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Features, Trends and Prospects of Container Shipping In the Straits of Malacca and Policy Implications for Malaysia

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Nazery Khalid Centre for Maritime Economics and Industries

24 December 2010

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Features, Trends and Prospects of Container Shipping

In the Straits of Malacca and Policy Implications for Malaysia

Nazery Khalid Senior Fellow, Centre for Maritime Economics and Industries

Abstract As a littoral state of the Straits of Malacca, Malaysia has benefited tremendously from its proximity to one of the world’s busiest and most important maritime trade passageway. Malaysian ports have prospered by hosting container shipping traffic flowing through the Straits through which a quarter of the world’s container trade passes. However, Malaysia could do more to capitalise on the presence of container shipping in the Straits and leverage on its strategic location along the sealane to capture more business from the flow of containers there. This is the core research question that this study attempts to answer to enable Malaysia to gain a bigger slice of the container trade business generated by shipping traffic in the Straits. This is achieved by first unraveling the features and trends of container shipping in the Straits of Malacca. The analysis of these features and trends provides a basis for the development of an outlook of the dynamics of container trade and liner shipping patterns in the Straits. Focus is given on discussing the impacts of these dynamics on Malaysia’s economy, its ports along the waterway and its maritime support services sector. The study unravels several opportunities that Malaysian ports and maritime support service providers can reap from the presence of liner shipping and container traffic in the Straits and their projected growth, and also the challenges that come with being a littoral state to one of the world’s busiest seaborne container routes. Opportunities presented by container traffic in SOM include the possibility of attracting more liner shipping companies to call at Malaysian ports, increasing container throughput at local ports, providing value-added services to shipping lines and shippers of containerised cargos, attracting investments into local ports and tapping into the booming China trade. The challenges faced in managing and maintaining SOM to facilitate smooth, safe and secure container traffic flow are also outlined. Several policy recommendations are made to capitalize on these opportunities and to confront the challenges. The recommendations include encouraging local port operating companies to invest in other international ports, deepening port channels and drafts to accommodate larger container ships, promoting more aggressively niche areas in which local ports already have a distinct advantage (for example in the handling of halal cargos) to attain differentiation from regional ports, providing competitively priced and a broader-based range value-added services and facilities to port users, and improving traffic management in the Straits to enhance navigation safety of traffic and facilitate growing traffic in the future. The paper concludes that Malaysia should take full advantage of the container trade and traffic in SOM but at the same time fulfill its responsibility as a littoral state to keep the straits open, safe, secure and clean. Keywords : Straits of Malacca, container shipping, container trade, Malaysian economy

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Executive summary As a maritime nation, Malaysia is blessed with many natural advantages. It is located in one of the world’s most vibrant economic regions and along some of the busiest and most important seaborne trade routes. It has a long coast that provides natural shelter from the harsh, open seas and an abundance of natural riches that generate plenty of economic activities and significant volumes of indigenous cargos for its ports. In Malaysia’s backyard is the Straits of Malacca (SOM), one of the world’s most pivotal shipping lanes which facilitates the transportation of an estimated one-fourth of global seaborne trade and one-third of its crude oil. The Straits provides passage that facilitates trade between the West and the East. It sits between the oil-rich Arabian Gulf and the huge consumer markets of Europe and South Asia, and the world’s most dynamic economies in the Far East which includes China, the world’s most populous nation and now its second largest economy. SOM has played an immense role in shaping the history of the region and the world, and will continue to command international attention due to its strategic location and importance to global trade. Being located adjacent to SOM provides Malaysian shippers with easy access to local ports along the Straits which are well-connected with many international ports, allowing them to market their products to the global market. Its ports benefit from the huge shipping traffic in the straits, as reflected in the growing number of ship calls throughput volumes handled and growing revenues earned.1 Given its location, it is therefore imperative that Malaysia takes full advantage of its location to reap the tremendous opportunities that arise from the presence of huge traffic of containers in its ‘backyard’. Although the nation has done well to leverage on its impressive achievements in the maritime sector, as evident by its port development and considerable international clout as a maritime nation, there is a feeling that Malaysia could do a lot more to capitalise from the presence of container flow in SOM. This study aims to answer the question how can Malaysia reap more of the opportunities presented by the presence of liner shipping traffic and of container trade flow in SOM. This research question guides the study in its analysis of the data and information related to the container flow and shipping traffic in SOM. The analysis of this data leads to the identification of the opportunities available currently, and in the future, arising from the container trade and shipping traffic in SOM for Malaysia to harvest. This research is an extension of a study conducted by MIMA in 2006 on shipping and trade in SOM. While that study looked at the seaborne transportation of all types of cargos in the Straits, this study focuses specifically on the dynamics of container trade and shipping in the sealane. The research hopes to address the vacuum in the literature on container trade and liner shipping traffic in SOM analysed from a Malaysian perspective. It sets out to identify the opportunities available for Malaysian shipping companies, ports, maritime support service providers, shippers and other stakeholders arising from the container flow and liner shipping traffic. It is hoped that

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the opportunities identified can be optimally exploited for the benefit of the Malaysian maritime sector in particular and the nation’s economy in general. The significance of the study is clearly demonstrated by the paucity of research work to unravel the dynamics of container trade and liner shipping flows in SOM from a Malaysian point of view. This study attempts to plug the gap and to unearth the opportunities presented by container traffic in SOM that Malaysia can tap into. It also hopes to outline the trends of container movement in the Straits to enable specific policies and strategies to be drawn to enable Malaysia to optimally benefit from the container trade and shipping in SOM. Among the key features and trends of container shipping traffic and container flow in SOM are :

• Increasing container shipping traffic • Growing volume of container throughput at ports along the Straits • Increasing volume of transshipment container flow • Increasing size of container ships traversing the Straits • More movement of Westbound container shipping traffic than Eastbound • Increasing demand for more comprehensive port services and maritime support services

from container shipping operators and shippers of containerized cargos

Analysis of the features and trends suggests that container shipping traffic and container trade flow in SOM will increase in the foreseeable future, provided the status quo that creates conducive circumstances for container shipping and container trade in the sealane to flourish. Factors such as development of ports and logistics capacity of nations in the SOM region; growth of China’s economy; global economic performance; regional geo-political stability; and the pace of globalization, liberalization and containerization at the regional and global levels will continue to exert their influence on container shipping traffic and container trade flow in SOM. The prospect of more container shipping traffic and trade flow in SOM brings with it not only a host of opportunities but also a set of challenges. The opportunities include generating more container throughput at its ports located along the straits and beyond, providing a host of services to mainline operators and feeder service providers traversing the straits, and attracting them to hub at local ports along the waterway. The challenges include increasing navigation safety in the straits, protecting its marine environment from threats of pollution and enhancing security in the waterway to ensure smooth, safe and secure passage of ships in SOM at all times. To meet these challenges, Malaysia will need to spend a considerable amount to put in place systems, equipment, infrastructures and manpower and to undertake initiatives to maintain and manage the Straits. In addition, Malaysia can expect to face pressure from the international community to keep the Straits open to all, a call that sometimes neglect the high cost that the littoral states have to bear to manage the waterway. This it must do in a way that ensures the rights of the users of the Straits is respected and its sovereign rights as a littoral state are not challenged, all in accordance with international laws and accepted principles. For Malaysia as a littoral state of SOM, it is imperative that it positions itself accordingly to seize the opportunities presented by the presence of container trade and shipping activities right on its ‘doorstep’. Malaysia should also be mindful of the enormous challenges and responsibilities that

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come with being a littoral state of such a strategic and busy sealane like SOM. For Malaysia to generate more container throughput at local ports along SOM, the following policy options are recommended :

• Encourage local companies which operate terminals in ports along SOM to invest in other international ports. This will result in strategic alliances that can lead to the enhancement of connectivity of Malaysian ports with foreign ports and the call of more container ships to Malaysian shores.

• Deepen port channels and drafts to accommodate larger container ships.

• Promote more aggressively niche areas in which local ports already have a distinct

advantage, for example in the handling of halal cargos, to attain differentiation from regional ports.

• Provide competitively priced and a broader-based range value-added services and

facilities to port users such as integrated logistics, bunkering and ship maintenance.

• Improve traffic management in the Straits to enhance navigation safety of traffic and facilitate growing traffic in the future.

The study emphasises the need to recognise the importance of the traffic flow and trade dynamics in the Straits and argues that they should inform policymaking in various areas such as trade promotion, economic planning, infrastructure development, supply chain management, environmental protection, navigation safety and human capital development. It advocates Malaysia to exploit and take full advantage of the tremendous volume of liner shipping traffic and container trade movement in the Straits to provide support services to the shipping lines, shippers and other players along the container trade supply chain by handling more container throughput, in line with Malaysia’s ambitions to become a regional maritime hub and attain global competitiveness. The framework developed in the study could be useful for policymakers, shippers and maritime industry players, and also researchers keen to undertake more detailed study on the subjects. The study concludes by emphasizing that Malaysia has certainly done well to capitalize on its location along SOM and reap the benefit of the presence of huge container flow and shipping traffic in the sealane. This is based on the achievements of its leading container ports, Port Klang and Port of Tanjung Pelepas, which are listed in the list of world’s top 20 container ports by way of throughput handled. However, it needs to be mindful of the tremendous opportunities available from the container traffic and flow in SOM yet to be tapped and the advantages it has to reap them. It also needs to be wary of the enormous challenges presented by the container traffic and flow in the SOM in terms of keeping the Straits open, safe, secure and clean at all times. Having in place sound policies, as recommended by the study, would be a helpful start for Malaysia to reap these opportunities and overcome these challenges.

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1. Introduction

1.1 Background to the study A comprehensive study on the nature of data on shipping traffic flow in the Straits of Malacca 2 (SOM) was carried out by the Centre of Economics Studies and Ocean Industries, MIMA and Dr Rawindaran Nair, Lecturer at the Logistics and Operations Management Section, Cardiff Business School, Cardiff University in 2007. The study examined the dynamics of shipping traffic for all categories of merchant vessels, based on data obtained from Marine Department Malaysia and complemented with data collected by the research team from various port operators and authorities and government agencies. These data and information are analyzed to unravel the features of seaborne trade in SOM and to determine the types and volumes of commodities traded through ports along SOM. The study covered all types of vessels traversing through SOM and a wide array of commodities shipped through Malaysian ports located along the waterway. To the best of the research team’s knowledge, the study was the first major effort to analyse the traffic flow in SOM by types of vessels and cargo from an econometrics perspective in order to understand the dynamics of trade along the straits and the opportunities and challenges they present to Malaysia. The study managed to identify several strategic issues faced by Malaysia with regard to shipping traffic and cargo flow in SOM. It also underlines the need for Malaysia to fully capitalise on the tremendous economic and strategic opportunities that SOM presents. The research also contributed to policymaking by way of developing a database outlining the sources of primary data on trade along SOM. The database revealed the need for better coordination among agencies involved in trade and the maritime sector in Malaysia to share the data that they collect individually to draw a ‘big picture’ of trade flow in SOM that can benefit policymakers, industry players and researchers. There is tremendous scope to follow up on and expand the findings of this study to further develop a framework on data on traffic and cargo flow in SOM and the composition of cargo shipped through ports along the straits. Such a framework could be useful for future research on SOM carried out by the institute. The importance of the traffic flow and trade dynamics in SOM should be recognised and should be placed as a key subject for policymaking related to SOM. This is especially relevant for MIMA which has already conducted several studies on SOM and is responsible for advising the Malaysian Government on policies relating to the maritime sector. The research project in 2007 established a framework on the composition of traffic flow in SOM. It is appropriate that a more extensive study be carried out on the subject to expand the literature on shipping traffic this critical trade lane. A more expansive and detailed study will be extremely useful for policymakers to develop policy options for Malaysia to capitalise on the traffic flow in SOM. For example, determining the flow of containerised cargos in SOM is relevant to Malaysia in the context of the target of the Third Industrial Master Plan 2005-2020 (IMP3) which has spelled out the target for Malaysian ports to handle a total container throughput of 36 mil. TEU by 2020.3 By capitalising on growing intra-regional and transshipment container trade along SOM, Malaysian ports can help attain this lofty target. In addition, growing container throughput at local ports can help boost the development of the

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logistics industry and maritime ancillary services in the country, not to mention of manufacturing activities that contribute much to indigenous containerised cargo throughput at local ports. Key to these is to develop a solid understanding of the dynamics of liner shipping and container trade in SOM and their impact on Malaysia’s economy. It is therefore timely that a new study is carried out as a follow up to the 2005 study which will examine and analyse the liner shipping and cargo flow patterns in SOM. 1.2 Objectives of the study

There are multiple objectives that study aspires to attain, namely :

i. To examine all available data on supply and demand side of container shipping and trade flow in SOM to determine patterns of services of major liner operators in and along SOM in the carriage of international container traffic. This include data global container trade and container shipping; total shipping traffic and container shipping traffic in SOM; size and capacity of container ships; and container throughput handled by ports along the straits.

ii. To outline the opportunities and challenges to Malaysia arising from the presence of container shipping traffic and container flow in SOM

iii. To recommend a set of policy options that will lead to Malaysia optimally

capitalizing on container shipping traffic and container flow in SOM and facing the challenges they present.

1.3 Significance of the study The significance of the study are as follows :

i. Few studies have been conducted to outline and analyse the features, driving forces, trends and outlook of liner shipping traffic in SOM. This study aims to fill in the vacuum with the hope that its analysis, findings and recommendations can benefit Malaysian ports, shipping companies, maritime service providers, shippers and other stakeholders by leveraging on Malaysia’s strategic location along SOM and reap the opportunities presented by the presence of container shipping and trade traffic in the Straits.

ii. Much of liner shipping traffic in the Straits is transit traffic. Still, there could be

untapped opportunities for Malaysian ports along the Straits and maritime industry players to tap from the traffic.

iii. The analysis of data on container traffic and throughput can reveal various aspects of

liner shipping in the Straits that can be useful for policymaking in various aspects of

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the maritime sector - including improvement in navigation safety, development of ports, enhancement of the competitiveness of ports, development of human capital, promotion of maritime support services and enhancement of intermodal connections and logistics services to support container trade.

iv. The study will analyse primary data of traffic flow in SOM available in the public

domain to determine patterns of services of container shipping operators in the sealane. It is hoped that the patterns outlined and outlook suggested from the analysis will lead to further studies to develop a model of liner shipping traffic and containerised cargo flow in SOM using an econometrics based approach. If the study could inspire other researchers to take this modest work further, it would contribute to a better understanding of the dynamics of container shipping and container trade in SOM. It is expected that the development of an econometrics-based model on container shipping and container trade in SOM could be useful for the stakeholders to make strategic decisions with respect to reaping the opportunities and facing the challenges arising from the presence of container ships and trade in the sealane.

