Excess Port Capacity at Newcastle

by Michael King
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Australia’s Port of Newcastle is simultaneously one of the world’s genuinely gargantuan maritime complexes and also a testing ground for grain terminal competition in Australia – a key goal of the deregulation of the grain industry over the last decade.

In 2014 the port, located in New South Wales on the eastern seaboard, handled a record 164.3 million tonnes of grain, up 5.3% compared to a year earlier. Newcastle handles some 25 different cargoes in any given year but is primarily known as one of the world’s biggest coal ports. Exports for Asia’s steel mills and power stations contributed 159 million tonnes to the 2014 tonnage haul, but recent investments in grain handling capacity at Newcastle were supposed to help increase cargo diversity. Those ambitions have so far not been fully realized.

Ambitions

The Port of Newcastle classifies grain and meal exports as including barley, sorghum, soybeans, canola, maize, canola meal and cottonseed meal. In its far-reaching development plan to 2020, the port admitted grain and meal exports were at the whim of the weather.

“Continuing strong demand for agricultural products is forecast as a result of rapid population growth in countries across Asia,” it said. “The port is well positioned to capitalize on this increasing demand. However, the key determinants in growth of agricultural exports will be the ability of the producing catchment to supply the products, which are principally influenced by weather conditions, and the capacity of the supply chain to deliver it to the port.”

While the supply chain to Newcastle has been improved, the port’s fears about poor harvests have proven perceptive. Indeed, 2014 was an awful year for the region’s grain exports. Meal and grains throughput fell 50.6% year on year to 192,655 tonnes, while wheat exports also slumped, down to 356,241 tonnes from 891,837 tonnes in 2013, declines the port attributed to drought in Newcastle’s eastern seaboard hinterland, especially the northern region of New South Wales.

Although last year there was some improvement in volumes – meal and grains throughput climbed 120% to 422,932 tonnes, although this was offset by a 17.4% decline in wheat volumes which fell to 294,293 tonnes — handling capacity still far outweighs demand.

On a policy level, disappointing grain throughput at the port has led some to question whether Australia really needs more grain terminals, a key plank of a national competition policy designed to give grain growers and marketers more export options and to lower prices in the post-deregulation era. Certainly all eyes are on Newcastle, where the opening of a new terminal at Dyke 2 in 2014 added a significant amount of extra grain handling capacity which, so far at least, has been hard to justify.

Newcastle’s newcomer

Dyke 2 features one concentrates ship loader and one grain ship loader which has a design throughput of 2,000 tph supported by five silos of 60,000-tonne capacity. The berth offers a design depth of 12.8 meters and channel depth of 15.2 meters.

The main user and operator of the terminal’s grain handling gear is Newcastle Agri Terminal (NAT), an independent logistics company formed in 2009 by Jock Carter and Martin MacKay. NAT’s head office is in Carrington, New South Wales, and the company’s remit is to “provide better grain supply chain solutions for exporters and to increase farm gate returns for growers.”

Unlike many terminal operators in Australia, it is not involved in grain marketing, although its three leading investors — CBH Grain, Glencore Grain and Agrex (a division of Mitsubishi) — are all grain exporters.

NAT’s A$28 million grain export facility was originally scheduled to be operational in 2013, but it only handled its first cargo of grain in February 2014 when the terminal was still in its commissioning stage. NAT handles grain arriving as both bulk and in containers, with the latter mode’s hinterland reaching as far as Sydney via rail links direct to Botany and adjacent berth access in Newcastle.

In December, NAT received one of the longest grain export trains in Australian history – 1.25 kilometers and carrying over 5,000 tonnes of wheat from Northern New South Wales bound for Southeast Asian markets and transported for exporters Agrex and Louis Dreyfus. After handling the mega-train, NAT Executive Director Jock Carter said using larger trains offered increased efficiency and lower costs, which equaled better returns for growers.

“It also frees up capacity for other users of the rail network,” he added. He also called for more government support to boost rail and other transport capacity in New South Wales.

“As well as upgrades to strategic sections of regional track, road infrastructure and access improvements are needed to streamline the connectivity from farm gate to major rail interchanges,” he said.

