President of HPC Ukraine: The Price of the Option on the Ilyichevsk Container Terminal Is Not Fair

Expectations of an increase in the container cargo traffic in Ukraine significantly exceed the actual volumes so far. However, industry participants are seeing positive signals that promise a revival of the market in the very near future. One of these signals is the Global Ports group’s call option to buy Container Terminal Ilyichevsk. However, the HPC Ukraine company, which operates the largest container terminal at the Odessa port, takes a cautious approach to the forecasts for the future despite its positive operating results. HPC Ukraine’s President Klaus Schmoecker explains why it is too early to speak about the market values of container businesses in Ukraine and discusses the trends in the industry and the reasons for the lack of optimism in an exclusive interview with the CFTS portal.

Please, comment on the recent major deal in the port industry - the acquisition of the NCC company by the Global Ports group. What is its significance for the container market in the Black Sea region?

At this moment, the deal has significance only for the Russian market. Both Global Ports and NCC own terminals in Russia.

What about Ilyichevsk?

It is not part of the deal.

But it can become part of it.

I do not think this will happen; at least, not in the near future.

Why?

In any deal, you evaluate each of its elements separately, and agreement should be reached on each one of them. One can draw only one conclusion from what has been announced: Global Ports agreed to buy 50% of the terminal for USD 60 million, but it is not prepared to pay it right now.

Obviously, if Global Ports announced the sum of USD 60 million for the option, one can assume that it considers this a fair price.

It is necessary to recognize that there is only an option and nothing more. So much currently depends on how the situation will develop in Ukraine in the coming years. If the Russian company’s expectations regarding the development of the Ukrainian market and resolution of all the regulatory nuances are justified, one can expect the deal to be closed. The only thing that one can assume is that the investor in the Ilyichevsk terminal is unlikely to invest in development of the terminal. Why would it invest more if it has already agreed the price it will receive?

The investor in the Ilyichevsk terminal is unlikely to invest money in the development of the terminal. Why would it invest more if it has already agreed on the price it will receive?

Does that mean that you think that the announced price of USD 60 million should not be considered indicative of the values of the container terminals in Ukraine?

It is difficult to consider it as such. What can be deduced from it? The cost per TEU of capacity at the terminal? But capacity is essentially nothing because price is usually calculated based on the revenue that an asset will generate. In addition, multipliers are applied to this key indicator in different markets, say 8.9 or 10 in our industry. On this basis, it turns out that if USD 60 million is paid for 50% of the Ilyichevsk terminal and the entire terminal is worth USD 120 million, then the profit of the operator must be at least USD 12 million. I think that this figure is far from the reality. In reality, this figure is at least lower by half. Based on this approach, it is obvious that we cannot consider the price fair. However, it would be pleasant to us because it sets a significantly higher multiplier.

Do you share the view of the market participants who are optimistic about the situation on the Ukrainian container market in the short term?

This year has been really good. We have had a growth of more than 10% at our terminal.

That is, you are growing faster than the market in general. The growth rate was about 6% in the first seven months of the year

At the moment, yes, our growth is ahead of the market average. However, I am not very optimistic about next year. One should also bear in mind the fact that we are still at the level of the 2008 volume. Therefore, I think that the situation is unlikely to change by the end of this year and in the near future after that.

Do you think that Ukrainian container terminals should also count on transshipment cargo traffic in their fight for transit cargo?

My opinion is that there are currently no prospects for transshipment on the Black Sea. Because of the tendency for the sizes of ships to increase, container lines are switching to using ports outside the Black Sea region - such as Turkey and Greece - as transshipment hubs. Therefore, I do not believe that transshipment will soon come back to us.

What about transit?

Transit is another matter. However, a lot here depends both on the political will of the Ukrainian authorities and foreign-policy issues. For example, the path that Ukraine will choose for itself – integration with the European Union or the Customs Union. It is clear that cargoes from member-countries of the Customs Union will largely determine the nature of cargo traffic in the region. Therefore, this direction is more promising from the point of view of transit.

Cargoes from member-countries of the Customs Union will largely determine the nature of cargo traffic in the region. Therefore, this direction is more promising from the point of view of transit.

In June this year, leading container-shipping lines announced the creation of an alliance and the merger of their fleets with the aim of combating unprofitability and surplus capacity. Did this in any way affect your terminal, which works with the alliance’s member companies?

I cannot yet say how it affects us. Following the announcement of the merger, talks about the alliance’s future services and its area operation have begun. We will see what the outcome of these negotiations will be. It is assumed that nine Black Sea ports could be involved in the integrated service. However, the shipping lines themselves have still not decided how this will happen and specifically how many terminals will be involved. If they decide to use only one terminal in Ukraine, it will be a pleasant situation for us because we are the largest. I think there are many ports in the world where Maersk, MSC, and CMA cannot call at just one terminal because their piers cannot accommodate such large volumes.

How do you assess the progress of the reform of ports in Ukraine?

The port reform started without the slightest experience, and we were initially unsure what it would look like in the future. At this moment, we are still negotiating many issues with the port administration.

Which issues? Please, give examples.

These issues include lease of ports, investment, tariff policy, and coordination of interactions with regulators. There are many of them, but I think that we find all the solutions during our discussions.