Russia Reroute Hits Riga Tonnes, But Boxes Still Growing

The port of Riga, Latvia's largest port, continues to suffer from Russia's rerouting of its liquid exports via its domestic facilities and faces further downside pressure on its throughput with Belarus stating it wishes to make greater use of Russian facilities for its supply chain needs to the detriment of Baltic States' ports. Latvia is, however, refocusing its gateway role toward catering more for Central Asia, a high-growth region, with the country already gaining expertise via its role in NATO's Northern Distribution Network (NDN). Latvian ports' gateway role is likely to boost growth in both tonnage and container throughput, with the nation's ports also set to benefit from an improving domestic demand, as, although Latvia's trade needs are relatively small, the country is set to be a growth outperformer in the European Union.

Short Term: Tonnes Slipping, But Boxes Offering Growth

BMI highlights that the tonnage outlook at the port of Riga is worsening after the port recorded a slowing in total tonnage throughput in 2012 with volumes increasing by just 5.8% year-on-year (y-o-y) to 36mn tonnes, compared with their growth of 11.8% in 2011. In January-February 2013 total tonnage volumes at the port have fallen by 11.6% y-o-y from 6.2mn tonnes in the first two months of 2012 to 5.4mn tonnes in January and February 2013.

Tonnes In Decline
LHC: January-February 2012 & 2013 Port Of Riga Total Tonnage Throughput ('000 tonnes & % Change y-o-y). RHC: 2012 & 2013 Port of Riga Total Tonnage Throughput ('000 tonnes & % Change y-o-y)

This decline has led BMI to revise down its full-year 2013 forecast for the port's total tonnage throughput to a y-o-y decrease of 1.8%, with total tonnage volumes projected to stand at 35.4mn tonnes for the full year. Our full-year decline is not as steep as has been witnessed in the first two months of 2013 and this is due to BMI's belief that the decline will level off in 2013. We do, however, highlight that there is downside risk to our 2013 forecast on the strength of decline posted in the first two months of 2013 and should this level of decline continue we will be further revising down our full-year 2013 total tonnage forecasts.

The decline in total tonnage throughput is due to the decrease in Russia's use of Baltic State ports for their liquid cargo exports, with Russia utilising its domestic facilities instead. This can be viewed in the port of Riga's tonnage breakdown for the first two months of 2013 with general cargo increasing by 0.3% bulk cargo down 13.4% y-o-y and liquid cargo posting an even deeper y-o-y decline of 15.5% y-o-y.

Russia Reroute Hits Riga Liquid Throughput
Port of Riga Throughput Breakdown, Jan-Feb 2013 (% Change y-o-y)

A further blow to Riga's throughput is Belarus' announcement that it wishes to increase its supply chain network through Russian ports. This intention was outlined in November 2012 when, during a meeting with Leningrad Region Governor Alexander Drozdenko, Belarus' President Alexander Lukashenko stated that he and Russia's President Vladimir Putin 'have agreed in principle to relocate large volumes of cargo shipments including potash fertilizers from Baltic-state ports to those in Russia's Leningrad region'.

This strategy would have a detrimental impact on Latvian and Lithuanian port throughput as both countries' ports currently meet a large percentage of landlocked Belarus' trade needs. We would highlight, however, that while this places further downward pressure on our total tonnage throughput forecasts for Riga, Belarus has yet to initiate its reroute plan from Riga with the port's handling of fertiliser increasing by 35.4% in the first two months of 2013.