However, Walker refused to comment when asked how NAT was coping with the dearth of exports from New South Wales over the last two years, or what this means for the company’s finances given the current imbalance between port capacity and grain volumes.

Market leader

GrainCorp, by contrast, was more forthcoming. In 2014-15, the company’s West Basin 3 terminal at Newcastle handled 407,000 tonnes, up from the 208,000 tonnes received in 2013-14 but far below the 1.25 million tonnes of 2012-13.

“Northern NSW has experienced a tough operating environment over the past two years, which has had an impact on overall volumes and consequent exports out of Newcastle,” admitted a spokesman. “Our facility has capacity to export in excess of 3 million tonnes and the largest export volume achieved was 2.75 million tonnes.”

Asked if there was excess capacity on the east coast now, the assessment from GrainCorp was blunt. “There is excess capacity across the east coast for two main reasons: the current operating environment of consecutive smaller harvests and additional capacity coming online,” said the spokesman, who added that it was too early in late December 2015 to make any throughput forecasts for 2016.

The company’s Newcastle terminal at West Basin 3 is a free hold facility with a license agreement in place with the Port of Newcastle for the ship loaders and associated equipment owned and operated by GrainCorp to reside on the wharf area. It operates on a deregulated basis which means all marketers have open access to the facility. GrainCorp provides the stevedoring for its customers which includes GrainCorp Marketing. The facility can receive up to and including Panamax size vessels, while total terminal storage capacity is around 150,000 tonnes. So far the largest vessel loaded was a bulk carrier of some 60,000 dwt.

The majority of grain received by the terminal is sourced from Northern NSW and is mainly delivered by rail.

“We do have the ability to receive grain via road from our own network, other bulk storage facilities or direct off farm,” added the spokesman.

In addition to the GAT and GrainCorp terminals, Louis Dreyfus also has a storage site in nearby Kooragang run by Mountain Industries, which is connected to berths via a third party conveyor, further adding to capacity at the port.

Excess ambition?

Australian efforts to deregulate its grain industry, especially in relation to wheat exports, have been an evolving process. Port access for growers and exporters has been a fundamental part of efforts to make Australian agriculture more competitive in global markets.

In 2014, as reported in World Grain, a new port access code was introduced designed to better support the supply chain of wheat by enabling exports of bulk wheat to access port terminal services on a fair and transparent basis, while also reducing the regulatory burden on port terminal operators. The code of conduct — which is monitored and enforced by the Australian Competition and Consumer Commission (ACCC) — works with existing competition law to ensure third-party access to critical port infrastructure. Although most stakeholders welcomed the reforms, some still believe more fine-tuning could improve supply chain efficiency and discourage new market entrants from building new capacity which is not, currently at least, required.

Peter Woods, a key player in the reform of the Australian wheat industry as the former CEO of the federal government regulator Wheat Exports Australia and now joint founder of innovative grain marketing start-up AvantAgri, has been a long-time critic of the push to increase competition at Australia’s grain export ports by opening new facilities.

“There was already excess capacity and the bulk handlers/port terminal operators had purchased these assets from state governments with little or no compensation to growers who had ultimately paid for them to be built,” he told World Grain.

Although boosting handling competition was a policy aim due to exporters’ frustration at the premiums they had to pay through auction systems and over the timeliness of their shipments, Woods said this was now further exacerbating the problem of excess terminal capacity both at Newcastle and in other grain exporting regions of Australia.

“The ACCC has made some good decisions in regard to reducing regulations in ports where there is more than one grain port terminal – for example, the ports of Kembla and Newcastle,” he said. “Bunbury is a different example, as Bunge doesn’t have exclusive rights to the conveyor and this provided competition to CBH in that area and should be a positive for grain growers.”

He also welcomed the ACCC’s decision in December to grant Viterra a green light to introduce long-term agreements (LTAs) for the allocation of port capacity at its six South Australian bulk wheat ports. This replaces Viterra’s previous auction and first-in-first-served (FIFS) processes for allocating port capacity with a negotiation-based framework using LTAs as the primary allocation method.

However, Woods said his view was that there were still flaws in the port capacity allocation and competition monitoring system put in place under Australian competition law. “You just need to look at the shipping stems to see that terminals are not operating to full capacity,” he added.

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