed. Late last year, US think tank The Center for a Secure Free Society published a study which showed that the number of Chinese-owned or operated ports worldwide had significantly increased – totalling 40 ports from Peru to Mexico, combined with 11 satellite ground stations in Argentina, Brazil, Bolivia, and Venezuela. This has led experts to warn that South America is now at the mercy of Chinese capital.
Yet, the increasing size of vessels and ports is an inevitable part of globalisation. The increased traffic to mega ports could benefit South America as whole but it depends on two factors. Firstly, how the planned port expansion developments progress across the region – they still require significant investment and buy-in to come to full fruition. Secondly, when fully operational, how the increased revenue is spent and invested is critical to the region taking full advantage of the opportunities of its global position.
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