While the port of Riga's role is being downgraded in Russia's supply chain and possibly in that of Belarus' logistics network BMI does not believe that it will be completely cut out. While Russia's development of its own ports on the Baltic Sea has led some to suggest that it is seeking to exert control, BMI is sceptical. It is natural and wise for a country to seek to cater for its own trade needs, both from a cost and a security perspective. We also highlight that this argument does not hold up considering Russia's determination to continue using Baltic State sea ports with Latvian Transport Minister Aivis Ronis and his Russian counterpart Maxim Sokolov meeting in December 2012 to discuss cooperation for improving cross-border connections between the two states in order to develop stronger freight transport links. BMI also highlights the investment that Russian firms continue to make into Baltic states' ports. At the Port of Riga, for example, Russian chemical giant United Chemical Company (URALCHEM) is developing a dry bulk fertiliser as part of a joint venture. The terminal is due online in 2014.

Russia's rerouting of its liquid cargo is, however, leading the port of Riga to assess its exposure to this sector and seek to diversify into other cargo areas. The percentage that liquid cargo accounts for in Riga's total throughput is decreasing down to 24.8% in the first two months in 2013 from 26% in the corresponding period in 2012.

Diversifying Into Boxes
Liquid Bulk & Container Jan-Feb 2012 & 2013 % of Total

The area that Riga is choosing to diversify into, one which a number of Baltic States are expanding their remit in, is the box shipping sector. In January and February 2013 the port of Riga's container throughput accounted for 11.3% of the port's total throughput up from 10% in the same period in 2012. The area is a strong growth sector for the port of Riga, with box volumes increasing by 9.2% y-o-y in January and February 2013. For the full year, we project container throughput levels to expand by 12.5% to reach 407,584TEUs up from the 362,297TEUs level in 2012 when container volumes increased by 19.6%.

Boxes Continue To Stack Up
LHC: January- February 2012 & 2013 Port of Riga Container Throughput (TEUs & % Change y-o-y). RHC: 2012 & 2013 Port of Riga Container Throughput (TEUs & % Change y-o-y).

This growth is in part due to the focus being placed on this sector by the port, which is seeking out new clients and so the fact that growth is from a relatively low base level. BMI also highlights that container throughput is being driven by Riga's role as a gateway, with the country catering for box traffic in Russia, other countries in Eastern Europe and Central Asia.

Latvia To Outperform
EU Real GDP Annual Average % Change 2013-2017

Box growth through the port is also being driven in part by domestic demand, as although Latvia's population is relatively small at around 2.2mn the country's economic growth is the European Union outperformer projected to expand by 4.3% y-o-y in 2013 and by an annual average of 4.2% over the medium term (2013-2017). BMI highlights that this growth trajectory places Latvia in BMI's top 20 European growth rankings in 11th position out of 53 countries.

Medium Term: Central Asia Focus Offers Upside

Over the medium term the main focus for the port of Riga will be developing its credentials as a gateway for trade in and out of Central Asia. This role offers upside risk to our medium-term forecasts with BMI predicting total tonnage volumes at the port will increase by 4.4%, an annual average of 1% to reach 37.6mn tonnes in 2017. Container throughput growth is set to be much stronger, with BMI forecasting box throughput to expand by 54%, an annual average of 9% to reach 557,633TEUs in 2017.

Upside Risk
LHC: Port of Riga Throughput, ('000 tonnes & % Change y-o-y). RHC: Port of Riga Container Throughput, (TEUs & % Change y-o-y)

BMI highlights that the port of Riga has already garnered some expertise in offering supply chain options through Central Asia, with the port playing a vital role on NATO's NDN freighting non-military goods to NATO's operations in Afghanistan. The port is set to play a continued role in this network, but it will increasingly see cargo moving in the opposite direction, with the operation being wound down over the medium term.

The NDN route has, however, given the port of Riga connections with Central Asian states, which the route passes through and the facility is seeking to capitalise on this, marketing itself as a gateway for Central Asian trade. The strategy has the backing of the Latvian government and other Latvian logistics operators.

In February 2-13 during a meeting with the Uzbek Ambassador to Latvia Afzal Artikov the Latvian Prime Minister Valdis Dombrovskis invited Uzbekistan to develop transit cooperation with Latvia. In November 2012 Dombrovskis used the opportunity of a visit to Azerbaijan to discuss the potential for Azerbaijan to develop logistics centres at Latvia ports and use them as a gateway for trade.

