Is Liverpool's £300m gamble about to come off?

Peel Ports' Liverpool dockside has looked like a construction site for most of the past 18 months. As part of a massive infrastructure investment, the port operator has been busily regenerating its Seaforth site with new warehousing, £100m ($153.57m) biomass silos for a decarbonisation project at Drax power station, and its ‘showstopper’ new £300m deepwater container terminal. 

Each of these projects is now reaching a critical stage of development with the sheds coming onstream in the last couple of weeks of September, the first phase of the biomass deal expected end of September or early October; and phase one of Liverpool2 at the end of 2015.

With such huge investment in the port and its facilities Peel, and its shareholders, is betting on a huge return: a complete overhaul of the UK logistics industry, no less.

“We see Liverpool2 as a catalyst for change rather than just a standalone investment,” Peel Ports chief operating officer Gary Hodgson told Lloyd’s List in a wide-ranging interview at its Liverpool headquarters.  

The well-publicised masterplan is to reclaim container cargoes back from the southern ports of Felixstowe, Southampton and Tilbury, which over the years have been diverted away due to severe space restrictions at the old Liverpool locks. 

“When we first started thinking about Liverpool2 five years ago, I said to the shareholders: look, we think there is a real opportunity to grow our share, to grow our capability in container logistics.

“But I also said, if we didn’t make an investment, we should decide [to] come out of containers, because my view, quite strongly, is that if we didn’t do Liverpool2, over time, Liverpool would get squeezed out.

“So it was quite a defining moment for us to decide. Because you don’t have to do containers… when you've got land you can do any number of other things. But we felt we could change the logistics model — how it was operating through southern ports and pushing everything up."

With Liverpool2, Peel aims to get cargoes closer to the end consumer from the moment they reach UK shores, thus reducing onward transport and, ultimately, costs.

It makes no sense for containers to come into southern ports, to be trucked all the way to the middle of the country, only to come back predominantly empty, Mr Hodgson says.

“It is just a hell of a waste.

“If you have a warehouse, where you are de-stuffing a box, doing some reconfiguration for onward shipment, and [sending them] out again, [having the goods closer to the end consumer] is a huge saving to customers.”

In order to kick-start the process of taking cargo back from southern ports, in April Peel unveiled its Cargo200 initiative, which aims to recruit up to 200 importers and exporters to support shipping lines connecting the UK market directly via Liverpool.

Peel believes that by joining the Cargo200 initiative, cargo owners would encourage shipping lines to introduce direct calls to Liverpool while supporting the movement towards a more efficient supply chain in the north and beyond.

Inter-connected

Peel’s masterplan relies on strong intermodal networks to feed planned increased container traffic through the port out to the end consumer. It has, to this effect, invested in a tri-modal approach that includes road, rail and water with a regeneration of goods moving along the Manchester Ship Canal.

In the first stage of this investment, Peel inked a £150m partnership with Culina Logistics in June 2014 to create the first canal-linked logistics park in the UK.

By linking directly to Liverpool2, the new facility will offer importers and exporters an all-water route to warehousing and manufacturing in the heart of the country without using any road or rail infrastructure.

“Nine months ago, Port Salford, as we call it, was just a big green field,” Mr Hodgson says. “Now it is the prime facility at the head of the Manchester Ship Canal.”

The first 250,000 sq ft shed is completed, backed by a lease to Culina, which will operate it as a multi-purpose warehouse.

Rail will come from Trafford Park until Peel builds the rail infrastructure at Port Salford, “which is part of our next phase of thinking”, says Mr Hodgson. “It will also have some road in and some road out capability.”

The project, including building berths at the ‘port’ and rail heads, is due to be finished next year.

Northern Powerhouse

Peel’s investments are separate to, and do not rely on, any funding promised in the government’s ‘Northern Powerhouse’ pre-election announcement, which recently suffered a set-back with a delay to the electrification of the TransPennine line, while other key investments have come under pressure.  .

Mr Hodgson admits to a sense of disappointment on hearing government plans to “cool the jets” on rail investments, but also believes that it remains committed to the Northern Powerhouse concept.

“I think government would be crazy in a wider context to slow it [Northern Powerhouse] down in any significant way because the economic benefit is large,” he says.

“And there are bigger consequences of not doing it… We will have to keep building more and more infrastructure in London and in the south, which is difficult to do, and very expensive.