1.4 Beneficiaries of the study

Various stakeholders should find value in the findings, recommendations and conclusions of the study. They include:

• Shipping companies • Shippers of containerised goods and commodities • Port operators and authorities • Logistics services providers • Maritime support service providers • Ministry of International Trade and Industry • Ministry of Transport • Marine Department Malaysia • Ministry of Human Resources • Economic Planning Unit, Prime Minister’s Department • Scholars and researchers

1.5 Research question

The problem statement of the study is as follows : How can Malaysia reap more of the opportunities presented by the presence of liner shipping traffic and of container trade flow in SOM?

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The research questions that will be raised in the context of the problem statement are as follows:

i. What are the inherent opportunities available for Malaysian shipping sector, ports, maritime support service providers, shippers and other stakeholders arising from the features and trends of container shipping traffic and container trade flow in SOM?

ii. What are the challenges that Malaysia has to face to keep SOM open, safe and secure

for shipping traffic, and to balance its obligations to the international community and national interests with regard to managing and maintaining the straits?

iii. What inferences can be drawn from the information and statistics on container

shipping traffic and movements along SOM on the state of play and future outlook of liner shipping, container trade and the economy at the national, regional and global levels?

iv. How would liner shipping traffic and flow of container trade along SOM facilitate

decisions with regard to policies relating to areas such as navigation safety, port development, human capital development, trade facilitation planning and business strategies?

v. What policies and strategies should be introduced and adapted for Malaysia to

optimally capitalise on the liner shipping traffic and container trade in SOM?

1.6 Research methodology

In conducting the research, the research team analysed information and data on container flow and liner shipping traffic in obtained from primary and secondary sources. The research methodologies employed in this study include the following :

• conducting a scoping study on the state of play on Malaysia’s seaborne trade in a local, regional and international perspective, especially containerised trade shipped through ports along SOM;

• reviewing studies carried out on SOM with respect to traffic and cargo flow, with a focus

on liner shipping and containerised cargo; • assessing the evolving structure of the container shipping industry using the PESTEL

(political, economy, social, technology, environment and legal) framework; • compiling existing data on traffic flow and trade in SOM based on the earlier study by

MIMA and Dr. Rawindaran Nair conducted in 2007 to see if there are gaps that can be addressed;

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• consulting several stakeholders including representatives from shipping companies, shippers, port authorities, terminal operators and maritime support services companies.

1.7 Limitations of the study

The study analyses data on seaborne container trade in SOM and on a global basis available from open sources. The short duration of the study did not afford the research team to collect more specific primary data that would have been helpful in drawing a more exhaustive and complete picture of container trade and liner shipping flow and patterns in SOM to facilitate the forecast of their volumes and traffic. The insights and information obtained from those interviewed – namely executives from liner shipping companies, port authorities, port operators, shippers and maritime support services providers – are used to make certain inferences and are assumed to be representative of the views of the sub-sectors they represent. Given the short timeframe of the study, the authors had to rely on mainly information available in the public domain and could only conduct a desktop research based on the information and literature review. Information and insights obtained from interviews with several stakeholders, and data retrieved from open sources, are used to draw inferences and make generalisations to arrive at the conclusions of the study. Data on container shipping, trade volumes and port throughput in and along the Straits of Malacca are available for short periods and are used to plot trends and make forecast over the long term. In coming up with an outlook on container shipping and trade in SOM and in drawing policy options and conclusions from them, the study assumes linear growth in global trade and economy, in demand for container shipping services and in the growth of container throughput at ports along the Straits. Hence, the research assumes that the status quo is maintained in projecting the outlook and making the recommendations. It is however mindful that major shocks like global recession, natural disasters and dramatic shift in the political, social and economic status quo could have impacts on the liner shipping and container trade movements in the Straits and surrounding areas. The short duration of the study did not afford the research team to dwell deeper into the complexities of factors that influence the dynamics of container shipping and trade in SOM. A more exhaustive analysis on the subject and a more expansive treatment on the information and data available would have enabled the research team to draw more conclusive findings and develop more solid recommendations. It is hoped that the study could inspire other researchers to conduct further research on the container shipping and traffic in SOM and expand the findings made by this modest research.

2. Literature review : The importance of SOM as a trade sealane and container traffic passage

SOM is mentioned in many maritime economics literature as one of the most strategic and important trade sealanes 4 in the world (Bateman, Raymond & Ho, 2006; Khalid, 2006).5 SOM

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facilitates the transportation of an estimated one-fourth of the global seaborne trade and one-third of its crude oil (Richardson, 2004).6 Khalid & Basiron (2008) called SOM a sealane of immense strategic, political and economic importance not only to the littoral states of Malaysia, Indonesia and Singapore but also to the international community.7 The straits provides a crucial route that links the trade between the West and the East (Khalid, 2007).8 The East Asian economic powerhouses of China and Japan are highly dependent on SOM as a shipping lane that facilitates much of their international trade (Hong, 2008; Tsunekawa, 2008).9 Given such dependence, it is no wonder that these economies consider the straits to carry immense strategic importance and are concerned about the occurrence of any incidents or developments that may prevent ships from passing through smoothly (Graham, 2006; Storey, 2006).10 Testimony to the commanding role it plays as a key global container trade sealane, SOM recorded 22,310 movements of container vessels in 2009 in SOM compared to 18,283 movements of container vessels in 2000 (Marine Department Malaysia, 2009). 11 Based on these figures, growth of container shipping traffic in the sealane from 2000 to 2009 recorded an impressive growth of 20% year on year. This growth can be partly attributed to the growing trade between the West and the East, largely on the back of China’s breakneck economic growth (Khalid & Basiron, 2008).12 The spectacular growth of China’s economy in the last two decades,13 largely on the strength of its international trade with all four corners of the world, can be attributed in large parts to the open, safe and secure route provided by SOM and the supporting facilities available along it (Naidu, 1997; Noer, 1996).14 Various studies have been attempted to identify the carrying capacity 15 of SOM, resulting in significantly different figures. A study commissioned by Nippon Foundation estimated that traffic in the sealane could reach 200,000 ships a year by 2015 (JITI, 2006).16 The preliminary results of another study conducted by Maritime Port Authority of Singapore (MPA) in 2009 maintained that the Strait of Singapore could accommodate double the capacity of shipping traffic of 2007 based on the 257,000 vessel movements recorded in Singapore Strait (MPA, 2009).17 An unpublished study by Maritime Institute of Malaysia carried out in 2010 concluded that different safe distances and safe separation scenarios/domains between ships can alter the carrying capacity of SOM and affect its traffic occupancy/density (Shahryari & Mohamad, 2010). 18 Taking a different approach from other studies that came up with absolute figures of the maximum number of ships that SOM can accommodate, the authors of this research maintained that maintaining different domains of 0.2 to 2.0 nautical miles (nm) safe distance variances and 0.5 to 5 nm safe separation would allow the ship carrying capacity in SOM to accommodate between 119,159 to 1,302,351 movements per year, resulting in a traffic occupancy/density of between 6% to 64% of the current traffic volume in the sealane. Plate 1 shows the major global seaborne trade routes and highlights the importance of SOM in facilitating container trade between East and West. The passage it provides links the economic behemoths of East Asia with their key trade partners in the West. The map clearly shows the heavy presence of merchandised ports in East Asia, namely in China, which stands testimony to

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the economic boom in China and its exports. Standing between East Asia and its trading partners in the West is SOM which facilitates much of the container trade between the two areas. Literature on container trade in the Asian region accords SOM a role of tremendous importance in enabling regional and global container trade (Pinder & Slack, 2004 19; McConville, Leggate & Morvillo, 2005 20 ).

Plate Major global seaborne trade routes

Source : www.infranetlab.org Khalid, Nair et al (2007) examined database on shipping traffic and trade flow in SOM and explored the types of vessels and cargos passing through the straits and handled by ports along the sealane to identify the links between them.21 The study recognized that with the help of a systematic and comprehensive set of database on shipping traffic and trade flow in SOM, it would be possible for policymakers and other stakeholders to make sound judgment and decisions with regard to protecting and advancing their interests and priorities in the straits. Given the pivotal role that SOM plays in facilitating East-West container trade, the safety and security of the sealane is naturally a matter of great international interest. This is more so after the September 11 attacks, as analysts raised fear that terrorist attacks could occur in the straits, although such fear has thus far proven unwarranted, and the threat of piracy is not alarming (Young & Valencia, 2003).22 Khalid (2010) argues that all parties along the ‘maritime supply chain’ - consisting of, among others, maritime industry players and security agencies - develop total domain awareness of their operating environment and inculcate a culture of ‘safety and security first’ to secure a high-stake maritime area like SOM from the multiple threats it faces.23

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Protecting this busy sealane featuring several chokepoints from pollution is also a matter of great international concern. Abdullah et al (2003) found that SOM was subjected to a variety of ‘environmental stresses’ owing to its strategic location as a major international container shipping lane, and the presence of agricultural, industrial and urbanisation activities which predominate on the west coast of Peninsular Malaysia that borders the straits.24 Scholars agree that given the projection of greater container traffic and flow in SOM in the foreseeable future, protecting SOM from ship-based pollution will be an agenda of high priority in the years to come. (Cleary & Goh, 2000 25, Francx, 2001 26). 3. Straits of Malacca : An economic lifeline to Malaysia As a maritime nation, Malaysia enjoys a tremendous strategic advantage by being located in a dynamic and populous economic region, and by having SOM, a key global sealane, in its ‘backyard’. If one were to choose where on the world map one would like to build ports to take advantage of global container trade flow, one could do worse than to mark spots along the western side of Peninsular Malaysia. It is no coincidence that this part of Malaysia features the largest population centres, the largest cities and the most prosperous economic zones in the country. The proximity of the western part of Peninsular Malaysia to SOM, which gives it access to one of the world’s busiest seaborne trade routes and connects its ports to many major international ports, has a lot to do with its vibrant economy. For Malaysia, the importance of SOM to its socio-economic prosperity cannot be overemphasised. By virtue of the fact that an estimated 95% of the nation’s international trade (by volume) is carried through seaborne transport,27 and 80% of this trade passes through SOM.28 On account of this, it would not be an exaggeration to state that the Straits acts as a lifeline to Malaysia’s economic growth.29 Its major ports along SOM, namely Port Klang and Port of Tanjung Pelepas (PTP), have flourished from a combination of domestic and transshipment cargos that are transported via the straits.30 Malaysian manufacturers and producers of goods and commodities reach their markets worldwide thanks to the excellent connectivity provided by Port Klang, PTP and Penang Port which are located along SOM.31 Malaysia’s maritime industry players – who are involved in activities such as merchant shipping, port operations, support services such as freight forwarding, haulage and logistics, among many others - have certainly has benefited from the presence of huge shipping traffic volumes in SOM.32 The considerable container throughput generated by its premiere container ports along SOM, namely Port Klang and PTP generates tremendous multiplier effects to the local maritime industry and ancillary services sector, and the nation’s economy. Malaysia certainly has benefited from of its location along the Straits. Its ports have thrived from the explosive growth of China’s economy in the last two decades.33 Malaysian ports have enjoyed tremendous spillover from the growing economic clout of China, which exports huge amounts of goods to the West and in turn imports all sorts of raw materials and products from the West.34 Its logistics sector that acts as an important supporter of the maritime sector and a crucial facilitator of the nation’s international trade has grown in leaps and bounds to become a major contributor to economic growth, contributing around 7% to the nation’s Gross Domestic

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Product.35 Much of the trade generated by China passes through SOM, hence providing lucrative transshipment business for Malaysian ports along the straits.36 Testimony to the impact of SOM, as a key facilitator of East-West seaborne trade, on Malaysian ports, Port Klang and Port of Tanjung Pelepas (PTP) have emerged among the top twenty busiest container ports in the world, by way of throughput handled. According to a ranking by UNCTAD, Port Klang, the national load centre, and PTP were ranked 13th and 17th respectively in 2009 based on their container throughput.37 It is no small feat for a country the size of Malaysia to have two representatives in this coveted group of ports.38 In recent years, the transshipment business has emerged as a driver of growth for these ports. Port Klang has seen its share of transshipment container business growing larger than the handling of domestic container, thanks to the ‘China factor’.39 In 2009, transshipment cargo contributed 58% to total throughput at the port.40 PTP, where transshipment container trade constitutes 95% of its total throughput in 2009,41 was established solely to take advantage of the growing transshipment trade emanating from the breakneck economic growth in China. These two ports, and other smaller Malaysian ports along the Straits, have enjoyed tremendous growth thanks to the proliferation of container trade passing through the sealane.42 The increased number of containers handled by these ports 43 has resulted in huge capital being invested by their owners and operators, and also by the Federal Government to increase the ports’ handling capacity. The capital outlay is spent on among others increasing number of berths; procuring cranes and port vehicles; expanding container yards; developing manpower and improving connectivity with other modes of transport and with the hinterlands. The prosperity generated by the container traffic in the Straits is not confined to ports alone. The goodies are also spread out to other players in the maritime sector. Local shipping companies providing feeder services to the main line operators calling at the ports along the Straits have thrived, owing to the presence of the latter.44 Companies providing a wide range of shipping- and port-related services such as bunker supplies, cargo handling, ship management, crewing and dredging have also prospered.45 So have shipyards providing services to shipping companies plying along the Straits and calling at local ports. Then, there are other indirect support service providers such as financial institutions, integrated logistics, freight forwarding, warehousing, distribution, packaging and many others whose business have also flourished, thanks to the growth of container trade and the presence of shipping lines in the Straits.46 The multiplier effects generated by container shipping in the Straits go far beyond the confines of companies involved directly or indirectly in the maritime sector. Industries and consumers benefit from having access to all kinds of goods and raw materials shipped worldwide into Malaysia via ports along the Straits. Our exporters also benefit from the extensive connectivity of local ports along the Straits to other ports worldwide, which provides them access to the global markets and contributes to the competitiveness of their products. When one considers Malaysia’s international trade is highly dependent on seaborne transport, and 90% of its container trade is handled by Port Klang and PTP,47 one would appreciate the tremendous importance of the Straits to the nation’s economy. It is therefore not an exaggeration

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to describe the Straits as a lifeline to Malaysia’s socio-economic prosperity. The flow of trade of the nation’s export-driven economy would simply be choked without efficient seaports acting as gateways to facilitate the movement of containers. Despite Malaysia enjoying a strategic location as a littoral state of SOM, only a third of ships transiting the Straits of Malacca called at its ports.48 The rest of them continue their Eastbound journey straight to Singapore Port, the region’s megahub ports and the world’s largest container port (UNCTAD, 2009), and their Westbound journey straight to their destinations after having called at Singapore Port to pick up boxes, getting services such as maintenance and repairs, and picking up spare parts and supplies. The container traffic in SOM has increased in 20% between 2000 and 2009, in tandem with growing number of ships passing through the sealane.49 Despite this, one feels that Malaysian ports certainly have what it takes to attract a lot more of this container shipping traffic to our shores. No doubt Port Klang and PTP have deep drafts that can accommodate large container vessels, competitive tariff rates, excess capacity, world-class infrastructures, high productivity, significant volumes of domestic cargo, good intermodal connections and good supporting services. However, these qualities seem underutilized when one compares the volume of container handled by Malaysian ports along the Straits to the throughput handled by Singapore Port and the size of the global container trade. 50 One of the factors that give Singapore Port the edge over Malaysian ports along the Straits is its more expansive connectivity with other container ports around the world. It is not for nothing that the port is the world’s largest transshipment hub that handled 25.9 mil. TEU in 2009 - which represented 20% of the world’s total container transshipment throughput and 6% of global container throughput - despite the small amount of domestic cargo generated by the tiny island nation.51 The port hosts nearly 200 shipping lines which provide daily voyages to every major port in the world, and boasts an almost unmatched connectivity with almost 600 ports in 123 countries.52 Compare this with Port Klang’s linkage with more than 500 ports in 170 countries; impressive as the number may be, it is fewer than the extent of Singapore Port’s connectivity.53 This begs the question, are Malaysian ports doing enough to lure ships traversing SOM? How can they increase their connectivity with other container ports worldwide? How can Malaysia generate more transshipment container business for its ports along the straits? How can local companies in the maritime industry and in the maritime supporting service sector capitalize on the huge business opportunities generated by container shipping and container trade flow in the sealane for the benefit of the nation’s economy? To be sure, Government agencies such as the Ministry of Transport, port authorities and terminal operating companies are working tirelessly to enhance the competitiveness of Malaysian ports, attract more users and promote them worldwide. Our ports are not lacking in infrastructures, productivity and efficiency with the best container ports I the world. However, there is no denying that much more can be done to attract more shipping lines to ports along SOM and to increase their container throughput. One feels that Malaysia could benefit economically and tap into more than just the 30% of its current share of the entire container trade flow in the straits.