Latvia is also keen to court greater Kazak trade through its ports with the heads of Kazakhstan Temir Zholy, the Kazakh rail operator, Askar Mamin and Latvian railway company Latvijas Dzelzcels (LDz) meeting in February 2013 to discuss boosting Kazakh shipments through Latvian ports and the potential for Kazakhstan to develop terminals at Latvian ports

Latvia's desire to diversify its gateway clients is understandable. Currently Russia makes up between 66% and 68% of total transit cargo through Latvia, with Belarus accounting for 22-25%. With Russia now increasing the utilisation of its domestic facilities and Belarus stating that it too wants to decrease its reliance on Baltic States ports, it is understandable that Latvia is seeking to increase the role of its other major transit client, Kazakhstan, which currently accounts for around 4% of total transit cargo in Latvia. Latvia is hoping to boost Kazakhstan's percentage to between 10% and 20% of the total.

Diversification Required
Latvia Transit Cargo Breakdown By % Of Total

BMI believes that Latvia's strategy to encourage greater transit cargo through its ports from Central Asia goes beyond a strategy of diversification, with Latvia looking to the region's growth outlook. In 2013 Uzbekistan, Kazakhstan and Azerbaijan are projected to expand by 7.7%, 5.8% and 3.6% some of the highest growth rates in Europe, with the countries also some of Europe's growth outperformers in the medium term.

Seeking To Play A Role In Central Asia Growth Story
Top 20 Europe Real GDP % Change y-o-y, 2013-2017. Highlighted Are Countries Latvia Ports Could Be Used By To Meet Transit Needs

The port of Riga's development as a maritime gateway is starting to attract interest from foreign investors. BMI specifically highlights China, with an International China Business Forum held in Riga in November 2012. The Chinese participants in the forum were reported to be mostly interested in Latvia's transport and logistics sector, with Latvia viewed not only as a gateway to high growth regions of Eastern Europe and Central Asia, but also as a window into the EU with the potential for Chinese goods to be produced in the Latvia, thereby being labelled as 'made in the EU,' which would reduce customs costs.

Long Term: Stiff Competition

The port of Riga's role as a maritime gateway faces tough competition, with other Baltic State ports also hit by Russia's rerouting of its liquid cargoes via domestic ports. BMI highlights that ports across the region are lining up to become gateways for container traffic into Russia, Eastern Europe and Central Asia.

Riga lags Lithuania's port of Klaipeda in terms of both total tonnage and container throughput (according to 2012 figures), with the port already a major competitor with Riga for Belarus transit cargo. The port of Tallinn in Estonia is developing into a serious rival for Riga's transit box traffic with Russia, with the Estonian port winning the Japanese automotives giant Mitsubishi as a client, with Mitsubishi using the port of Tallinn as part of its supply chain to ship containers to company's assembly plant in Kaluga Russia, a role the port of Riga also competed for, but failed to win. Tallinn achieved a further coup in 2012 becoming a direct port of call for major container line CMA CGM.

Strong Competition
LHC: Baltic States Ports 2012 Total Tonnage Throughput ('000 tonnes). RHC: Baltic States Ports 2012 Container Throughput (TEUs)

While Riga faces stiff competition from Klaipeda and Tallinn for its Russia and Eastern Europe transit role, BMI believes Riga is better placed to carve out a larger market share in Central Asian transit cargo, although it will also face competition from the other ports in this arena as well.

In such a competitive enclave of ports, BMI expects Riga to seek new means to entice more shippers and this strategy includes the port's relocation. It is going to move its Andrejsala and Export facilities from the city centre to Krievu Sala (also referred to as Russian Island), reducing the journey of arriving vessels by 15-20km and making the facility more competitive.

This article is tagged to:
Sector: Freight Transport, Shipping
Geography: Latvia

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