“If we didn’t do this [Liverpool2], if we continued with a lemming-like approach to building our big ship infrastructure in the south of England, then maybe, not this government, maybe not the next one, but a government somewhere, will have to start thinking about putting more lanes on the M25. And can you imagine the chaos, just the construction work would cause and the cost would be absolutely huge.

“So our view is that there is a better bang for your buck, Mr Government, in investing in some of the road and rail pinch-points that we have here.

“It’s an absolute no-brainer… developing east-west connectivity would bring more economic prosperity to the country overall.”

Catalyst for change

Change cannot come fast enough for Peel, which has shouldered huge financial outgoings in the past 18 months, with little return on investment to date.

Peel refinanced the business back in 2012 raising enough finance to cover the cost of Liverpool2.

It set up a separate company to fund the biomass project through project financing.

“With things like biomass, it’s a long-term commercial contract, with guaranteed minimum tonnages, with blue chip clients like Drax, so people can get their head round funding that,” Mr Hodgson says.

Whereas funding Liverpool2 as a separate investment was always going to be quite challenging.

“You don’t get long-term contracts with container terminals. Liverpool2 is more of a big infrastructure development for the long-term future for Liverpool as a container port,” Mr Hodgson says.

“We’ve been toiling away for nearly 18 months now, but every time the tide comes in you don’t see what you’ve been doing, it just disappears.

“It’s been quite soul destroying taking people around if the tides in, it’s like — Oh, what have you been doing for the past 12 months? So it's all happening now above ground, so it’s starting to take on a different feel to the project."

The focus now to secure its first new customers and reverse the outgoings to incomings. “As one of our shareholders said on a trip round [the port] — ‘This is great, but it’s all money coming out at the moment. When will it start coming in?’”

New customers

Peel is under non-disclosure agreements with all its customers, and therefore cannot as yet reveal any new lines that are due to call at Liverpool2. Mr Hodgson says the port is talking “commercial terms” with customers and that it’s an “interesting stage of the project”. However, the balance of power remains very firmly in the lines’ favour with so many UK ports competing for business. 

“When you’re building something, people actually want to see something there and so when the cranes come, I think that’s another milestone,” he says. “There are a number of very clear milestones coming up quickly now people start to see things really happening.”

The first cranes for Liverpool2 have been shipped from Shanghai Zhenhua Heavy Industry Co’s Changxing base, Lloyd’s List exclusively revealed.

Five megamax ship-to-shore cranes were loaded onto a ZPMC vessel and are expected to reach Liverpool at the end of September or early October. The bright red cranes should be up and running by the end of the year in line with the launch of Liverpool2.

http://www.fleetmon.com/en/vessels/Zhenhua_23_24680

Existing transatlantic customers at the port include ACL, ICL and OOCL. There are a number of intra-Europe feeders such as MacAndrews, CMA CGM — which connects with Le Havre — and BG Freight Line.

However, some years ago the port lost business from Taiwanese line Evergreen and it has never managed to entice world-leader Maersk Line, despite its UK commercial headquarters existing just four miles down the road. 

“It all comes down to ship sizes,” says Hodgson. “We are very constrained on size. We [can take a maximum of] about 3,000 teu. It’s very tight through the locks.

“We’ve talked to Maersk about some of their feederships. I’ve personally been involved some years ago. All their feederships are just too big to come into Liverpool.” 

The launch of Liverpool2 will blow those size restrictions out of the water. The only thing it needs now is a new big-name customer to make it pay. And with a ‘big announcement’ being touted ahead of London International Shipping Week, the ink on that first deal could very well be drying right now.

Peel is getting to the crunch point of its strategic £300m deepwater gamble. Mr Hodgson sees recent independent investment in warehousing facilities along the M62 corridor from Liverpool to Manchester as an indication that Peel has got its strategy right.

“If you drive along the M62 from here there’s probably, and I’m guessing now, but there is probably about 2m sq ft of sheds gone up in the last two years,” he says.

Retailers investing in the sheds include Travis Perkins, Asda and delivery giant Hermes, Mr Hodgson says. “The fact that we’ve seen so many sheds being built in the location before L2 is even opened, really gives us some confidence that we’re on the right track.

“We’ve had a very clear strategy around Liverpool2: that is around the streamlining of the whole logistics chain; it’s not just about somewhere to park your new ship.

“Liverpool2 will be a catalyst for changing how logistics works. It will take time, and we know that. But our investors are in it for the long term. And we know there is a bigger story to Liverpool2 than just the fact we’re building 40 acres of new land and sticking some very big cranes on top of it.”

First published on www.lloydslist.com