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4. Features and trends of container traffic in SOM There are several visible features and trends in the container trade passing through SOM and in the surrounding areas and region. Outlining these features and trends provides an important first step in establishing a macro perspective of the dynamics of the container flow and container shipping traffic in SOM. By understanding the elements that drive and affect container trade in SOM such as the flow of the trade, origins and destinations of containers carried via the sealane, the dimensions vessels they are carried on, and the characteristics of ports along SOM, we can then be able to develop a learned forecast on the prospect of the container trade in this crucial passageway. This will form the basis of providing an outlook for container trade in SOM and generating policy options on how Malaysia can optimally capitalise on the container trade in the Strait. The most notable trends on container trade in SOM, in no order of importance, are : 4.1 Growing container shipping traffic There is an unmistakable trend of gradually increasing container shipping traffic in SOM in the last decade, based on the movements of container ships (see Table 1). The table shows that movements of container shipping traffic constitutes a third of the total movements of all ships in SOM.

Table 1 Movements of container ships vis a vis total movements of all ships above 300 GRT in SOM

from 2000 to 2009

Year Movements of container ships

Total movements of ships

% of total movement

2000 18,283 55,957 32.67

2001 20,101 59,314 33.89

2002 20,091 60,034 33.47

2003 19,575 62,334 31.40

2004 20,187 63,636 31.72

2005 20,818 62,621 33.24

2006 22,615 65,649 34.45

2007 23,736 70,718 33.56

2008 26,359 76,381 34.51

2009 22,310 71,359 31.26

Source: Marine Department Malaysia

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This is not surprising given the high dependence of many nations in the SOM region on merchandised trade, much of which is carried by containers, for their economic growth. With China’s economy expected to continue to be on a growth trajectory 54 and the global economy recovers,55 and with regional economies such in South East Asia projected to grow in tandem with increasing intra-regional trade, container shipping traffic and container trade flow in SOM are expected to grow in tandem. The global economic downturn that began in late 2008 had an adverse impact on global trade and hence container trade. 56 Volumes and rates declined steeply on the back of falling global consumer demand and manufacturing and production activities.57 ISL Bremen reported that trade press estimates put the shipping industry losses at around USD20 billion due to the global recession.58 At the same time, huge new tonnage entered service in the container trade in 2009, adding to the overcapacity woes of liner players.59 This naturally impacted merchant shipping traffic and in particular container traffic in SOM which hosts a quarter of global container trade. As seen in Table 1, there was a decline in the container shipping traffic in SOM from 26,359 movements in 2008 to 22,310 movements in 2009. However, the global container trade showed signs of recovery in the second quarter of 2010 and most of the container vessels that could not find employment in early 2010 have started being deployed again in mid-2010.60 Evident of growing bullishness of the prospect of recovery in global container trade, World Trade Organisation (WTO) projected a growth of 9.5% for world trade in 2010 and an expansion of 9.5% in volume of global exports in the same year.61 WTO revised its forecast of global trade growth in 2010 upwards to 13.5% following faster than expected world trade growth.62 The recovery of global economy should have positive impact on seaborne trade and hence container shipping traffic and volume in SOM. 4.2 Growing container throughput at major ports along SOM Container trade in SOM has been growing significantly in the last decade. Evident of this is the growth in throughput volumes of containers handled at major Malaysian ports along SOM, namely Port Klang, PTP and Penang Port, as shown in Table 2.

Table 2 Container throughput (in mil. TEU) at major ports in SOM, 2000-2009

Port 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Port Klang

3.206 3.759 4.533 4.841 5.243 5.543 6.346 7.118 7.973 7.309

Penang 0.635 0.604 0.634 0.688 0.772 0.795 0.849 0.925 0.917 0.958

PTP 0.037 2..050 2.668 3.317 3,836 4.177 4.637 5.297 5.466 5.835

Singapore Port

17.040 15.570 16.941 18.410 21.329 23.192 24.792 27.935 29.918 25.866

Source : Ministry of Transport Malaysia, Maritime and Port Authority of Singapore

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This trend is fuelled by many factors including increasing volumes of merchandised trade in the SOM region, growing intra-Asian and intra-ASEAN trade, increasing rate of containerization of cargos, more liberal trade practices, better port and trade transport infrastructures and greater capacity to handle growing container trade, and many others. The drop in volumes handled by the SOM ports as shown in Table 2 can be attributed to the global economic downturn that resulted in sharp drops of global trade and, with it, global container trade. With the exception of PTP, which recorded a growth of 7.5%,63 the decline suffered by Port Klang and Penang Port was not dramatic. They generally showed impressive resilience to handle higher container throughput volumes at a time when many ports around the world suffered sharp drops in container throughput volumes due to the global recession.64 Singapore Port suffered a 13.5% fall in the volumes of containers handled in 2009 compared with 2008. Although the global economy and trade are showing signs of recovering, it remains uncertain as to when full recovery will take place. The years ahead will be challenging for container ports around the world and in SOM to pull in shipping lines, as economies reel from the effects of the downturn and huge new tonnage of container ships enter the trade. However, when one considers that shipping facilitates much of global trade, there is reason to be bullish of the long term prospect of container trade, especially in a passageway like SOM which is a conduit to the container trade between East and West. 65 Many factors – including external ones like global economic performance and internal ones like port handling capacity - affect the volumes of containers handled by ports in SOM. However, all eyes will be on China to sustain its economic growth, which generates significant volumes of containers. The outlook for container throughput in ports along SOM in the years ahead will be heavily influenced by China’s economic performance. Should China’s economy continues on its growth trajectory, it can be expected that Malaysian ports in SOM will enjoy the spillover in terms of handling significant volumes of transshipment containers generated by China and its trading partners and which are transported through the straits.

4.3 Growing transit traffic of container ships In tandem with growing number of container ships passing through SOM in recent years, the movement of container ships in the sealane has also been on the rise (see Table 3). This is a reflection of growing trade and container trade volumes that the straits helps to facilitate. After growing every year from 2008 to 2008, the number of movements of container ships in transit in SOM dropped in 2009, reflecting the decline in container throughput at ports along the straits as shown in Table 2.

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Table 3 Container shipping traffic transiting the Straits of Malacca (based on number of

movements of ships above 300 GRT), 2000–2009

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Movements 18,283 20,101 20,091 19,575 20,187 20,818 22,615 23,736

26,359 22,310

Source: Marine Department Malaysia

It is a well-known fact that within the ‘hub and spokes’ container port system in the South East Asian region, there is a well-established order of container shipping traffic and container flow.66 Being a mega-hub port and the world’s largest transshipment port, Singapore Port acts as the hub port in this scheme, while regional ports like Port Klang, Laem Chabang (Thailand), Manila Port (Philippines), Muara (Brunei) and Tanjong Priok (Indonesia) act as ‘feeder ports’ along the ‘spokes’ that connect to the ‘hub’. Singapore Port is also the preferred destination of many MLOs, which are always looking to minimize their cost by calling at as few ports as possible, due to the availability of comprehensive one-stop shipping-related services at the port, which include bunkering, ship repairing, legal support, financing, crewing and many others.67 Huge container vessels operated by MLOs can only call at a few ports in the region, namely the likes of Singapore Port, Port Klang and PTP, which have deep drafts and adequate capacity to handle these big ships and the cargos they carry. These ports also provide extra value-adding services such as free zones and have excellent multimodal connectivity and logistics support services to support the calls by big ships. In turn, smaller feeder vessels distribute the containers loaded off the big vessels to smaller ports in the region. The same process is also applicable to export containers in the ‘hub and spoke’ system. Containers originating from smaller ports in the SOM region are shipped using feeder vessels to larger ports, which have better connectivity compared to smaller ports, before the containers are loaded onto big ships to be taken to their destinations. Nair, Khalid et al (2007) found a strategic relevance of SOM to Malaysia’s economy based on the proportion of traffic in transit serving the nation’s trade.68 The strong linkage between container ships’ transit traffic underscores the need to take into account the economic importance and value of SOM to Malaysia’s economy. 4.4 More Westbound container shipping traffic compared to Eastbound Over the last decade, it was observed that there have been greater Westbound movements of ships in SOM compared to eastbound (see Chart 1), bigger volume of Westbound traffic compared to Eastbound traffic in SOM. This can be explained by analyzing the trade flow between East and West over the corresponding period. With the rise of China as an economic superpower, demand for raw materials and

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manufactured goods from the world’s most populous country has risen dramatically. China counts nations to the West of SOM in Europe, South Asia, Africa and Latin America to be among their key trading partners, and export huge volumes of goods to them. China, in turn, buys fewer goods from them, hence its imbalance of trade with many of its trading partners.

Chart 1 Flow of ships in Straits of Malacca from 2000 to 2009

Notes Movements of Eastbound and Westbound traffic are recorded by the Vessel Tracking System at Port KIang Movements of ships under ‘Port Adjoining’ are recorded when they leave the Traffic Separation Scheme lanes (Westbound or Eastbound) to call at ports and then rejoin the lanes. Their directions are not recorded.

Source : Marine Department Malaysia

Due to this, the cargo flow in the trade between Asia and Europe is heavier from Asia to Europe than the other way round (see Table 4). Much of the items manufactured by China and exported to those countries are carried in containers by ships, most of which pass through SOM.

Table 4 Container flows on trade between Asia and Europe (mil. TEU), 2007-2008

Year Asia-Europe Europe-Asia 2007 17,236,936 10,085,181 2008 16,740,642 10,500,068

% change 4.1% 8.4%

Source : UNCTAD

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The trend in the flow of trade between Asia and Europe should also be seen in the context of production patterns. The South East Asian and East Asian region are the favorite destinations for manufacturers from developed countries in the West. The global outsourcing phenomenon seen in recent years by western multinational companies (MNCs) which have set up plants in the East to undertake assembly and value-adding activities can be attributed to the advantage of lower cost of factors of production that the East has.69 Developing countries such as in South East Asia and China offer low land cost; productive, skilful workforce; and increasingly good infrastructures and governance, hence making them attractive to MNCs which are looking to reduce their cost of production and get closer to the international markets they serve. With the outsourcing phenomenon by Western MNCs of various manufacturing activities to the East not expected to relent anytime soon, it can projected that the flow of trade from East to West will be higher than the other way around in the foreseeable future. Based on this, it is suggested that the flow of Westbound container trade in SOM in terms of number of TEU will be higher than Eastbound in the years ahead. 4.5 Presence of bigger capacity container ships An unmistakable trend in merchant shipping is the advent of bigger ships, thanks to a combination of improving shipbuilding technologies, increasing shipyard capacity, financing support and demand for greater volumes of cargos. This trend can be clearly seen in the container trade, as illustrated by the growing capacity of container ships in the last three decades in Table 5.

Table 5 Average capacity of container ships (in TEU), 1980-2006

YYeeaarr AAvveerraaggee ccaappaacciittyy ooff ccoonnttaaiinneerr sshhiippss

((TTEEUU))

CCaappaacciittyy ooff wwoorrlldd’’ss llaarrggeesstt ccoonnttaaiinneerr sshhiipp

((TTEEUU))

1980 975 3,057

1990 1,355 4,409

2000 1,741 7,200

2004 1,999 8,063

2006 2,318 11,300

Source : Drewry, Lloyds Register - Fairplay Evident of the trend of bigger container ships using the straits is the arrival of the world’s largest container ship at Malaysian ports. In October 2006, the world’s largest container ship in operation then, Emma Maersk, owned by Denmark’s Maersk, the world’s largest container

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shipping operator, which has a capacity of 11,300 TEU, called at PTP. 70 With the deployment of bigger ships, the expectations of container shipping operators for ports in SOM to develop the capability and provide the capacity to serve these behemoths have become higher. To attain the economies of scale that comes with the deployment of such huge ships, their owners have to maximize the utilization of onboard capacity of those ships while minimizing the number of port calls. To realise this strategy, these ships can realistically be deployed only in the trade lanes serving Asia trade which can generate the kind of container volume that can fill up the huge capacity of such ships. Ships in the class of Emma Maersk can only call at ports with the features and handling capability to serve them, such as Port Klang, PTP and Singapore Port when passing through SOM. The saturation in the container shipping market and oversized orderbook notwithstanding, it can be expected that the average size of container ships will grow.71 Given the likelihood that they will be deployed in the Asian trade, SOM can be expected to see the arrival of bigger container ships in the future. This will bring huge opportunities as well as challenges for ports along the straits to attract and serve these ships and capitalise on the huge business they bring. 4.6 Growing volumes of intra-ASEAN container trade

In the last decade, it is observed that there is growing volumes of intra-ASEAN trade (see Table 6). This can be attributed to many factors, chief of which is the opening up of the economies of ASEAN member states. Literature on the subject has recognised that the rise of rapidly growing economies in the ASEAN region is closely related to their adoption of liberal trade strategies which include export promotion.72 Towards the end of the 1980s, many ASEAN countries had focused on foreign trade and investments to fuel their economic growth.73 In 2009, intra-ASEAN trade of USD376.2 bil. represented 24% of total ASEAN trade of USD1.536 trillion.74

Table 6 Value of intra-ASEAN trade, selected years

Year Trade value

(USD bil.)

