Container shipping in Estonia is steadily developing, with domestic demand for containerised goods picking up and the country positioning itself as a gateway for container shipments into Russia and Central Asia. Estonia faces stiff competition for this role, with both Latvia and Lithuania expanding their container shipping expertise and seeking to develop into maritime gateways. While still only handling relatively small amounts of container shipments, Estonia is being noticed by industry players in the box shipping sector, its ports are becoming better connected to liner routes, and it is investing in its container terminals at port level and container logistics network further up the supply chain. In BMI's opinion Estonia and primarily its port of Tallinn must develop its container shipping expertise if the port is to combat the steady decline in total throughput brought on by the loss of its role in Russia's oil export supply chain.
Diversifying To Survive
Estonia's role in the maritime sector has previously centred on acting as a conduit for Russian oil exports. Liquid bulk still accounts for the largest percentage of cargo throughput at the Port of Tallinn, making up 75% of the total cargo handled at the port in January 2013.
|Diversifying, But Liquid Still Dominates|
|Port Of Tallinn Cargo Traffic Breakdown, January 2013 (% of total)|
The port must, however, diversify away from its reliance on liquid bulk cargoes, specifically Russian oil export cargoes. With Russia's development of its own oil export supply chain, the port is being gradually removed from the loop. The opening of the Russian Port of Ust-Luga on the Gulf of Finland is steadily reducing the country's reliance on Baltic State ports for its oil exports. While liquid bulk cargo continues to dominate Tallinn's cargo mix, both the volumes passing through the port and its percentage share in the facility's total throughput are falling.
In 2012 volumes of liquid bulk cargo declined by 26% year-on-year (y-o-y) and its percentage in the port of Tallinn's total throughput fell from 72.2% in 2011 to 65.7% in 2012.
|Port Of Tallinn Liquid Bulk Throughput - LHC: % Change Y-o-Y; RHC: % Of Total Throughput|
To fill this void the port of Tallinn is repositioning itself as a gateway for container traffic, with box volumes steadily increasing. In 2012 container throughput at the port increased by 15.2%. Box volumes are also steadily playing a greater role in the port's total throughput. In 2012 container throughput accounted for 4.5% of total throughput; in 2013 this had increased to 5%.
|Boxes Stacking Up|
|Port Of Tallinn Container Throughput, 1999-2012 (TEU)|
Investing In Box Shipping
BMI expects container volumes at Tallinn to continue increasing and for boxes to play a greater role in total throughput. To keep pace with this expanding sector and to show its commitment to developing a role in the global container shipping supply chain, the port is expanding its container facilities.
In May 2012 Port of Tallinn container terminal owner Transiidikeskuse placed an order for two rubber tyre gantry (RTG) cranes and two straddle carriers from Konecranes. The straddle carriers were delivered in 2012 and the RTGs are due to come into service in 2013. A longer-term plan at the port is to boost the facility's container operations with another container terminal. Building work on the new Muuga Container Terminal, being developed by Russia's Rail Garant, began in February 2012. The terminal is scheduled to accept its first container in 2013. It will initially boast a capacity of 150,000 twenty-foot equivalent units (TEUs), with plans to expand to 300,000 TEUs by 2015.
Estonia is also aiming to diversify its ability to handle containers, with the country's second port, Sillamae, developing box handling facilities. Operations are expected to begin in 2013. The facility will have four docks, with a total length of 850 metres (m), that will connect to a railway line to ensure full supply chain needs are met. The port is seeking a container terminal operator for the facility and is in talks with Russian, Kazakh and Western partners.
Domestic Demand Driving Growth…
Estonia's domestic economic outlook is one of the factors that will drive demand for containerised goods. The consumer class has steadily expanded over the last decade and the economy is projected to keep growing over the medium term. Although real GDP is forecast to expand by just 3.3% in 2013, with an annual average increase of 2.8% projected over the medium term Estonia is set to remain the outperformer in the eurozone.
|Eurozone Average Real GDP % Change Y-o-Y, 2013-2017|
Estonia's consumer sector and by extension demand for containerised good imports will be bolstered by the economy's continuing expansion. A decline in the unemployment level, set to fall to 8.5% of the population and to average 7.1% over the medium term, will also drive demand.
... But Russian Gateway Role Attracting The Most Interest
Domestic demand is just one reason why container shipping lines are increasingly interested in Estonia. The country's population is relatively small, at 1.3mn, but many shipping lines believe Estonia has the potential to become a gateway into Russia and Central Asia.
