Hong Kong container line invests record amount in new SoCal terminal.
By Eric Johnson and Eric Kulisch
The liner carrier Orient Overseas Container Line has made a huge commitment to its operations in Southern California.
In late January, the Hong Kong-based line tied up a deal with the Port of Long Beach to pay $4.6 billion over 40 years to lease the to-be-completed Middle Harbor property currently being redeveloped by the port.
OOCL had already been a tenant on roughly half the land that will go toward the new, larger terminal, through its Long Beach Container Terminal subsidiary. The line told American Shipper
it sees the investment as a “pragmatic decision to cater for long-term growth.”
“LBCT is for OOCL and our alliance partners, so we won’t derive any profit, purely costs,” said Stanley Shen, director of investor relations for OOCL. “We’re planning for future growth.”
Shen said OOCL has been in talks for years with Long Beach over the future of the terminal, noting that leases for such facilities come up rarely. Typical Long Beach terminal lease agreements stretch 25 years or longer.
He said the sale of several OOCL terminals in 2006, as well as the 2010 sale of its property division, did not factor into the decision to sign what is the most expensive terminal lease in U.S. history.
“It was totally independent,” he said. “There was no relevance. These landlocked assets are typically long term. It had nothing to do with the sale of the terminals division.
|“We’re planning for future growth.”
“We had an adjacent site and it was getting too full for future growth. This combined site became available, and our lease was also expiring. It’s as simple as that,” he added. “It’s more or less double the size of the current terminal, and it can handle three very large ships, whereas our current one can only handle one.”
The current iteration of LBCT is an oddly-shaped piece of land with limited ability to handle intermodal traffic. The configuration makes container storage and truck access more difficult as well. The new terminal will place an emphasis on on-dock rail, increasing the efficiency with which discretionary cargo will be handled.
Shen said the key is that the terminal will allow OOCL and its alliance partners to control its own destiny through Southern California.
“We’re most interested in lowering the cost per unit,” he said. “The second priority is to have the capacity to handle the increased trade in years to come. Thirdly, is berthing window priorities; the ability to create a highly modern and efficient terminal, which goes along with cost.”
Shen emphasized the importance of berthing windows, saying that at times of congestion, OOCL and its partners wouldn’t have to wait to unload their vessels.
Long Beach is investing $1.2 billion to consolidate the existing LBCT facility with the erstwhile California United Terminals facility, which was vacated by its operator Hyundai in 2011. Work began last year on the $125 million first-phase, and is expected to take nine years to complete.
The project will increase capacity from the present 1.3 million TEUs annually to 3.3 million TEUs when complete, as well as bumping usable acreage from about 200 acres to more than 300 acres. In October, dredging was completed on the main channel all the way to the port’s Middle Harbor and East Basin sections, providing the necessary depth to handle the largest containerships in the world.
Shen said the transpacific trade can comfortably handle ships of 8,000 TEUs, with some lines ready to regularly deploy ships of 10,000 TEUs. The average size ship plying the Asia-U.S. West Coast trade today is around 5,800 TEUs.
OOCL will invest $500 million for cranes and other cargo-handling equipment. Its annual lease payments amount to about $115 million over the course of the deal. At 3.3 million TEUs, OOCL would need around $35 per TEU in revenue to account for the costs of the port lease. For context, APM Terminals generates about $140 per TEU globally at its terminals.
OOCL does not break out the revenue and profits from its terminals, as the line sees the terminals as a cost center that’s part of its larger global shipping operations.
The terminals sold in the 2006 deal to an Ontario teachers’ pension fund in Vancouver, New York, and New Jersey were multi-user terminals from which OOCL derived profit.
Shen said OOCL’s interest in securing its own operations in Southern California stem from a belief that Asia-U.S. trade has far from run its course.
“Despite the gloom and doom of world trade right now, people have not looked at what trade growth will look like in 40 years,” he said. “The reality is America cannot replace Asian imports. It cannot. No other country can provide the U.S. consumer with the type of product it desires at the price they want.”
The largest long-term contracts or sales of operating rights at ports among terminal operators since the boom in container terminals last decade have been for about $1 billion per terminal.