1993 82.4 1995 123.8 1997 150.0 1999 131.5 2001 152.1 2003 159.5 2005 304.9 2007 403.1 2009 376.2

Source : ASEAN Secretariat

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Reflective of this trend, ports along SOM have been handling greater volumes of intra-ASEAN containers in recent years. For example, about 70% of the container throughput handled by Northport in 2009 was from handling intra-Asian cargo75 and the port is focusing on developing niche barge shipping business to capitalise on growing intra-ASEAN trade.76 Another factor contributing to this is the increasing penetration rate of containers in intra-ASEAN and intra-Asian trade. This is especially noticeable in seaborne trades of commodities such as wood-based products (i.e. sawn timber, plywood, veneer) and palm oil end-products such as oleo-chemicals and consumer products.77 Many trade and transport initiatives have been introduced by ASEAN to enhance economic cooperation and boost trade among member nations.78 At the forefront of these initiatives is the ASEAN Free Trade Area (AFTA) which when fully implemented in 2015 is poised to play a catalyst role in boosting intra-ASEAN trade and regional cooperation in the transport sector.79 With AFTA, intra-ASEAN container trade, Malaysia’ trade with its ASEAN neighbours and container traffic in SOM are also expected to grow, given that much of intra-ASEAN trade is containerised and seaborne. 4.7 Increasing demand for comprehensive maritime support services Growing container shipping traffic in SOM and container throughput in ports along the straits has resulted in a corresponding increase of demand for container handling from container shipping operators and shippers of containerized cargos. Such services including free zones; distriparks; freight forwarding; multimodal transport services; container maintenance; container storage and warehousing; shipyard services; bunkering; ship management; crewing; trade and ship financing; legal services and many others.80 These services are crucial in ensuring that container shipping and container trade activities can be carried out efficiently to ensure that trade flows smoothly. The success of ports like Port Klang, PTP and Singapore Port in attracting shipping lines and shippers hinges on their ability to provide a comprehensive range of value-adding support services at competitive costs. With the projected growing traffic in container shipping and trade in SOM and the surrounding region, it can be expected that the demand for more of such services will increase in tandem. Stakeholders such as port owners and operators; logistics service providers and governments will invest to provide more and better services to shipping lines and shippers of containerized goods. 4.8 Increasing investment at ports to increase container handling capacity As competition among ports along SOM to attract shipping lines and cargos heats up, port owners and operators have invested heavily to expand their capacity and increase their productivity to handle more container traffic and throughput. Port users prefer to do business with ports with excess capacity, high productivity and comprehensive range of services.81 This drives port owners and operators to splurge huge capital outlay to meet the expectations of their

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users and to win new business. These require ports to expand their berthing length, increase the capacity of container yards, build more warehouses, purchase new cranes and vehicles, put in place trained and adequate manpower and improve customer satisfaction to retain existing users and attract new ones. Not only that, they must offer these at competitive prices too.82 As more ports in the region improve their infrastructures, capacity and productivity, port users are increasingly spoilt for choice, hence can pick and choose to do business from a range of ports in the region. Only ports that can offer a range of services at a satisfactory level and at competitive prices stand to attract users in the ultra-competitive operating environment of container trade, especially in niche business segments such as transshipment. Already, several ports along SOM have invested heavily to expand their capacity to provide more comprehensive services, and will no doubt continue to do so once the global economy recovers and demand for containerised cargos increase. For example, Northport, one of the two terminals at Port Klang, invested more than RM500 million on redeveloping its existing wharves at Container Terminal 1, upgrading two multipurpose wharves and upgrading container yard operations at Container Terminal 2 and 3.83 In March 2009, PTP was reported to look to raise RM4 bil. to expand over the next five years, on top of the RM2.5 bil. allocated under the first phase of the port’s expansion plan.84 In doing so, the port is mindful to spend conservatively in these lean times and challenging operating environment, by way of eliminating costs through efficient management and deployment of state-of-the-art technology and equipment. 85 To further underscore the massive capital needed to attract shipping lines and maintain their competitiveness, Penang Port Commission, which oversees Penang Port currently spends RM30mil in maintenance dredging annually to keep its draft between 9m to 11m, and requires RM350mil in capital dredging every 10 years.86 Amid the debilitating global credit crunch, present port operators, owners and authorities would find it a real challenge to raise the huge capital outlay to increase their container handling capacity. For a developing country like Malaysia, which suffered a drastic drop in FDI in 2009 compared to previous years,87 the task of raising financing to fund the development of trade infrastructures like ports will pose a real test in the years ahead. 4.9 Growing transhipment container traffic and throughput at ports The increase in intra-ASEAN trade and China trade has brought with it a sharp rise in the shipping traffic of transhipment container in SOM. This naturally has resulted in growing volume of transhipment containers handled by ports long SOM (see Table 7). Underscoring the growing transhipment container trade in ASEAN and SOM is the success of PTP, Malaysia’s newest container port. In just a decade of operation, PTP has emerged as the 17th largest container terminal in the world and the busiest in Malaysia, in terms of container throughput handled.88 An estimated 95% of its throughput comes from transhipment containers, although its gateway throughput has been on the increase.89 Given its stellar performance in 2009 as one of the few container ports in the world that recorded year-on-year grow amid tough

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operating conditions, the port is poised to handle more boxes with its ambitious capacity expansion drive, improving productivity and aggressive marketing. It is a measure of the prosperity arising from the enlarged trade area born out of AFTA that a new port in the region – and close to Singapore Port, one of the world’s busiest ports at that - can thrive by just handling transhipment containers mainly from intra-regional trade.

Table 7 Transshipment container volumes at Malaysian ports along SOM, 2005-2009

2005 2006 2007 2008 2009

Port Klang Transshipment

throughput (mil. TEU) 2,923,965 3,554,724 4,116,628 4,745,058 4,315,682

Total throughput (mil. TEU)

5,543,527 6,346,295 7,118,714 7,973,579 7,309,779

% of transhipment to total throughput

52.74% 56.01% 57.83% 59.51% 59.04%

PTP Transshipment

throughput (mil. TEU) 3,985,464 4,431,013 5,072,298 5,154,404 5,538,477

Total throughput (mil. TEU)

4,177,123 4,637,418 5,297,631 5,466,191 5,835,085

% of transhipment to total throughput

95.41% 95.55% 95.75% 94.29% 94.92%

Penang Port Transshipment

throughput (mil. TEU) 65,500 21,022 27,455 28,855 62,947

Total throughput (mil. TEU)

795,289 849,730 925,991 917,631 958,476

% of transhipment to total throughput

0.08% 0.02% 0.03% 0.03% 0.06%

Source : Ministry of Transport Malaysia

The transshipment container trade involves laden and empty containers. Different ports have different focus on what type of containers to handle in this trade. For example, Pasir Gudang Port focuses on handling empty container transshipment while PTP, a port where 95% of throughput handled is transshipment containers, handles more laden transshipment boxes than empties. Meanwhile, Singapore Port, where an estimated 70% of containers handled are transshipment boxes, handles only laden containers which generate more revenue to the port compared to empty containers. It is however important to point out that the increase in container traffic in the SOM does not necessarily mean that trade volume is also increasing. Transshipment of containers does not involve indigenous or gateway cargos, and ports handling transshipment trade are merely acting as transit or warehouse ports as the containers in this trade do not leave the port premise and arguably do not generate much multiplier effects to the economy of the hinterland behind the ports.

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It is ascertained that container shipping lines plying between East Asia (which include Korea, China, Japan and Taiwan) and the Middle East are handling fewer transshipment activities. This is due to the fact that they can carry full load of containers from their ports of origin without having to pick up other containers along the way. This is especially true for China which has recorded strong economic growth even amid the global recession. Shipping lines also prefer handling local containers as opposed to transshipment boxes due to lower fees charged by ports to handle the former. It is ascertained that transshipment cost of handling containers constitute about a third of total fee, hence shipping lines prefer direct port calls services. This is evident from the trend of main line operators reducing the number of port calls in order to reduce paying port tariffs and the proliferation of scheduled services provided by liner shipping operators. 90 From the point of view of port operators, they have to diversify their income base and maximize revenue hence cannot afford to focus only on import/export business. However, they are aware that given a choice, shipping lines will opt for direct calls due to lower costs of operations compared to plying multi-port routes. Since transshipment is a booming business and has been identified by many port operators as a growth segment of seaborne trade, port operators are keen to cater to this trade by providing infrastructures and services to lure shipping lines carrying transshipment containers.91 This is necessary given the keen competition among regional ports to attract shipping lines and in particular those operating transshipment services.92 An executive of a port operating company lamented that Malaysian ports operate in a rather independent way without taking into account greater national interest.93 This results in a number of ports fighting over small volume of business which does little to help them attain economies of scale in their business and enhance the competitiveness of local ports. There could well be a case for local ports to consolidate ports to enable them to compete more effectively with leading container ports such as Singapore Port and Hong Kong Port. The growing transshipment trade in the region presents several challenges as it does opportunities to port operators. For example, it demands that ports which are keen to grow their handling of the transshipment business to invest in infrastructures to cater to the trade. The deployment of larger container ships in the trade, especially in the Trans-Pacific trade, will necessitate ports to reconfigure their layout and asset utilization to handle these bigger ships. 4.10 Liner shipping companies investing in container ports in the region A not-to-be-ignored trend in port investment is the equity ownership of terminal operating companies by shipping lines. This trend has not escaped ports in SOM. One obvious example is PTP which counts Maersk as one of its equity owners. The Danish container operator, the world’s largest, holds 30% stake in PTPT through APM Terminal, its port unit. 94 The equity ownership gives Maersk not only priority services at the port but also a say over the way it is developed in order to match the shipping line’s business operations and strategies in the SOM region.

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This strategy of having equity ownership in container terminals makes business sense to container shipping operators from the point of view of supply chain management. As liner players add bigger vessels and more capacity to their fleets, they are under tremendous pressure to fill in the slots onboard their vessels voyage in, voyage out to the maximum. To operate huge vessels profitably and to sustain the business, they have to employ the strategy of attaining economies of scale to lower the per unit cost of carrying containers. At the same time, they also need to reduce third party costs such as land-handling charges payable to companies providing logistics services and berthing charges payable to ports. To reduce berthing charges, it would be in the interest of the shipping lines, especially MLOs, to make as few port calls as possible. They would also prefer to call at ports which can provide quality services at competitive rates. To ensure this, it is highly sensible for shipping lines to invest in port terminals where their ships call as a means to ‘secure control’ over the operations and management along the supply chain in which they operate. In doing so, they can gain not only a high degree of assurance of getting the kind of services from ports that meet their demand and needs, but also dictate the development and business strategies of the ports. In acquiring ownership of container ports, MLOs can complement their own long-term strategies and improve their bottom lines and capitalise on the strategic, operational and business advantages of those ports. With this strategy, MLOs investing in ports located along a busy container trade route like SOM can enhance their market share. Besides the investment of Maersk in PTP, several other MLOs have bought equity ownership in other terminals. Examples include China Shipping Container Lines (CSLC) which owns 80% equity in CS Terminal which owns and operates container berths at the Chinese port of Yingkou 95 and and COSCO which owns 13.7% interest in Sigma Enterprises Ltd. which owns terminals in Yantian Port in China.96 As shipping companies, especially MLOs with financial clout, seek greater control of their supply chain, it can be expected that more of them will invest in container terminals. Given the strategic location of terminals in the SOM region and the volumes of containers they offer, it is expected that in the near future, more shipping companies will take the lead from Maersk to invest in container terminals in the sealane. 5. Analysis of container trade in SOM based on the features and trends Based on the analysis of features and trends outlined earlier, the study can make a learned projection and offer an outlook of container shipping and traffic in SOM. The prognosis will the be used as a basis to recommend policy options for Malaysia to take advantage of the presence of container ships and container trade flow in the waterway, and to confront the challenges that they present. The analysis looks at factors affecting the flow of container ships and container trade in SOM, followed by the opportunities and challenges they present.

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5.1 Factors affecting port calls in SOM Before coming up with an action plan of what needs to be done to attracting more container ships to Malaysian ports along the Straits, a thorough understanding of the factors influencing container trade and liner shipping flow in the Straits is essential. By knowing what drives liner shipping companies to sail where they sail, to carry what they carry and to deploy the ships they deploy, the task of drawing up an effective strategy can be made a bit easier. The following are among the key elements that influence the transportation, flow and volumes of container trade in the Straits of Malacca, not in order of importance : i. The cost-saving provided by the ‘short-cut’ route of the straits that links seaborne trade

between East and West ii. Intensity of globalization and liberalisation iii. Economic and trade policies of regional nations and their trading partners iv. Origin and destination of East-West and intra-regional container trades v. Production and consumption patterns vi. Population distribution vii. Location of raw materials viii. Foreign investment distribution ix. Features, facilities, handling capacity/capability, efficiency, productivity, tariff rates,

business strategies and range of services of container ports x. Navigation safety and security xi. Incentives provided by ports and governments xii. Strategies deployed by liner shipping operators, including owning stake in port operating

companies, reducing number of port calls and deploying larger vessels xiii. Existence of trading houses and distributors in the region xiv. Contractual obligations between liner shipping operators and shippers and among parties

along the maritime supply chain xv. Existence of the world’s premiere container port, Singapore Port and other feeder ports

within the ‘hub and spokes’ (involving transfer of containers from MLOs to feeder vessels) and ‘cross string’ (involving MLO to MLO container transfer) port system in the region

xvi. Existence of shipyards in the region that can provide various services to container ships xvii. Availability of a host of services supporting container shipping and trade xviii. Good connectivity between transport modes xix. National policies affecting shipping and seaborne trade such as Cabotage Policy and load

centering xx. Investments in maritime and trade infrastructures Given that ports provide what is known in economic terms as derived-demand services,97 it is essential that port operators and owners understand the nature of demand for their services. This begins from having a full grasp of what is the nature of business of their clients - which include shipping lines, shippers and providers of various support services – their needs, and the factors that drive demand for shipping services, and the elements that influence container trade and the operating environment of liner shipping operators. By understanding what makes the container

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trade tick, port operators and lead agencies should be able to develop strategies to attract more liner ships and increase throughput. 5.2 Dynamics of seaborne container trade in the ASEAN region Located at the heart of the ASEAN region, SOM facilitates huge volumes of trade not only between Malaysia and its regional neighbors but also among ASEAN countries. Given this, it is essential to outline an ASEAN perspective before analysing the seaborne container trade in SOM from a Malaysian viewpoint. Various studies have projected traffic flow in SOM to increase, in tandem with growing global trade.98 This is in line with growing global container trade which was estimated to have grown at an average annual rate of about 10% between 1988 and 2008 (UNCTAD, 2009).99 With this projection, there is bound to be tremendous opportunities arising from the container shipping trade and flow in SOM.100 Malaysian ports and other stakeholders should capitalise on this and prepare themselves to reap the opportunities arising from the expected increase in containerised cargo flow in the strategic trade waterway. Container market share in the ASEAN region increased sharply from a mere 4.8% of share of world total in 1980 to 13.5% in 2008 (see Chart 2). From handling 33 mil. TEU in 2000, major ASEAN ports handled around 60 mil. TEU in 2009, marking an impressive annual increase of 9.2% within that period.101 So fertile is the SOM region as a container trade area that three ports along the sealane, are included in the list of top 20 container ports in the world, volume-wise.