Estonia has already played a role in Russia's trade supply chain, functioning as an export point for Russian oil. The two countries' logistics infrastructure is therefore well developed. However, Estonia's continued role in Russia's supply chain is being brought into question because Russia has recently reduced its use of Tallinn for oil shipments, choosing instead to develop domestic oil export facilitates.
Russia already has its own box terminals on the Baltic Sea. The Port of St Petersburg, further up the coast from Tallinn, is Russia's largest container port. Meanwhile, facilities have been developed at the Port of Ust-Luga, with a container terminal opening in October 2011 and the terminal gaining the expertise and investment of global port operator Gulftainer. While the port is so far functioning only as a transshipment call, it has medium-term potential to develop into a direct call as an overflow facility for St Petersburg. The port is capable of handling 6,000TEU vessels and is being developed in phases with a planned annual capacity of 3mn TEUs due to be in place in 2025.
|Port Of St Petersburg And Port Of Tallinn Container Throughput, 2005-2012 (TEU)|
Despite these developments and the fact that there have been diplomatic issues between the two states, BMI believes Estonia has a role to play in Russia's container supply chain, and that Russia will encourage Estonia's participation in this sector. The new Muuga Container Terminal being constructed at the port of Tallinn is being developed by Russian rail freight operator Rail Garant. The company would not be investing EUR120mn if it were not sure that it can attract clients and play a long-term role in Russia's container supply chain.
Box supply chain links between the Port of Tallinn and Russia are already developing. In September 2012 the director general of the Estonian Tax and Customs Board, Marek Helm, and Russian Federal Customs Service head Andrei Beljaninov put in place a test project to accelerate the border crossing for authorised companies via the Koidula-Kunitchina Gora customs checkpoint.
The Estonian port is also looking at rail freight options to link it with Moscow, with Muuga Container Terminal operator Transiidikeskuse signing a preliminary agreement to launch a new container train between the port and Moscow.
Foreign firms are already noting Estonia's potential as a conduit for box traffic into Russia. Japanese carmaker Mitsubishi has selected the Port of Tallinn as a 'strategic partner' for shipping auto components and supplies to its new plant in Kaluga, Russia. Three container trains a week now ship Mitsubishi spare parts from Tallinn to Kaluga. Mitsubishi is determined to triple its vehicle output in Russia. We believe others could follow Mitsubishi's lead, with Tallinn's container facilities in line to benefit.
|Playing A Part In Russia's Automotive Growth Story|
|Russian Vehicle Sales (mn units)|
Offering Access Into Eastern Europe
Russia is not the only Eastern Europe state for which Tallinn could offer connections. It could also play a role in landlocked Belarus and Ukraine's box supply chain. Again, former USSR ties mean Estonia's transport network is well connected with Belarus and Ukraine, and box transit options are already being developed.
|Entry Point To Eastern Europe|
In February 2012 a new container train linking the port with Kiev and Dnipropetrovsk in Ukraine was launched. The Zubr container train is a joint venture (JV) between Estonian Railways' freight subsidiary EVR Cargo and Citodat Invest. According to Urmas Glase, head of PR for Estonian Railways, the box train has led to an increase in container throughput at the port of 1,500-2,000TEUs a month.
Meanwhile, global logistics company Katoen Natie is set to build Estonia's largest logistics centre (65,000sq m) at the port. The EUR30mn project will be developed in three stages and will include the development of railway links, with Katoen Natie aiming to use the logistics centre's position as a 'bridge between East and West and mediate goods primarily to Russia, Belarus and Ukraine', a strategy that will support Tallinn's plans to become a maritime gateway for cargo to these countries.
Opening Up Landlocked Central Asia
Further afield, Estonia has the potential to develop into a maritime gateway for Central Asia. Again, the country benefits from historical ties with this region. BMI notes that Tallinn has already started to develop its freight connections with Central Asia via the its role in the Northern Distribution Network (NDN), the logistics supply chain that transports goods via container for the US Army based in Afghanistan. Tallinn's role in the NDN will be of use to the port in its plans to develop as a gateway for Central Asian states, as it is already familiar with freight operators in these countries.
