DP World Australia has again infuriated the trucking industry by signalling it will all but double the contentious infrastructure fees it charges freighters carrying containers to and from its terminals at Australia’s three biggest container ports.
And, in an important shift in public narrative, the nation’s biggest container stevedore is no longer seeking to justify the fee hikes at terminals in Sydney, Melbourne and Brisbane as simply a means of recovering increases in costs like port rents, labour rates or electricity bills.
The DP World view is that infrastructure fees are an appropriate mechanic for what is a necessary restructuring of the way the stevedores earn their revenue. And critically, this shift of public stance and strategy is cautiously supported by the Australian Competition and Consumer Commission.
Indeed, according to ACCC chairman Rod Sims, the regulator has been urging this change in the public messaging since becoming dubious about the cost-recovery story last year.
“We went on the same journey you are going on,” Sims told The Australian Financial Review on Wednesday. “When these charges first started going up two years ago we assumed they were in response to rising costs,” he said, recalling the great debate over the Port of Melbourne’s attempt to jag rent rises of up to 750 per cent.
“We originally took the line, too, that this was about investment in infrastructure, but then realised that this was not exactly true, that we were being fed a line that wasn’t quite right and that, dare I say it, we were being a bit misled.
Offsetting revenue losses
“We told them [the stevedores] that a better way to characterise it was to talk to the revenue recovery story. DP World is now being quite upfront about that and I thank them for that. The shipping industry is consolidating and that is driving down stevedore rates and this [infrastructure fees] is a way for stevedores to gain extra revenue to offset the revenue they are losing.
“The stevedores’ profits, we understand, are still under pressure and they are using it [infrastructure fees] to offset revenue losses elsewhere. We accept that line and we are pleased we now have a story that is not false.”
Needless to say, what pleases DP World and the ACCC doesn’t bring joy to the trucking industry. “Our members are angry that DPWA is continuing to use them as cash cows and, without regulation, they’re at the mercy of the stevedores,” the chief executive of Road Freight NSW, Simon O’Hara, said after a meeting on Wednesday with Deputy Prime Minister and Minister for Infrastructure, Transport and Regional Development, Michael McCormack.
“For the third time, in less than two years, DPWA has hit carriers with another round of excessive charges and, with no real explanation and no consultation, industry is asking whether they’re just cynically increasing access fees to offset losses in other parts of the business. It’s wrong.”
Until April 2017, DP World charged no infrastructure fee to users of its terminal at Sydney’s Port Botany while there was a nominal fee of just more than $3 for every container at its Port of Melbourne operation. The only place DP World charged anything like a meaningful fee was at its Fisherman’s Island terminal. That fee was just over $30 a container.
Customers made to pay
Last week, DP World Australia chief executive, Paul Scurrah, told the logistics industry that from New Year’s Day 2019, DP World would charge $63.80 to carry a laden container to or from Port Botany, $85.30 a box at DP World’s Melbourne terminal and $65.15 at Fisherman’s Island. The industry was also told the fee for using the various vehicle booking systems would pretty much double to $12.95 for every slot booked.
To be clear, the truckers do not carry that cost. They pass it back to customers who are either importing or exporting the goods sitting inside the big steel boxes. But, where this impost really hurts, is on the cash-flow lines. The truckers have 28 days to pay their DP World infrastructure bills while their own payment terms are often much longer or more uncertain.
Nonetheless the anxiety these increases have triggered at the margins, of both the trucking industry and its exporting customers most particularly, is real and justified. A base of the industry is calling on governments, state and federal, to contemplate regulation of the container terminal sector and urged intervention by the ACCC. Neither option seems likely to be pursued.
A more realistic proposition was offered by one of the industry’s many peak councils, the Freight & Trade Alliance, which represents the international supply-chain sector. It accepted that the stevedores might need a new cost recovery model but it railed that the infrastructure fee rises had consistently arrived without consultation.
“While it may be true that new stevedore cost-recovery models are needed, a unilateral price increase, with no negotiation, at a time when our farmers and rural shippers are struggling, should not be tolerated,” the alliance said in a statement last week.
So what is so broken about the stevedore’s current revenue model that DP World feels there is an urgent need for change from a revenue model that had traditionally seen them draw between 95-100 per cent of their revenue from the shipping companies?
Combination of structural shifts
The way DP World’s Scurrah sees the trading world, there have been structural shifts in the industry, one local, one international, that have undermined a historic revenue model that was never really appropriate to the Australian port model in the first place.
The local shift was the introduction of a third terminal operator at Australia’s two most important container destinations, Sydney and Melbourne. And globally there has been a consolidation of shipping operators.
There were 25 big shipping companies in 2011. There are now 16 and DP World reckons there will eventually be 12. Just as importantly, the number of major container shipping alliances has been trimmed from four to three. These consolidations invariably end up with lower fees. For example, Mersk and Hamburg Sud were both DP World customers. One paid higher fees than the other. When they merged, the lower fee became the base for both.
The mix of new competition here, and less in shipping, has been a pincer movement on the stevedores’ revenue and profit margins through a period when the move to ever bigger ships has required investment in new infrastructure.
In August, Scurrah, who will leave DP World by year’s end, delivered a speech to a logistics conference in Darwin that, in retrospect, pretty plainly flagged the fee hikes ahead.
Making the first move
“Australia’s stevedores continue to face a dynamic and evolving market with unprecedented change, major investment in infrastructure, increasing costs and declining tariffs.To ensure a sustainable future in an increasingly competitive market, DP World Australia is continuing the journey to a rebalanced revenue recovery from waterside to land-side,” Scurrah said.
“As it is my view that access charges are not a problem to solve, and is rather a necessary reshaping of the recovery by stevedores for access to the expanded and improved infrastructure that is driving the very healthy growth rates we are seeing.”
Given the risks Scurrah has taken in being the first mover in pushing infrastructure charges as a means of creating a land-side revenue base, he draws considerable succour from the fact container volumes are growing at above long-term trend rates.
But the rub for DP World is that volume improvement has not arrived with similar weights of revenue growth. That means the departing Scurrah had to find a way of directly charging the shipping companies’ customers. Enter infrastructure fees.
It is not exactly clear yet where Scurrah reckons this new balance between waterside and land-side revenues might need to be. There are estimates that DP World’s new split will see it drawing about 25 per cent of its revenues from the land-side sector. And there is talk that Scurrah sees a future that has the split running at closer to 55 per cent waterside and 45 per cent land-side.
Just finally, the whole sector will be watching to see what DP World’s only serious competitor in Australia makes of this. Having followed Scurrah’s lead earlier this year, Patrick Ports is committed to holding infrastructure fees until maybe April next year. And it has not yet publicly back the Scurrah view that a revenue rebalancing is necessary, nor that access fees are anything but cost coverers.