Chart 2 Trend of container market share by region

Source :MLTM Korea & Korea Maritime Institute The increase in ASEAN’s share of the global container market reflects the region’s strong economic growth.102 However, ASEAN was not spared from the global recession which adversely affected global trade, as seen in the decline of container throughput at regional ports from 2008 to 2009 (see Chart 3).103 The slump can be attributed to the weak economies of the region’s key trade partners such as Japan, US and Europe.104

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Chart 3 Container throughput of ASEAN ports 1990-2009

Source : MLTM Korea & Korea Maritime Institute

Despite the drop of container volumes in 2009, ASEAN recorded an overall container volume increase of 9.2% annually from 2000 to 2007. This is largely propelled by growing transshipment container volume in the region during that period, which at 32 million TEU accounted for 50% of total throughput.105 Evident of this trend is the proportion of transshipment container volume vis a vis domestic cargo in Port Klang. In 2004, transshipment business accounted for only 51.78% of the port’s total container throughput.106 However, its share grew to 59.04% in 2009 on the back of growing transshipment container trade in the region, especially fueled by growing container trade in and out of China.107 Based on the prospect of ASEAN to generate considerable volumes of seaborne containers even in these trying times, there are reasonable grounds to be bullish of the prospect of container trade in the ASEAN region in the near future. Chart 4 shows the historical and projected volumes of trade (excluding transshipment trade) of containers of six ASEAN countries 1995-2012.108

Chart 4 Container volumes of six ASEAN countries (mil. TEU), 1995-2012(F)

Source : MLTM Korea & Korea Maritime Institute

Source : MLTM Korea & Korea Maritime Institute

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From Chart 4, it can be seen that the container traffic of the six ASEAN member countries increased by an annual average of 8% during the past 15 years. Although Indonesia, Thailand and Malaysia recorded average growth during that period, Vietnam witnessed rapid growth of 17% per annum on average during the same period.109 With improving prospects of the global economy and the projected growth in intra-regional trade, it is foreseen that container throughput at ASEAN ports, including those along SOM, will see better days ahead, although recovery will not be immediate.110 As ports in the region increase their capacity, pro-business and pro-trade economic policies prevail, income per capita grows, and ASEAN member nations invest further in expanding their trade infrastructures, it can be expected that container trade in the region will grow at a healthy rate in the foreseeable future. This will surely have a positive effect on container shipping and container in SOM. Analysing data of container traffic in ASEAN by member country, it is clear that the countries along SOM hold much prospect of growth in this trade, based on their stellar performance in the last decade (see Table 8). Notwithstanding the drop in throughput volumes in 2009 from 2008, it is projected that ports in the region and in SOM will record growth in 2010, based on their strong performance in the first half of 2010, and the prospect of global economic recovery, bigger regional trade, greater container handling capacity by the ports and their host countries, among other factors.

Table 8 Container traffic in ASEAN by member countries (mil. TEU), 1999-2009

Year Brunei Cambodia Indonesia Malaysia Myanmar Philippines Singapore Thailand Vietnam Total

1999 62 28 3,552 3,978 169 2,966 15,999 2.892 1,070 30.715

2000 53 40 3,864 5,475 200 3,605 17,096 3,356 1,374 35,064

2001 79 145 3,902 8,040 230 3,091 15,573 3,573 1,512 36,136

2002 78 167 4,540 9,454 278 3,325 16,986 3,967 2.038 40,832

2003 88 181 5,177 10,936 300 3,468 18,411 4,441 2,191 45,193

2004 112 214 6,124 12,188 330 3,970 21,329 5,078 2,614 51,959

2005 119 241 6,599 12,855 372 3,925 23,192 5,343 2,918 55,564

2006 113 269 6,999 14,516 409 4,014 24,792 5,817 3,450 60,379

2007 109 301 7,529 16,331 440 4,333 27,932 6,466 4,528 67,968

2008 100 317 8,237 17,479 473 4,543 29,918 6,978 5,053 73,098

2009 88 281 7,296 15,962 419 4,024 26,499 6,181 4,476 64,745

Source : Containerization International Yearbook

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It is important to note that the discourse on ‘ASEAN ports’ must be tampered with a reminder that ports in the region are vastly different in terms of handling capacity and capability. This is reflective of the disparities in the state of socio-economic development among member nations of the grouping, which consists of the developed economy of Singapore and relatively underdeveloped nations like Myanmar, Laos and Cambodia. Even comparing among three world-class ports in SOM, namely Port Klang, PTP and Singapore Port is a futile exercise as Singapore Port enjoys nearly unsurpassable lead as the ASEAN region’s only megahub port and only a handful among other ports in this elite category.111 To this end, it is important to not fall into the trap of assigning generic labels and descriptions to all the ports in ASEAN. However, for purpose of forecasting container shipping and container trade trends in SOM, it is inevitable to look at ASEAN ports as a group of ports to analyse their collective performance. Given that intra-ASEAN trade will figure prominently in the coming years in SOM, on account of the impending full implementation of AFTA in 2015, it is helpful to forecast the trend in performance of ASEAN ports as a collective entity. Analysing their individual performance would not be helpful in forecasting a prognosis of the prospects of ASEAN ports as a basis to develop an outlook for container shipping and trade in SOM. To overcome this, it would be useful to compare the capacity, throughput and utilisation of ASEAN various categories of ports against other clusters of ports elsewhere. Chart 5 shows the balance of container cargo and port capacity of various categories of ports. It shows where ASEAN ports stand in this regard, and provides a supplementary understanding of the factors influencing container trade flow in SOM and the reason behind container operators’ choice of port calls in the region.

Chart 5

Capacity and throughput of ports in various categories

Source : Drewry

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From Chart 5, it is seen that world-class transshipment ports with berth handling capacity of 500,000 TEU – which include Singapore Port - show very high facility utilization rate of 91%. However, world-class gateway ports like Port Klang show only 69%, utilization rate. Global ports providing global service as regional gateways handling around 1 million TEU show facility utilization rate of 66%, due to the fact that actual cargo handled does not commensurate the intensity of port development. Regional ports show high utilization rate of their facilities, but record low loading/unloading productivity due to shortage of equipment such as cranes. 5.3 Trend in global container trade Another reason to be bullish towards the outlook of seaborne container trade in SOM is the prospect of growing global container trade. Despite the dramatic slump in the trade due to the global economic crisis and credit crunch, and the slow recovery, several positive projections have been made on the container trade, on the back of improving global economic climate and growing consumer confidence.112 Chart 6 shows the volume of global container trade from 1990 to 2020. Based on the chart, there is much to feel confident that despite the severe hit that the container trade took during the recession, the demand for containerised goods will remain high, albeit growing at slower rate.

Chart 6 Volume of global container trade (mil. TEU and percentage change), 1990-2020

Source: UNCTAD Review of Maritime Transport, 2009

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Based on the analysis, there is good reason to be confident of the prospects of container traffic and trade in SOM. Major indicators on container shipping traffic, container trade flow and container throughput in SOM show positive signs of further growth, barring any unforeseen circumstances that may render dramatic changes to the status quo. Consumers and businesses will continue to demand all sorts of goods and materials, which are increasingly carried in containers, and seaborne transportation, which facilitates much of the world’s container trade, should continue to be in high demand. Once the demand for containerized cargos get back to matching the supply of containers and container ships, the container trade should return to more stable times that will provide a sound footing for another round of growth trajectory last seen before the global economic crisis.

Chart 7 shows global seaborne trade (in mil. tons) in selected years. It shows the steady growth of container trade (in the dotted region). This growth is consistent with the growth of other major cargos, namely crude oil and oil products; bulk cargos and other dry cargos. Literature in maritime economics often point to the astounding growth of the developing economic giants of Brazil, Russia, India and China (BRICs) for spurring the huge demand for containerized goods in the last decade.113

Chart 7 Volume of global seaborne trade loaded (mil. tons), selected years

Source : UNCTAD Review of Maritime Transport, 2009

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Goldman Sachs, which has been tracking the performance of BRICs economies meticulously since the beginning of the new millennium has a positive outlook for these emerging economies. The global investment banking and securities firm predicted in May 2010 that BRICs, which are estimated to contribute to a third of the global GDP in the last decade, will contribute twice as much to global growth in the next decade.114 This will augur well for the growth of global trade and hence for container shipping and trade flow in SOM which facilitates much of the global container trade. Based on the above analysis, the following is the outlook for container shipping and container trade in SOM :

• Barring any unforeseen circumstances and assuming global economic recovery will continue uninterrupted, container shipping traffic and container trade volumes in SOM along the sealane should grow in 2010 compared to 2009. The volumes should also improve in 2011 from 2010 levels.

• Transshipment traffic of container trade in SOM should grow, on the back of bullish prognosis of global trade and global container trade growth in 2010 and in the years ahead, and in the growth of intra-ASEAN and intra-Asian trades

• Ports along SOM should see a growth in throughput volumes in container trade in 2010 compared to 2009, and continue on a growth trajectory in the years ahead. Again, the caveat is that no major events or ‘shocks to the system’ would occur to upset the status quo and disrupt the recovery of world trade and economy.

6. Findings of the study 6.1. Challenges for Malaysia arising from container shipping and trade in SOM Based on the outlook generated by the analysis of features and trends of container shipping traffic and flow in SOM, several challenges are identified for Malaysia to optimize the presence of container ships and trade in the sealane. They are listed below : 6.1.1 Enhancing navigation safety in SOM

Being a sea line of communication (SLOC) 115 of immense importance to the international community and the littoral states, ensuring navigation safety in SOM is a matter of great importance to the stakeholders. The busy straits, which features several chokepoints (see Table 9), poses a keen navigational challenge to ship captains and the Marine Departments of the littoral states to ensure safe passage for shipping traffic.

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Table 9 Chokepoints along Straits of Malacca

Location of chokepoint Width (m) Depth (m)

One Fathom Bank 1,391 23.3 Deep Water Route Depression at Pulau Rupat 3,704 25 Western Entrance to Straits of Singapore 2,665 28.1

Phillips Channel 1,600 / 800 22.5 West-Bound Buffalo Rock 532 20

Batu Berhantu, near Singapore’s Southern Islands 800 21.2

Source : Marine Department Malaysia

When one considers the sheer size of the container shipping traffic in SOM, it should come as a wonder that the number of accidents involving container ships in the busy sealane is almost negligible. From 2000 to 2009, only six incidents of collisions involving container ships were recorded in SOM (see Table 10). This stands testimony not only to the enhanced safety features of the new generation vessels and the high standards of safety among the crews, but also to the excellent work of the littoral states to maintain and continuously enhance navigation safety in the waterway. Special mention must be given to Marine Department Malaysia for their tireless efforts to maintain safe navigation for ships in the increasingly busy sealane.

Table 10 Accidents involving container ships in SOM, 2005-2010

Date Ship(s) Ship(s) type Accident type

11 Jun 2005 MV New Glory Container Fire

10 Sep 2005 MT Gertrude / MV Hatsu Prima Tanker / Container Collision

24 Mar 2006 MV Sinokor Seoul/ MV California

Container / Bulk carrier Collision

21 Sep 2006 APL Dubai/ APL Almandine Container / Container Collision

11 Nov 2006 MV Aghios Makarios Bulk carrier Collision

30 Jun 2007 MV Maersk Kimi/ MV Bao Xing Container / \Bulk carrier Collision

03 Dec 2008 MV Bright JS /MV Asian Trader Cargo / Container Collision

11 Nov 2009 MSC Kalina / Al Jalaa Container / Tanker Collision

21 Aug 2010 MV Reecon Wolf / MV Capt Stefenos

Container / Bulk carrier

Collision

Source : Marine Department Malaysia

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Given the high costs the littoral states have to bear to maintain and upgrade equipment and systems and train manpower to ensure navigation safety in the SOM, the years ahead will pose a keen challenge to the littoral states to ensure growing traffic in the sealane is guaranteed of safe passage at all times. For Malaysia, a developing country with many socio-economic priorities, it will need to spend huge amounts or resources to facilitate smooth and safe traffic in the straits. To meet the financial needs of enhancing navigation safety in SOM to meet the expectations of the users of the straits and to protect its own national interests will exert considerable pressure for Malaysia in the years to come.

Malaysia must also be actively involved in international efforts to enhance navigation safety in SOM, so as long as the initiatives do not impinge on its sovereign rights and sovereignty as a littoral states. In this respect, Malaysia must push to prioritise the six projects under the Cooperative Mechanism 116 to enhance the navigation safety of SOM and its environmental protection.

6.1.2 Increasing port capacity, efficiency and productivity to handle more containers and

bigger container ships

For a major trading nation like Malaysia whose economic prosperity depends heavily on maritime trade, it is critical to provide adequate port capacity to handle its growing trade volumes. This is important in the light of rising dependence on trade to power the nation’s economic growth, and the rising competition among regional ports to attract shipping lines and cargos. More so for container ports in SOM which operate in a very competitive environment. The increasing demand for speed, efficiency and cost competitiveness by port users will continue to exert tremendous pressure on port authorities, terminal operators and governments to improve capacity, efficiency and productivity of their ports and provide high quality and cost competitive services.

For Malaysia, huge challenge awaits to provide massive capital outlay to ensure our ports along SOM have the adequate features to attract shipping lines and shippers to use the ports. Huge funds will be required for capital and maintenance dredging to accommodate growing size of vessels; expanding ports; procuring equipment like cranes and port vehicles; putting in place systems to manage port operations; ensuring sustainable operations; and investing in human capital; among many other tasks that port owners and authorities and the Malaysian Government have to undertake to ensure that our ports along SOM are competitive.