Tallinn's fellow Baltic Sea port of Riga, in Latvia, has played the largest role in the NDN of the Baltic State ports, with Latvia handling 6,500 NDN-associated containers compared to Estonia's 4,000 and Lithuania's 1,600 in January-July 2012. In the short term, NDN container volumes are set to increase, as the US's withdrawal from Afghanistan gets underway and equipment is shipped back via the route to the US. However, BMI expects volumes to drop over the medium term following the US military withdrawal, although, in our opinion, they will not dry up as the route could still be used to bring aid into the country. Although US military involvement in Afghanistan is set to end, economic aid will continue. Afghanistan topped the list of US foreign aid in 2010 (last available data). It is a landlocked country and must rely on the NDN or supply chain links through Pakistan or via Kazakhstan, the Caspian Sea, Azerbaijan and Georgia for international trade.
|Central Asian Growth Story|
|Top 10 European Economic Growth Outperformers, Measured On Real GDP Annual Average Increase, 2013-2017|
According to our Country Risk growth forecasts for Europe, Central Asian states are set to be outperformers over the medium term. This will bolster the region's trade and Tallinn will be well placed to play a role in this growth story.
Estonia's potential to develop into a maritime gateway for Eastern Europe and Central Asia means the port is starting to attract international interest. China views the Port of Tallinn as an option to facilitate a greater number of Chinese exports into Russia. The Chinese port of Ningbo was due to develop a container terminal at Tallinn, and while that deal fell through during the 2009 crisis, Chinese firms remain interested in Estonia's box shipping potential.
Chinese state-owned transport and logistics company Sinotrans has signed a cooperation agreement with the Port of Tallinn, under which the port will become its regional goods distribution centre, with the development of cargo flows from the Chinese port of Fuzhou to the Estonian facility. Chinese cargoes through Estonia's largest port will also be boosted by the fact that a memorandum of cooperation has been signed between the Estonian Logistics Cluster and China's Xiamen Logistics and Fujian Logistics Association.
Meanwhile, in November 2012 the China National Corporation for Overseas Economic Cooperation (CCOEC) signed a cooperation agreement with the Port of Tallinn which it is hoped will encourage Chinese firms to establish distribution and production centres in Estonia.
Chinese firms are not the only ones to spot Estonia's potential. The US Port of Maryland signed a memorandum of understanding (MoU) with the Port of Tallinn in November 2012, which it is hoped will lead to an increase in maritime business between the two ports.
The potential for Estonia to develop its container shipping credentials is there, and with it upside risk to Tallinn's container throughput and connectivity. In 2012 (last available data) the port handled 227,809TEUs, and this is projected to increase rapidly over the medium term. The country's connectivity to container liner services is also expected to increase. Estonia was ranked last out of 11 regional peers according to the UNCTADstat Liner Connectivity Index in 2013.
|Emerging Europe UNCTADstat Liner Connectivity Index, 2012|
Container lines' interest in Estonia is picking up, with CMA CGM adding Tallinn to its Europe Caribbean Service (ECS) in August 2012.Previously goods on this route had to be transshipped to Tallinn via one of the major Northern Europe ports (Hamburg, Rotterdam or Antwerp.) In our opinion, the inclusion of Tallinn is part of a wider trend of Baltic Sea ports being added as direct calls, with the Polish Port of Gdansk linked with Asia and the Russian Port of St Petersburg connected directly with South America.
While BMI believes Estonia has the potential to develop into a maritime gateway for Eastern Europe and Central Asia, it must remain competitive. Tallinn faces stiff competition from other Baltic State ports. Like Tallinn, these ports have seen a fall in Russia's use of their facilities and so are diversifying, seeking to become gateways for container trade into Russia and to offer trade options for landlocked Central Asian countries. We have previously noted Riga's role in the NDN, which places it in a strong position to develop its supply chain links with Central Asia.
|Lagging Behind Its Peers|
|Baltic Eastern Seaports Container Throughput, 2012 (TEU)|
The Port of Tallinn lags behind its rivals in the container shipping sector, ranked fifth out of eight Baltic eastern seaport rivals in terms of container throughput in 2012, and third out of five Baltic State ports container throughput in the same year, with Lithuania's port of Klaipeda and Latvia's port of Riga considerably ahead of the Estonian port.
Estonia comes last in terms of liner connectivity, 11th out of its 11 European peers, with Latvia and Lithuania at 10th and eighth position respectively.
However, in BMI's opinion the expansion of Tallinn's container operations, CMS CGM's choice of the port as a direct call and Mitsubishi's decision to choose Tallinn over Riga show just how much potential Estonia has and the strong position it is in to play a much bigger role in the global container shipping supply chain.