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Fonterra Sales to China Threatened by New Zealand Ports: Freight

July 04, 2012

Fonterra Sales to China Threatened by New Zealand Ports

A ship approaches the port of Auckland in New Zealand. Photographer: Brendon O'Hagan/Bloomberg

New Zealand’s ports, the gateway for a quarter of the nation’s economy, have a potential threat to their future: Most container ships under construction are so big they’d run aground on arrival.

Aging terminals from Auckland on the North Island to Otago in the south are struggling to keep pace with rivals along Australia’s east coast. Of New Zealand’s four busiest export hubs, only Port of Tauranga Ltd. is in the advanced stages of expanding for larger vessels, while others encounter regulatory delays and public opposition to their development.

New Zealand needs to ensure that companies such as Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, can tap the growing demand for protein-rich diets in China and beyond. Already handicapped by the three weeks it takes a ship to get to Hong Kong, New Zealand’s shippers say a failure to act could cause the nation of 4.4 million people to cede ground to its larger neighbor in the race to supply Asian markets.

“We either keep getting small vessels and get less and less competitive as the fuel price eats away at the profit margins for the New Zealand exporter, or worse, we lose deep-sea vessels coming to New Zealand in favor of the carriers trans- shipping over to Australia,” said Chris Greenough, chief executive officer of Kotahi Logistics LP Ltd., Fonterra’s freight handler, in an interview.

Tauranga’s Investments

Port of Tauranga shares gained 1.5 percent at the 5 p.m. market close in Wellington, extending their advance this year to 14.3 percent, more than double the 6.4 percent rise in the nation’s benchmark NZX 50 Index (NZSE50FG), as investors bet on its growth prospects. About 160 kilometers (99 miles) southeast of Auckland, Tauranga has more than NZ$150 million ($121 million) in capital investments planned or started, including a 170-meter (558-foot) wharf extension.

“Those ports that are the most efficient and the most productive are in the best position to take advantage of the opportunities,” said Craig Brown, an Auckland-based fund manager at OnePath NZ Ltd., a unit of ANZ National Bank Ltd. that manages NZ$13 billion in stocks, bonds and property.

While a court recommended Tauranga’s consent in December, 2 1/2 years after lodging the plans, two Maori groups have objected to dredging the harbor, citing cultural reasons, Chief Financial Officer Steve Gray said in a telephone interview. New Zealand’s indigenous people have grievances relating to breaches of the nation’s 172-year-old Treaty of Waitangi, along with strong spiritual ties to the land and water.

Deep-Sea Ships

Tauranga can handle larger full ships than other New Zealand ports, according to New Zealand Shippers’ Council Inc., which represents exporters of more than half of container cargo. The largest full vessel it could host at all tides would have a capacity near 4,500 20-foot equivalent units, or TEUs, Gray said. About 77 percent of all container ships currently on order will carry more than 6,000 TEUs, according to Clarkson Plc (CKN), the world’s biggest shipbroker.

Tauranga is confident it will reach agreement with the indigenous groups this year, Gray said. The consent will allow the port to be deepened to as much as 14.5 meters, even though it won’t dredge that far initially, and capable of hosting ships as large as 8,000 TEUs in the longer term, he said.

Asian demand for commodities has helped make the New Zealand dollar the best performer this year among the Group of 10 currencies tracked by Bloomberg. With more land mass than the U.K. and about 1/14th of Britain’s population, the Pacific country is marketing its cheese, meat, fruit and wine to buyers from India to Malaysia to China.

Milking Profits

To handle the demand, New Zealand’s two largest South Island ports, Lyttelton and Otago, are seeking to expand as they service regions rich in dairy farms and livestock producers. Those facilities, along with ones at Tauranga and Auckland, the nation’s largest city, are best positioned to take advantage of larger ships calling at fewer ports, said Greg Steed, chairman of the shippers’ council.

“Probably five years ago the typical vessels would have been calling at nine ports in New Zealand,” said Mark Cairns, CEO of Port of Tauranga, in an interview. “Now they’re looking to drop that back to four or five ports and I think that’ll continue to reduce.”