6.1.3 Providing comprehensive range of maritime support services for container trade

As the volumes of container shipping and trade in SOM grows in the future, the demand by port users for a wide range of services to support container transportation will increase in tandem. It is not good enough to have ports which are well-equipped and with good

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features to handle big ships and huge throughput volumes. They must be backed with an array of services such as bunkering, logistics, Customs, inspection, warehousing and those provided by Free Zones. Beyond the port gates, the availability of services such as ship repairing, ship maintenance, financing, ship management, legal services, ship broking and many others are also essential to pull in shipping lines, especially MLOs, to our ports. The absence of any of these, or the lack of efficiency in the quality of these services, could swing the decision by MLOs against calling at local ports and worse, blunt Malaysia’s competitiveness as a maritime nation.

The challenge to provide these services at a high degree of efficiency and at competitive cost requires the commitment from many sides. Port authorities and terminal owners must spend considerably to enhance their service offerings to retain customers and gain new ones. Major local shippers such as Government Linked Companies have a key role to play to procure these services from local players to provide them, with the break they need to handle big business. This will lead to more investments in improving their capacity and services, and in turn attract more MLOs to Malaysian ports in SOM and increase their throughput and revenues. The Government could play a leading role in spurring the development and growth of companies providing maritime support services by providing them with incentives and planning for human capital development to meet the manpower need of this segment. Fulfilling these challenges would require some form of policy directive to promote the development of maritime support services in an orderly manner.

6.1.4 Protecting the marine environment

The threat of pollution arising from the increasing risk of ships colliding and running aground in SOM is growing in tandem with the increase in shipping traffic in the straits. In addition, threats from land-based sources can pose a considerable threat to the ecosystem of the Straits.

The need to protect the vulnerable straits’ environment from pollution goes beyond keeping Mother Nature clean and to ensure sustainable use of the sealane for future generation. It is also vital from a strategic standpoint. Should an accident resulting in pollution of the straits occur, resulting in even a temporary disruption to the traffic flow in the sealane, the consequence for Malaysian ports along SOM and for the nation’s trade and economy could be dire. There would be loss of revenues for ports, delay in shipment of cargos, and disruption in production and delivery of vital goods to markets. These would have far reaching repercussions and would have a broad negative effect across supply chains and markets. Pollution in the straits could also cause environmental degradation that would adversely affect the livelihood of fishermen and coastal communities, and spoil recreational sites like beaches and islands.

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Malaysia will face quite a challenge to ensure that the straits is safe from the threat of pollution and environmental degradation. Although there are plans and initiatives to prevent pollution in the straits117, every effort must be made to ensure that the assets in place are in tip-top condition and personnel in ‘combat ready’ mode at all times to respond quickly and effectively to pollution incidents in SOM. Just as in the case of enhancing navigation safety, it must spend considerably to put in place assets and manpower to prevent and combat pollution. To this end, it must enhance cooperation with littoral states, user states and international organizations in capacity building measures and joint initiatives to ensure that any incidents resulting in pollution in SOM can be swiftly attended to and contained.

6.1.5 Enhancing security in the waterway

Being an SLOC of crucial importance to global trade, the issue of security in SOM is rightly a matter of global attention. The littoral states and user states whose trade and economic prosperity depend so much on safety passage of ships in the straits simply cannot afford any threats on the security of ships and the flow of trade in the sealane.

When a spate of piracy attacks occurred in SOM in 2004, the influential London-based marine insurance underwriters Lloyd’s Market Association branded it a ‘war risk zone’ and increased insurance premium in the waterway, giving the sealane a bad reputation as a piracy-prone area.118 Since the September 11 incident, security and enforcement agencies in the region have been vigilant and have stepped up patrols in the Straits, and the effectiveness of their measures is evidenced in the sharp drop in piracy cases in recent years.

Malaysia and other SOM littoral states have done well to curb piracy in SOM, and there has not been a single terrorist attack recorded in the straits thus far. Still, they must not rest on their laurels and must always be on guard to maintain security in the sealane at all times. Although the probability of security threats in the straits is low, judging from the sharp decline of piracy cases and the absence of any terror threats, the security of ships and cargos and infrastructures along SOM should never be taken for granted. Being a littoral states which has full responsibility to safeguard and protect the straits from any security threats, Malaysia faces enormous challenge of providing the resources to keep the peace in this vital sealane. At the same time, it has to be mindful of the rights of the users of the straits to its unimpeded use.119

6.1.6 Balancing international expectations and national interests

The high expectations of international users and the ever-burgeoning traffic in the Straits have combined to exert considerable demand on the littoral states to provide the maritime infrastructures and adequate measures to ensure security and navigation safety in the waterway. This further adds to the burden of the littoral states, which include developing nations with limited resources and more pressing priorities.

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In this regard, Malaysia’s conduct in SOM must be based on international laws and principles but at the same time not compromising on its national interest and rights as a sovereign nation. The challenges to ensure smooth, safe and secure passage of ships in SOM at all time will present a real test to Malaysia’s ability as a littoral state of the sealane and as a member of the international community to balance the need to keep the straits open to international traffic and protecting its own national interests. Facing and overcoming these challenges will exert considerable pressure on its financial resources and will test its resolve and international relations skills.

6.2 Opportunities for Malaysia arising from container traffic in SOM

There are as many opportunities as there are challenges for Malaysia, arising from the presence of container traffic and container trade in its ‘backyard’ in SOM. While Malaysia has done admirably to capitalise on its strategic location along the straits, as evidenced by its achievements such being one of the world’s top 20 trading nations and as having two of the world’s largest container ports, it can certainly do more to gain a bigger portion of the huge container trade in the sealane and the surrounding region.

6.2.1 Providing value-added services related to container shipping and container trade in

SOM

As stated in the analysis section of this paper, the projection of global economic recovery will bring with it a rebound in global trade and container shipping. This, in turn, will result in growing container shipping and container trade volumes in SOM, which is a key enabler of global container trade. The presence of big volumes of container trade in the sealane presents a wide range of opportunities to Malaysia as a littoral state. Before the nation lies almost non-stop flow of container ships and container in the straits, which presents huge business and economic opportunities for the local maritime industry to serve and attract.

Local ports need to work hard at attracting shipping lines, which are always seeking to reduce cost by making fewer port calls, to shift transit volumes to local ports. To do so, the ports must increase their operational efficiency, reduce cost, improve handling capacity and productivity, and offer attractive incentives to shipping lines. They must also be backed with good intermodal connection, a comprehensive range of maritime support services, pro-trade and pro-investment policies, and strong Government support to enhance their attraction to shipping lines, especially MLOs which are very demanding in choosing which ports to call.

For local ports and maritime industry players to reap the opportunities presented by projected growth in global and regional container trade, they must offer value-added services to shipping lines and shippers of containerised cargos. Although Singapore Port has a distinct edge over Malaysian ports in attracting the big container operators, tahnsk to the comprehensive shipping- and trade-related services the pot and the city state

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provide, Malaysia has every potential in the world to gain a larger slice of the container business cake. The success of PTP in grabbing a considerable amount of business from Singapore Port stands testimony to this. Malaysia stands every bit of chance to gain a bigger percentage of the container shipping and trade in SOM if it can offer great services to shipping lines and shippers, to complement the excellent infrastructures it has.

Huge opportunities are presented in certain niche business segments in the container trade. Growing intra-ASEAN and intra-Asian trade will generate bigger transshipment business that Malaysian ports stand to capitalise from further, given their strength in servicing the trade and growing share of the business. Malaysian ports can create differentiation by focusing on specialized trade such as the halal trade, which features many types of containerised cargos. Port Klang can leverage on its strength in this area by further beefing up its capacity and handling capability to serve halal cargos. PTP can certainly handle bigger throughput volumes given its potential for further development of its huge greenfield sites.

In line with the aspirations of the New Economic Model (NEM) which envisions a Malaysian economy whose growth is propelled not just by capital but by productivity, and to generate high-income activities. Plenty of opportunities exist in the container trade for Malaysia to generate such activities to serve the trade. They conclude ship designing, ship financing, marine insurance, legal advisory and consultancy. In light of this, local ports and companies servicing the container trade must focus on increasing their productivity to propel the growth of their business and the industry, instead of just relying on the injection of capital alone to spur business growth. This is an essence of the NEM that will require wholesale change in the way industry players do business, overcome challenges, reap opportunities, and position themselves accordingly in a world in constant flux.

6.2.2 Increasing efficiency and productivity of maritime service providers

Industry players must also boost efficiency in the production of goods and provision of services. They should strive to deliver to their customers better quality products and services at competitive costs and in good time. For this to happen, they need to upgrade their infrastructures, evaluate the processes and systems, harness and nurture talent, leverage on technologies and IT, and adopt a culture of ‘doing better everyday’. Given that competition is rising in all facets of business in the maritime industry, it is essential that Malaysian industry players improve their productivity, efficiency and delivery to retain customers and win new ones. This is a must in order for them to capitalise on the opportunities presented by container shipping and trade in SOM amid keen competition from regional ports and countries to win bigger business from this trade.

Productivity and efficiency cannot be attained by mere pronouncements of grand plans and wishful thinking. To be sure, maritime industry players can fast-track the process of becoming productive and efficient by developing strategic alliances and joint ventures with foreign partners who have better resources and more experience, and benefit from

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technology transfer and investment from their partners. However, companies which are serious about growing in the long haul and tackling bigger markets inevitably need to invest in R&D to develop better products and services.

6.2.3 Tapping into growing container trade from and to China

There are tremendous business opportunities in the container trade presented by China’s economic growth. Malaysian ports, shipping companies and logistics service providers should increase efforts to tap into the booming China trade. All eyes will be on China’s economic growth which, despite having recorded strong performance amid the global recession and credit crunch, has shown signs of overheating. The world’s most populous country has almost single-handedly powered global economic growth in these trying times when many major trading nations falter. China’s economy grew 9.6% year on year in the third quarter of 2010, as reported by Beijing-based National Bureaus of Statistics.

While this by itself is impressive, it marks a slowdown from the 10.3% growth recorded in the second quarter of 2010 and the blistering 11.9% of the first quarter of the year.120 Should China continue to grow at the current pace, there is every reason to expect global seaborne trade to grow in tandem. This also points to growing container shipping traffic in SOM which, as pointed out earlier, facilitates a significant amount of China’s international trade. The opportunities are there for the taking by Malaysia and its maritime industry players to tap into growing container trade to and from China.

7. Recommendations for Malaysia to optimally reap the opportunities presented by

container traffic in SOM The following are some broad strategies that can be employed to enlarge the share of Malaysian ports of the container trade passing through the Straits of Malacca :

Strategic thrust (ST)

Plan of actions

Performance indicator(s) Lead agency(ies)

ST1 Increasing the competitiveness of ports along SOM

Increasing capacity, productivity, efficiency and service delivery Improve trade facilitation services such as electronic Data Interchange (EDI)

Bigger throughput volumes at ports. Presence of more users, tenants and investors to ports. Meeting the target set in IMP3 for local ports to handle 36 mil. TEU by 2015.

Ministry of Transport (MOT) Ministry of International Trade and Industries (MITI) Port authorities and terminal operators

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ST2 Attracting shipping lines to ports along SOM

Offering features that can accommodate bigger vessels. This includes having deep drafts, adequate berths, top-notch equipment, adequate capacity and good supporting services. Offer attractive fiscal incentives to shipping lines to hub and set up offices in Malaysia.

Presence of more MLOs to call and hub at local ports along SOM and to set up office in Malaysia. Presence of more feeder operators to feed containers to local ports along SOM. Increased investment by MLOs in local port operating companies. More local shippers exporting through Port Klang.

MOT MOF Port authorities and terminal operators

ST3 Providing comprehensive maritime support services

Introduce more value-added services to support players in users. Increase efficiency of the transport sector and match it with infrastructure development i.e. by developing freight corridors linked to ports.

Growing number of companies providing support services to port users such as integrated logistics, bunkering, legal services etc. Increasing port throughput and revenues of ports. Acknowledgment of port users and industry players of quality service at Malaysian ports.

MOT MITI

ST4 Creating differentiation among ports along SOM

Promoting niche areas in which local ports have advantage. Meeting specific needs of port users i.e. hubbing operations. Focus on high-yield businesses i.e. intra-ASEAN, import-export cargo, distripark

Creation of distinct service offering among local ports. Increase in the handling of halal containers at Port Klang. Increase in variety of services offered by local ports.

MOT Marine Department Malaysia Port authorities and terminal operators

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ST5 Boosting navigation safety and security in SOM

Improving traffic management in the straits.

Reduction in the number of accidents. Ability to accommodate shipping traffic smoothly.

Marine Department

ST6 Enhancing environmental protection in SOM

Ensuring that SOM is protected from environmental threats and pollution.

Reduced number of incident resulting in pollution in SOM. Recognition of SOM as a clean and sustainable straits.

Department of Environment Shipping lines

ST7 Balancing international community’s expectations and national interests in SOM

Ensuring the rights of users to use the straits are protected and national interests are safeguarded.

Acknowledgment by the international community of Malaysia’s commitment to keep SOM open to all and of its sovereign rights and sovereignty as a littoral state.

