A deal between the Port of Newcastle and container terminal operator DP World Australia has broken down, with DP World understood to be talking with the owner of Port Botany and Port Kembla about a rival terminal at Wollongong.
Although DP World has signalled that negotiations ended because its investigations showed the Newcastle proposal was uneconomical, Port of Newcastle is taking a more optimistic view of the split, saying it is now able to talk to other operators.
Supporters of the Newcastle plan also say DP World’s move can also be interpreted as a sign that vested interests in Sydney recognise the competitive threat of a Newcastle terminal, and are trying to white-ant it to preserve the status quo.
Confirming the decision to go their separate ways, a DP World spokesperson said: “We can confirm that we have ceased engagement with the Port of Newcastle.
“As Australia’s biggest container stevedore, we are continually assessing options to serve our customers, regionally as well, to deliver the best outcome for the import and export of goods.”
Responding, Port of Newcastle chairman Roy Green said the “exclusive” memorandum of understanding between the two parties “came to an end at the end of last month (July)”.
“We were negotiating with a proponent but we could not reach an agreement with them over the operation of a terminal at the level that we believed was viable and competitive, so those negotiations are now at an end and we are accepting other, unsolicited proposals for the operation of a container terminal and as of now we are entering into those discussions,” Professor Green said.
News of the potential tie up between the Dubai-based DP World and the privatised Port of Newcastle was only made public in April, when the Australian Financial Review reported the two were in “early stage discussions” over the container terminal plan.
The Newcastle Herald understands talks began as early as 2015. It was not until December last year, when new chairman Roy Green took over, that Newcastle began to publicly promote its desire for a container business to supplement its earnings from coal handling.
DP World is one of three terminal operators at Botany, but its site is regarded as heavily restrained, and its success against its two Botany rivals, Patrick Stevedores and Hutchison Ports Australia, means it is looking for further capacity.
It had seen the Newcastle proposal as a way of securing that capacity but DP World sources involved in the deal say Newcastle’s “export-based” plan could not be made to stack up at the sort of scale that was likely in the early stages, even without considering the controversial Newcastle container fee that will add at least $150 per container to Newcastle’s operating costs unless it can be lifted.
The fee – repeatedly denied by the state government until exposed by the Herald in July 2016 – was designed to protect Port Botany from competition.
Critics including the state Labor opposition believe it breaches federal competition law and the Australian Competition and Consumer Commission has confirmed an investigation, although little detail is known.
The DP World sources described the port commitment deed – as the secret fee is formally known – as “a significant cost”. If it could not be removed, it would take a huge increase in demand to get a Newcastle terminal to the point where it could absorb the weight of the container fee.
It might take 20 years before a Newcastle terminal would reach such a level and it would take substantial subsidies in the meantime to maintain the operation through potentially loss-making times.
The sources said the “sheer distance” from Newcastle to Sydney and the “geographical challenge” of getting the containers across the Hawkesbury River made it “an expensive supply chain”.
They said that while Port Kembla needed dredging and the construction of the 35-kilometre Maldon to Dumbarton rail line to make a terminal possible, it was close to the main population growth in Sydney, which they said was towards the south-west.
They also indicated that DP World had been talking to NSW Ports – the operator of Botany and Kembla – about the potential for a terminal at the Illawarra port, which was described as “a compelling opportunity”.
NSW Ports has said it will respond to the Herald’s questions on DP World today.
As well as the proximity to the south-wards growth of Sydney, DP World sources say Newcastle’s proposal for a terminal based as much on exports as imports was flawed.
However the terminal was set up, DP World believed it would need subsidising early on, but Newcastle was apparently not willing to subsidise the shipping lines. It would take a carefully worked out agreement, known as “term sheets”, to set down the basics of the operation, but the two sides were unable to reach agreement.
Public affairs consultant Greg Cameron was a key player in the BHP team that conceived the terminal in the late 1990s as a replacement for the Newcastle steelworks.
Still advocating for the terminal today, Mr Cameron said from Canberra that he interpreted DP World’s decision to walk away as a sign of “Botany vested interests” taking the Newcastle threat seriously.
“I’d say they are trying to kill the business because they have had a better offer from NSW Ports,” Mr Cameron said.
“It looks very much like DP World is injecting some competitive tension into Newcastle’s threat to Botany.
“Right now, the ACCC is undertaking an economic evaluation of Newcastle for a container terminal. There is no need for the ACCC to examine anything other than the government’s dodgy fee that requires Newcastle to pay the government $150 a container, which it then hands over to Port Botany.
“That’s $150 million a year for operating a modest container terminal with throughput of 1 million containers a year.
“Once that anti-competitive fee is removed, investors will be lining up. Let the free market speak.”
Historically, Newcastle had been slated as the state’s next container terminal from the days of the Carr government, but the incoming Coalition government changed NSW’s “three ports policy” before it privatised the ports, to put Port Kembla ahead of Newcastle in container planning.
In 2013, it leased Botany and Kembla for 99 years in a $5.07-billion transaction with NSW Ports, a consortium owned 80 per cent by Australian super funds and 20 per cent by an Abu Dhabi sovereign wealth fund, Tawreed Investments.
A year later, Newcastle was leased for 98 years for $1.75 billion to Port of Newcastle, which is 50 per cent Australian-owned and 50 per cent Chinese-backed, through a conglomerate called China Merchants Group.
In February this year, China Merchants announced that it had shifted its Newcastle stake to company called China Merchants Ports Holdings, which is listed on the Hong Kong Stock Exchange and regarded as the world’s largest container port operator, by volume, moving 100 million containers last year.
It has 17 ports, including Newcastle, outside of China. While China Merchants Port Holdings would be a natural operator of the Newcastle terminal, Professor Green would not be drawn on whether the Chinese were interested at this stage.
“What I can say is that we are discussing a proposal that would allow the Port of Newcastle to become an integrated container port, operating its own terminal with significant investment by a global port operator,” Professor Green said.
DP World is also a large global operator, and moved 70 million containers last year.
The three operators at Botany, including DP World, shifted 2.5 million containers in 2017. Port of Newcastle has said it hopes to start with about 350,000 to 500,000 containers a year, but with aims of tapping into what it sees as a growing export market to expand in stages to a Botany-sized operation.
Backed by analysis commissioned from Deloitte Access Economics, the Port of Newcastle has been promoting the case for a Newcastle container terminal by saying that it stacks up economically, and also helps remove a substantial number of trucks from the heavily congested roads leading out of Botany.
Asked about DP World’s withdrawal from Newcastle, a spokesperson for Ports Minister Melinda Pavey said that “as the commercial organisation operating the infrastructure, the Port of Newcastle is in the best position to consider future markets”.
Kembla remained the government’s “recognised overflow for containers” once Botany reached capacity.
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