Auckland’s port isn’t seeking approvals for expansion, spokeswoman Dee Radhakrishnan said in a response to e-mailed questions. The port, which is owned by the city’s council, is using consent gained in 1998 to boost its handling area and provide a third container berth.

Auckland’s Strategy

Officials at Auckland’s port disagree with the shipping council’s focus on bigger ships because it can already handle the largest vessels likely to visit in the “foreseeable future,” Radhakrishnan wrote.

“The very large ships are unlikely ever to call at New Zealand, as we are such a small market,” she said.

A proposal to extend the facility by 250 meters into the harbor was opposed by the public and officials in March. The council is reviewing its options for the port, which is near the central business district and residential apartments.

“Aucklanders understand the huge contribution the port makes as the region’s most important economic asset,” Auckland Council Investments Ltd. CEO Gary Swift said in an e-mail. “Without the port, it’s difficult to imagine any kind of economic future for the city.”

The biggest barrier to port expansion plans is legislation that allows parties to object on multiple grounds, according to Geoff Plunket, CEO of the South Island’s Port of Otago. It has spent five years seeking dredging consent.

‘Exporting Nation’

“If we call ourselves an exporting nation, the consenting process is more difficult than it generally needs to be,” Plunket said in a telephone interview.

While port capacity is a long-term challenge, productivity is a more pressing concern, said Julian Bevis, managing director of A.P. Moeller-Maersk A/S (MAERSKB)’s Maersk New Zealand Ltd., in an interview. Maersk, the world’s biggest container shipper, permanently moved one of its biggest services to Tauranga from Auckland in December. The service earns about NZ$20 million a year, according to Ports of Auckland.

“New Zealand, as a country which is almost completely dependent on international trade, must be at the leading edge of port productivity and not rather down the bottom where it is at the moment,” Bevis said in a telephone interview.

Productivity, measured by the rate at which a port can move containers, has to improve in Auckland, according to Bevis. Auckland-based Fonterra redirected NZ$27 million of weekly trade through Tauranga and Napier in January amid strike action at Auckland, prompting the port’s CEO, Tony Gibson, to say it must “significantly improve” customer service.

China Demand

Reaching buyers in Asia will be a driver of future growth for New Zealand. China’s gross domestic product per capita doubled at the end of 2011 from 2007, according to data compiled by Bloomberg.

Fonterra forecasts milk demand in China will rise 7 percent a year on average by 2020, according to a presentation from CEO Theo Spierings in March. China’s own supply is estimated to increase about 4 percent a year, creating the opportunity for milk producers to meet the shortfall, he said.

Spierings expects New Zealand milk production will increase to 22 billion liters by 2020 from 17 billion liters currently, giving the company scope to tap the increased global demand.

At Lyttelton Port Co. (LPC), the busiest on the nation’s South Island, officials are waiting for permission to dredge to allow bigger ships. They submitted plans in 2010, when the region was struck by the first in a series of earthquakes that damaged its wharves and handling area. Approval could be granted this year absent a legal challenge, CEO Peter Davie said in an interview.

Australian Aid

About 1,500 miles across the Tasman Sea, Australia’s Victoria state government in June gave an extra A$400 million ($412 million) for the redevelopment of the Port of Melbourne, bringing the total project to A$1.6 billion. The nation’s biggest container port is the main competitor to New Zealand’s ports, being the closest that can host bigger ships, Steed said.

“They’re a threat to New Zealand if we don’t become big- ship capable,” said Steed of the shippers’ council. Carriers will stop at Australia and say “New Zealand, you get your cargo over here,” he said.

If some of New Zealand’s ports aren’t capable of hosting 7,000 TEU container ships by 2015 and bigger vessels only visit Australia, about NZ$200 million a year could be added to supply chain costs and transit times will increase, the Shippers’ Council estimates.

In April 2008, New Zealand became the first developed country to sign a free-trade agreement with China, and in 2010 Prime Minister John Key pledged to double in five years their two-way trade.

“We need all four ports to be capable within 10 years because of the growth situation we expect,” Steed said. “We’re not getting there fast enough, that’s the bottom line.”

To contact the reporters on this story: Chris Bourke in Wellington at cbourke4@bloomberg.net; Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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