Ministry of Foreign Affairs

8. Conclusion Given that it has a strategic advantage by virtue of its location along the Straits of Malacca, and its superb port facilities, Malaysia should do more to draw container ships to its shores. Its ports are certainly capable of handling more container throughput volumes than what they are currently processing. Malaysia has spelled out ambitious plans to make its ports globally competitive. In the 10th Malaysia Plan (10thMP), funds totaling RM2.7 billion will be set aside from the development allocation of RM230 billion to build roads and rail lines to key ports.121 A sum of RM1 billion will be provided to deepen port channels in Westports in Port Klang, PTP and Penang Port.122 The emphasis on these ports underscores the Government’s attention of the need for them to be competitive to take advantage of the shipping traffic and trade flow in SOM, and of the huge business potential therein. For Malaysia to take full advantage of its location along SOM, it should develop a strong grasp of the dynamics of the movements of liner shipping traffic along the sealane and the nature of production and trade of containerised cargo. There are huge opportunities for Malaysian ports along SOM, ancillary service providers such as shipyards, ship management companies, ship brokers, bunker suppliers and even manufacturers and shippers to take advantage of from the current and future liner shipping and containerised cargo traffic in SOM. The opportunities

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identified in this study warrant closer inspection for the stakeholders to optimally exploit the presence of growing container shipping traffic and flow in SOM. It is clear that on their own, port operators and owners can only do so much to pull in MLOs traversing the Straits of Malacca. What is needed is a nuanced approach by way of a set of strategies and the commitment of many parties to ensure that Malaysia can truly capitalise on its strategic position along SOM and the busy container shipping lane that it provides. It is hoped that the strategies recommended in this study could lead towards positioning Malaysia on a stronger plane to reap the tremendous opportunities that the container shipping and trade in the straits have to offer and to overcome the challenges they pose. It is also crucial that any strategies laid out to increase Malaysia’s share of the container trade and traffic in SOM must be aligned with other national plans such as the IMP3 and various roadmaps conducted under the Plan, the 10th Malaysia Plan and the New Economic Model. For Malaysia as a littoral state of SOM, it is imperative that it positions itself accordingly to seize the opportunities presented by the presence of active container shipping traffic and container trade activities right on its ‘doorstep’ in the straits. Malaysia should also be mindful of the enormous challenges and responsibilities that come with being a littoral state of such a strategic, important and busy sealane like SOM 9. Areas for further research The development of an econometric model for container shipping traffic in SOM will be a novel contribution from the study and is an idea that was developed when the study was being conceptualised. However, the study will require a more critical analysis to truly appreciate the extent of how container shipping traffic influences Malaysia’s economy. A more exhaustive treatment on the subject based on the model developed should lead to solid forecast of container traffic growth in the Straits. The model developed in this study is at best an exploratory model and should be refined further to facilitate further studies on the subject. With more resources and time, researchers keen to follow up on this study can use its analysis and findings as a basis to develop an econometrics-based Time Series model of container shipping and container flow in SOM. Such a model could provide a sound basis too forecast the prospects of container shipping and container trade flow in SOM and enhance our understanding on the complexity of the dynamics of this subject. This could facilitate the stakeholders to make strategic decisions related to container shipping and container trade in SOM. MARITIME INSTITUTE OF MALAYSIA 24 December 2010

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Endnotes 1 Northport recorded a profit of RM437.1 mil. in the first half of 2010, a jump of 12.5% from the previous corresponding period. Westports was confident of recording a revenue of RM900 mil. in 2010, compared to RM700 mil. in 2008. See Khalid, N. (2010). At the forefront of trade. Smart Investors. October 2010. 13. 2 In the context of this research, the ‘Straits of Malacca’ is defined as the area lying between the west coast of Thailand and Malaysia in the northeast, and the coast of Sumatra in the southwest. This is based on the definition by the International Hydrographic Organization. See International Hydrographic Bureau, The Limits of Seas and Oceans, Special Publication S-23 (3rd edition) (Monaco: International Hydrographic Bureau, 1953). 3 MITI (2006). Third Industrial Master Plan 2006-2020. Kuala Lumpur : MITI. 4 In the context of this paper, the term “sea lane” is used to describe an established maritime passage used by ocean shipping. The definition of “shipping lanes” can be clarified by reference to Article 41 of the United Nations Convention on the Law of the Sea (UNCLOS) which concerns shipping lanes and shipping traffic separation schemes. See Article 41, United Nations Convention on the Law of the Sea (New York: United Nations Publication, 1997): 38. 5 See Bateman, S., Raymond, C.Z. and Ho, J. (May 2006), Safety and security in the Malacca and Singapore Straits: An agenda for action. Institute of Defence and Strategic Studies Policy Paper, Singapore : ISEAS. See also Khalid, N. (2008). Maritime trade and development. In Ibrahim, H.M. & Husin, H.A. (eds), Profile of the Straits of Malacca : Malaysia’s perspective. Kuala Lumpur : MIMA. 98. 6 Richardson, M. (2004). A time bomb for global trade : Maritime-related terrorism in the age of weapons of mass destruction. Singapore : ISEAS. 3. 7 Khalid, N. & Basiron, M.N.B. (2008). Securing energy transportation in the Straits of Malacca. In Chircop, A. Coffen-Smout, S.& McConnell, M. (eds), Ocean Yearbook 22, Leiden : Martijnus Nijhoff. 513-533. 8 See Khalid, N. (2008). With a little help from my friends : Maritime capacity-building measures in the Straits of Malacca. Contemporary South East Asia. 31(3). December 2009. 424. 9 Underscoring the dependence of East Asian economies on SOM, 80% of China’s import of crude oil passes through the sealane. See Hong, Y. (2009), China’s perspectives on the Straits of Malacca. In Khalid, N. (ed), Proceedings of the 6th MIMA International Conference on the Straits of Malacca : Charting the future. Kuala Lumpur : MIMA. 22. In the case of Japan, 90% of oil tankers from the Middle East bound for Japan passes through the straits. See Tsunekawa, J. (2009). Japan’s perspectives on the Straits of Malacca. In Khalid, N. (ed), Proceedings of the 6th MIMA International Conference on the Straits of Malacca : Charting the future. Kuala Lumpur : MIMA. 31.

10 See Graham, E. (2006). Japan's sea lane security, 1940-2004 : A matter of life and death? Oxon, UK : Routledge. See also Storey, I. (2006, April 12). China’s “Malacca Dilemma”. China Brief. 6(8). Retrieved October 1, 2010 from China Brief website : http://www.jamestown.org/programs/chinabrief/single/?tx_ttnews%5Btt_news%5D=31575&tx_ttnews%5BbackPid%5D=196&no_cache=1

11 Marine Department Malaysia, 2009. 12 Khalid, N. & Basiron, M.N.B. (2008).

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13 Testimony to the breakneck growth of China’s economy, it has now surpassed Japan as the world’s second largest economy. In the second quarter of 2009, China’s economy was worth USD1.337 tril. Compared to Japan’s USD$1.288 tril. See Hamlin, K. & Yanping, L (2010, August 16). Bloomberg News. China surpasses Japan, capping three-decade rise. Retrieved 2010, August 17 from Bloomberg News website : http://www.businessweek.com/news/2010-08-16/china-gdp-surpasses-japan-capping-three-decade-rise.html At the current rate of its growth, China’s economy is expected to overtake the United States as the world’s biggest by 2027, as predicted by Goldman Sachs Group Inc. chief economist Jim O’Neill. See Wilson, E. (2010, September). China’s economy : China’s best of times is also the worst of times. 14 Naidu, G. (1997), The Straits of Malacca in the Malaysian economy. In Hamzah, B.A. (ed), The Strauits of Malacca : International cooperation in trade, funding and navigational safety. Kuala Lumpur : MIMA. Noer, J.H. (1996), Chokepoints : Maritime economic concerns in Southeast Asia. Washington DC : National Defense University Press. 15 In the context of shipping in SOM, its carrying capacity refers to the number of ships that can traverse the sea lane within the limits of its natural resources and without causing any adverse effect to its environment or the maximum number of safe vessel movements that the straits] can sustain in a specified time interval under a given set of conditions. 16 See Notes of Panel Discussion Session 5, The International Symposium on Safety and Protection of the Marine Environment in the Straits of Malacca and Singapore, 24 November 2008. Retrieved August 2, 2010 from Nippon Foundation website : <http://www.nippon-foundation.or.jp/eng/current/malacca_sympo/12.doc>. See also 17 Ho, J. (2009, December 3). The Straits of Malacca and Singapore : Ensuring safe and efficient shipping. RSIS Commentaries. 119/2009. Retrieved September 4, 2010 from RSIS website : http://www.rsis.edu.sg/publications/Perspective/RSIS1192009.pdf 18 Shahryari, M. & Mohamad, M.A.A. (2010). Studying on ship carrying capacity in the Straits of Malacca (unpublished). 19 Pinder, D. & Slack, B. (2004). Shipping and ports in the twenty-first century : Globalisation, technological change and the environment. Oxon, UK : Routledge. 20 McConville, J., Leggate, H. & Morvillo, A. (2005). International maritime transport : Perspectives. Oxon, UK : Routledge. 21 Nair, R., Khalid, N., et al (2008). Study of the traffic flow in the Straits of Malacca and its implication on shipping policies (unpublished). 22 Young, A.J. & Valencia, M.J. (2003). Conflation of piracy and terrorism in Southeast Asia: Rectitude and utility. Contemporary Southeast Asia. 25(2003). 269-283. 23 Khalid, N. (2010). Rising of security alarm in the Straits of Malacca: Lessons Learned. The Journal of Diplomacy and Foreign Relations. 11(1). 2010. 77-88. 24 Abdullah,A. R. et al (1999). The GEF/UNDP/IMO Malacca Straits Demonstration Project: Sources of Pollution. Marine Pollution Bulletin. 39(1-12). January 1999. 229-233. 25 Cleary, M. & Goh, K.H. (2000). Environment and development in the Straits of Malacca. Oxon, UK : Routledge. 26 Franckx, E. (2001). Vessel-source pollution and coastal state jurisdiction : The work of the ILA Committee on Coastal State Jurisdiction Relating to Marine Pollution (1991-2000). The Hague : Martinus Nijhoff Publishers.

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27 Malaysian Shipowners' Association (MASA). (2008). Malaysian Maritime Yearbook 2007-2008. Kuala Lumpur: MASA. 28 Najib Tun Razak (2007, March 13). The security of the Straits of Malacca and its implication to the South East Asia security. Speech delivered at Korea National Defence University, Seoul. Retrieved September 11, 2010 from Prime Minister’s Office website : http://www3.pmo.gov.my/WebNotesApp/tpmmain.nsf/6eb1bf73408d07794825674f0006897f/09ee4377fd049191482572aa00144782?OpenDocument 29 See for example Khalid, N. & Basiron, M.N.B. (2006). 30 Testimony to this, of the 7.3 mil. TEU handled by Port Klang in 2009, 60% of them were transshipment containers. PTP, Malaysia’s largest transshipment container port, handled 6.01 mil. TEU in 2009, of which 95% were transshipment containers. 31 Port Klang, Malaysia’s National Load Centre port, has connectivity with more than 500 ports worldwide. PTP, the busiest container terminal in the country in terms of volume based on the 5 mil. TEU it handled in 2009, is strategically located near the confluence of the world's busiest shipping lanes in SOM. Penang Port, while not as big in terms of throughput handling as Port Klang and PTP, is strategically located in the Indonesia-Malaysia-Thailand Growth Triangle which allows it to tap into considerable volumes of container trade generated by this vibrant economic zone. 32 See Khalid, N. (2007). Promoting maritime support services in Malaysia. MIMA Research Paper (unpublished). 33 Khalid, N. (2006). Ports in South East Asia : Issues and challenges. Jurnal Jabatan Pengajian Asia Tenggara (JATI). 13. December 2005. 29. 34 Khalid, N. (2006, March 29). Port development boom in China. China Brief, 6(7). Retrieved September 25, 2010 from China Brief website : http://www.jamestown.org/programs/chinabrief/single/?tx_ttnews%5Btt_news%5D=31529&tx_ttnews %5BbackPid%5D=196&no_cache=1 35 Kok, C. (2010, October 19). Ekuinas now substantial shareholder in Konsortium. Retrieved September 21, 2010 from The Star website : http://biz.thestar.com.my/news/story.asp?file=/2010/10/19/business/7252386&sec=business 36 See for example Noer, J.& Gregory, D. (1996). Chokepoints: Maritime Economic Concerns in Southeast Asia. Washington DC : National Defense University. See also Harriss, J. (2005). China’s regional policies : How much hegemony? Australian Journal of International Affairs. 59(4). December 2005. 481– 492. 37 See Cargo Systems (2010). CS Top 100 container ports. August 2010. 38 Both Port Klang and PTP have made it into UNCTAD’s list of top 20 container ports by volume handled since 2000. 39 An analysis of container throughput data of Port Klang showed that transshipment throughput handled by the port, Malaysia’s load canter port, increased 6.3% from 2005 to 2009. 40 Li, K. S. (2010, January 11). Port Klang container, cargo throughput down. Business Times. Retrieved September 27, 2010 from Business times website : http://www.btimes.com.my/Current_News/BTIMES/articles/toput/Article/

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41 Ali, S. (2010, August 12). Johor Port, PTP can still achieve cost savings. The Star. Retrieved September 27, 2010 from Business times website : http://biz.thestar.com.my/news/story.asp?file=/2010/8/12/business/6841014&sec=business 42 For example, Penang Port handled 958,476 TEU in 2009, an increase of 3.1% from the previous year. This is an impressive achievement amid the global recession. In July 2010, Penang Port handled a record- breaking 99,568 TEUs and it was expected to handle over one million TEUs in 2010. See ‘Deputy Transport Minister visits Penang Port’. Retrieved 2010, October 11 from Penang Port Commission website: http://webcache.googleusercontent.com/search?hl=en&q=cache:KjFJxJWTMCoJ:http://www.penangport.gov.my/latest_news.htm+penang+port+teu+2009&ct=clnk. 43 According to statistics from Ministry of Transport Malaysia, 2009, Port Klang handled 7.3 mil. TEU of containers in 2009, a decline of 8.3% from 2008. However, PTP recorded its highest ever throughput volume since it began operations in 1999, handling 6,02 mil. TEU or 7.5% higher than 2008 and making it one of the few ports in the world that recorded throughput growth in such a challenging year. Malaysian ports handled a total of 16.04 mil. TEU in 2009, compared to 16.4 mil. TEU in 2008 The Government, in the Third Industrial Master Plan 2006-2020, has set a target for Malaysian ports to handle 36 mil. TEU in 2020. To enable the attainment of this target, ports need to increase their capacity and huge capital expenditure is needed to build infrastructures such as highways and expand the logistics network and handling capacity in the country to handle bigger volumes of containers. 44 Nair, R, Khalid, N. et al (2007). 45 Khalid, N. (2008). Enhancing maritime support services in Malaysia : A strategic approach. MIMA Research Report (unpublished). 46 Khalid, N. (2008). Enhancing maritime support services in Malaysia : A strategic approach. MIMA Research Report (unpublished). 47 Based on 2009 throughput volume figures of Malaysian ports compiled by Ministry of Transport Malaysia. 48 Based on data of movements of vessels above 300 GRT in SOM in 2005 as captured by the Vessel Traffic System or Port Klang, compiled by Marine Department Malaysia. See Nair, R, Khalid, N. et al (2007). 49 According to figures of shipping traffic in SOM obtained from Marine Department Malaysia, Container shipping traffic (measured by movements of ships) in SOM in 2009 increased by 22% compared to traffic in 2000. 50 In 2008, Singapore Port handled 29.9 mil. TEU, making it the world’s second busiest container port. See Maritime and Port Authority of Singapore (2009). Ready for the future. Annual Report 2008. 17. UNCTAD estimated the world total of containerized trade in 2008 stood at 137 mil. TEU, an increase of 5.4% over the previous year. See UNCTAD (2009). Review of Maritime Transport 2008. Geneva : UNCTAD. Based on these two figures, Singapore Port had a 21.8% share of global containerized trade, compared to 0.01% share of both Port Klang and PTP which between them handled 13.57 mil. TEU in 2008. 51 The percentage is derived based on the estimate by UNCTAD of 137 mil. TEU of containerized trade generated in 2008. 52 Ibid. 53 Malaysia’s principal port. Retrieved August 31, 2010, from Port Klang Authority website : http://www.pka.gov.my/Background.asp

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54 World Bank expected China’s economy to grow 9.5% in 2010, a considerable achievement considering the state that the global economy is in after the recession and credit crunch that battered many economies worldwide. See Xiaoji, C. (2010, March 17). World Bank sees China GDP up 9.5% in 2010. China Daily. Retrieved 11 September, 2010 from China Daily website : http://www.chinadaily.com.cn/bizchina/2010-03/17/content_9603364.htm 55 The International Monetary Fund (IMF) projected that the global economy will expand 4.8% in 2010 and 4.2% in 2011, on the back of slow recovery of the world economy hit badly by the global recession and credit crunch that started in 2008. See IMO (2010, October). World Economic Outlook - Recovery, Risk, and Rebalancing. New York : IMF. 1. 56 Global GDP grew by a mere 2%, compared to 3.7% in 2007, and below the annual average rate of 3.5% recorded between 1994 and 2008. See UNCTAD (2009), 1. So devastating was the effect of the global recession on global trade and seaborne transport that UNCTAD described 2008 as the year that marked a major turning point in the history of the world economy and trade (UNCTAD, 2009, 1). 57 According to World Trade Organisation (WTO), the global economic crisis resulted in a 12.2% decline in the volume of global trade — the largest such decline since World War II. See WTO (2010, March 26), Press Release 598/2010. Trade to expand by 9.5% in 2010 after a dismal 2009, WTO reports. Retrieved July 23, 2010, from WTO website : http://www.wto.org/english/news_e/pres10_e/pr598_e.htm 58 ISL Bremen (2010). Shipping Statistics and Market review. 54(5/6/). 2010. 5. 59 Ibid. In early 2010, an estimated 500 container ships with a total capacity of 1.2 mil. were laid up as a result of not having any cargos to carry. 60 ISL Bremen (2010). 5. 61 WTO (2010). Press Release 598/2010. 62 WTO forecasted that merchandised exports of developed economies will grow by 11.5% in volume terms in 2010, while the rest of the world (including developing economies and the Commonwealth of Independent States) is projected to experience an increase of 16.5% in merchandised exports for 2010. See WTO (2010, September 20), Press Release/616. Retrieved July 24, 2010, from WTO website : http://www.wto.org/english/news_e/pres10_e/pr616_e.htm 63 PTP attributed this impressive performance to the good business of its main customers and volumes contributed by its new customer, the French container operator, CMA-CGM which started calling at the port in July 1009. 64 For example, Russia’s St. Petersburg Port suffered a drop of 32.3% in container throughput in 2009 from 2008 volumes, handling 1.34 mil. TEU. Germany’s Hamburg Port handled 28% fewer containers in 2009 (7.01 mil. TEU) compared to 2008, while Freeport in Bahamas saw a drop of 22.1% in boxes handled in 2009 (1.32 mil. TEU) from 2008 levels. See Anon. (2010). CS Top 100 container ports. Cargo Systems. August 2010. 65 Reflecting this optimism, Port Klang projected a growth of 10 to 12 per cent in container volume in 2011 from 2010. See Li, K.S. (2010, 12 July). Port Klang retains status as busiest container port. Retrieved September 28, 2010 from Business Times website : http://www.btimes.com.my/Current_News/BTIMES/articles/westopo/Article/#ixzz13XpAOnOv 66 For a comprehensive treatment of the subject, see Notteboom, T. & Rodrigue, J.P. (2010). Foreland based regionalization : Integrating intermediate hubs with port hinterlands. Hofstra (unpublished). Retrieved September 27, 2010 from Hofstra website : http://people.hofstra.edu/jean-paul_rodrigue/downloads/Foreland-based%20regionalization_IFSPA-final.pdf

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67 Singapore pride itself for being an International Maritime Centre, a concept propagated by the city-state to enhance its attraction to shipping lines as a global maritime hub. This is achieved by way of providing the necessary support to attract shipowners, ship operators and maritime services providers to set up operations in Singapore. 68 Nair, Khalid et al (2007). 9. 69 To understand the ‘outsourcing’ phenomenon, one could do worse than referring to Bardhan, A.D. & Kroll, C. (2003). The new wave of outsourcing. Berkely, CA : Fish Centre for Real Estate and Urban Economics. Fall 2003. Retrieved 1 October, 2010 from eScholarship University of California Berkeley website : http://escholarship.org/uc/item/02f8z392;jsessionid=93BDFED4D30531578A385D3BFAA6A82F. See also Yourdon, E. (2005). Outsource : Competing in the global productivity race. Melbourne : Lavoisier. 70 See Anon. (2008, March 6), Kendalian kargo PTP berganda, pelabuhan lain teris maju. Utusan Malaysia. Retrieved October 4, 2010 from MMC website : http://webcache.googleusercontent.com/search?hl=en&cr=countryMY&tbs=ctr%3AcountryMY&sa=N&q=cache:gk6oPf6PUksJ:http://www.mmc.com.my/content.asp?menuid=100041&rootid=100003&MediaId=288+emma+maersk+klang&ct=clnk 71 ISL Bremen reported in mid-2010 that more than 70% of the capacity of container ships on order in was over 5,000 TEU capacity. 166 boxships have the capacity of over 10,000 TEU and the largest such ship on order is a series of 30 ships with a whooping 14,000 TEU capacity each, to be constructed at Samsung and Daewoo shipyards in South Korea. See ISL Bremen (2010). Shipping and Statistics Market Review. May/June 2010. 14. 72 Dixon, C. (1991), South East Asia in the world economy, New York : Cambridge University Press. 73 Poon, J. (2003), ‘Trade networks in South East Asia and emerging patterns’, in Chia, L.S (ed.), ‘South East Asia Transformed : A geography of change’, Singapore : ISEAS. 385. 74 Based on ASEAN trade statistics compiled by ASEAN Secretariat. Retrieved October 11, 2010 from ASEAN Secretariat website : http://www.aseansec.org/stat/Table18.pdf 75 Ali, S. (2010, January 4). Port operators see volume growth. The Star. 76 Jamal, S. (2010, August 30). Northport ready to unleash its full potential.. Bernama Online. Retrieved October 13, 2010 from Bernama Online website : http://maritime.bernama.com/news.php?id=282076&lang=en&cat=ex 77 MIMA & AGN (2006). Port competitiveness study in East Malaysia. Consultancy Study for Ministry of Transport Malaysia. 78 For a comprehensive treatment on the subject, see Khalid, N. (2006), ASEAN initiatives on trade and transport : Implications for Malaysia and its maritime sector. MIMA Research Report (unpublished). Retrieved October 6, 2010 from MIMA website : http://www.mima.gov.my/images/stories/ResearchCentres/MEI/Research/nazery%20-%20afta%20initiatives%20on%20trade%20and%20transport%20-%20implications%20for%20malaysias%20maritime%20sector.pdf 79 AFTA was initiated by ASEAN leaders at the Fourth ASEAN Summit in Singapore in January 1992 with the main objective of increasing the region’s manufacturing competitiveness by attracting more FDI and thereby expanding their production base geared for the world market. Conceived based on the Framework Agreement on Enhancing ASEAN Economic Cooperation, AFTA is designed with the view to lower the cost of conducting business in the region to stay competitive against rising economic powers such as China and India, and to attract foreign direct investments into the region. 80 See Khalid, N. (2008). Enhancing maritime support services in Malaysia: a strategic approach. MIMA Research Paper (unpublished). 3-11.

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81 Personal communication with several executives of companies which ship and import goods through Port Klang. 82 It is argued that a competitive port is one that can offer a range of services to port users at prices which give value for money to the users. Many scholars view cost competitiveness as a key criteria of a competitive port, or one that can offer services that meet the needs and expectations of port users at prices better than their like-for-like competitors in the business that the ports engaged in. For example, see Haralambides, H. (2002). Competition, excess capacity, and the pricing of port infrastructure. International Journal of Maritime Economics. 4(4). December 2002. 323-347. See also Khalid, N. (2008) Nazery, K. (2009). To liberalize or not to liberalize? An assessment of Malaysia's port tariff regime. MIMA Research Paper (unpublished). Retrieved October 22, 2010 from MIMA website : http://www.mima.gov.my/images/stories/ResearchCentres/MEI/Research/Tariff_2008_(Nov08).pdf 83 See Jamal, S. (2010, August 30). Northport ready to unleash its full potential.. Bernama Online. Retrieved October 13, 2010 from Bernama Online website : http://maritime.bernama.com/news.php?id=282076&lang=en&cat=ex 84 Anon. (2009, March 2). Maersk maintains keen interest in PTP. Business Times. Retrieved from Logistics Malaysia website : http://logistics-malaysia.blogspot.com/2009/03/maersk-maintains-keen-interest-in-ptp.html 85 Mehta, M. (2010, December 1). PTP uses lean strategy to tide over crisis. Cargonews Asia. Retrieved October 17, 2010 from PTP website : http://www.ptp.com.my/media-news.aspx?mid=1&mnid=7&cid=0&itmid=2481&title=PTP%20uses%20lean%20strategy%20to%20tide%20over%20crisis 86 Anon. (2010, May 12). Penang Port will be staying put. Retrieved 2010, October 26 from The Star website : http://thestar.com.my/news/story.asp?sec=nation&file=/2010/5/12/nation/6241128 87 Ng, F. (2010, February 2). MITI looks to India, China for FDI. Retrieved October 25, 2010 from The Star website : http://biz.thestar.com.my/news/story.asp?file=/2010/2/2/business/5589910&sec=business 88 Anon. (2010). CS Top 100 container ports. Cargo Systems. August 2010. 89 In 2009, domestic containers handled by PTP grew by 9% year on year. See Anon. (2010, January 15). Things looking up for 2010? World Cargo News. Retrieved October 17, 2010 from World Cargo News website : http://www.worldcargonews.com/htm/w20100115.555383.htm With the economic activities generated by Iskandar Development Region, a massive economic development corridor that PTP is part of, gateway containers handled by PTP are expected to grow further. 90 Personal communication with a Senior Executive of a Malaysian shipping company during MIMA Roundtable Discussion on ‘Features, trends and prospects of container shipping in the Straits of Malacca and policy implications for Malaysia’, 8 December 2010.

91 Northport Chief Executive Officer / Managing Director Dato’ Basheer Hassan was reported as saying that the 30 percent growth in the port’s transshipment business in the first quarter of 2010 (from 250,782 TEUs in the previous year’s corresponding period to 324,899 TEUs ) was ‘particularly as it reflected a strong resurgence in the growth of regional economies. See Bernama Online (2010, April). He pointed out that Northport was handling more than 120 shipping lines with extensive feeder network linking the port with more than 250 ports worldwide which enhances the attraction of the port as a transshipment hub to shipping lines. See ‘Northport records 26 percent growth in containers handled. Retrieved December 21, 2010 from Bernama Online website : http://bernama-malaysian-national-news-agency/mi_8082/is_20100422/northport-records-26-growth containers/ai_n53272962/+northport+transshipment&ct=clnk

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92 Dato’ Basheer Hassan of Northport said that the transshipment trade had become very competitive not only regionally but nationally. As such, he deemed the growth in Northport’s transshipment throughput as a positive reflection of the port's high level of service given that shipping lines are spoilt for choice to call at regional ports, many of which offer a range of very good facilities and services at competitive rates. See ‘Northport records 26 percent growth in containers handled. Retrieved December 21, 2010 from Bernama Online website : http://bernama-malaysian-national-news-agency/mi_8082/is_20100422/northport-records-26-growth containers/ai_n53272962/+northport+transshipment&ct=clnk 93 Personal communication with a Senior Executive of a Malaysian shipping company during MIMA Roundtable Discussion on ‘Features, trends and prospects of container shipping in the Straits of Malacca and policy implications for Malaysia’, 8 December 2010. 94 Anon. (2009, March 2). Maersk maintains keen interest in PTP. Business Times. Retrieved from Logistics Malaysia website : http://logistics-malaysia.blogspot.com/2009/03/maersk-maintains-keen-interest-in-ptp.html 95 Anon. (2007, November 14). China Shipping in Yingkou joint venture. PortWorld. Retrieved October 29, 2010 from PortWorld website : http://www.portworld.com/news/i69744.print 96 COSCO (2010, June 14). Press Release. Completion of acquisition of 13.70% effective interest in Sigma Enterprises Limited. Retrieved October 29, 2010 from COSCO website : http://www.coscopac.com.hk/eng/media/p100614.pdf 97 The demand for port services stems from the demand for the cargos they handle, hence the term ‘demand-derived’. This concept, applied to shipping, is explained in various literature on maritime economics. For example, see Stopford, M. (2009). Maritime Economics, 3rd edition. Oxon, UK : Routledge. 567-8. 98 For example, an unpublished 2009 study by Maritime Institute of Malaysia puts the carrying capacity of the Straits at 122.640 ships (of above 300 gross registered tonnage) by 2024, assuming the shipping traffic in the waterway grows at the rate of 3% per year. Japan International Transport Institute estimated that traffic in the sea lane could reach 200,000 ships a year by 2015. See Notes of Panel Discussion Session 5, The International Symposium on Safety and Protection of the Marine Environment in the Straits of Malacca and Singapore, 24 November 2008. Retrieved August 2, 2010 from Nippon Foundation website : <http://www.nippon-foundation.or.jp/eng/current/malacca_sympo/12.doc>. Although subject to debate, the projection made in such studies unmistakably point to a future when traffic in SOM will be higher owing to growing global trade and the forecast of continuous economic boom in China. 99 UNCTAD (2009). Review of Maritime Transport 2009. Geneva : UNCTAD. 100 This is among the core findings of the study by Nair, Khalid et al (2007) which suggested that Malaysia should explore, among others, shore-based activities linked to maritime trade in SOM in order to serve the huge number of ships traversing the sealane. Such activities include financing, legal and logistics services. 101 Ministry of Land, Transport and Maritime Affairs Republic of Korea and Korean Maritime Institute (2010). Features and prospects of ASEAN network ports. Workshop on ASEAN Network Port Performance and Capacity. 27-28 July 2010. Kuala Lumpur. 102 This can be attributed to various factors including shift from agriculture-based to manufacturing-driven economy, increase income per capita, rapid industrialisation, more open trade policies and improved trade infrastructures in the region. These factors are outlined in Khalid, N. (2007). AFTA initiatives on trade and transport: implications for Malaysia's maritime sector. MIMA (unpublished). 103 See for example Li, K.S. (2010, January 11). See also Rillo, A. (2010). ASEAN economics : Challenges and responses during the crisis. In Singh, D. (ed). Southeast Asian Affairs 2009. Singapore : ISEAS. 17-27.

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104 As economies of Organisation of Economic Cooperation and Development (OECD) countries felt the pinch of the global recession, consumers in those countries tightened their belts, pace of production and manufacturing slowed, and demand for imports from major manufacturing markets such as ASEAN declined, hence contributing to the fall in global trade and container throughput at ASEAN ports. See UNCTAD (2009), 2. 105 As China’s economy held steady amid the global economic crisis, thanks to aggressive pump-priming measures and a massive stimulus package introduced by its Government, China’s trade and economic growth held firm, and container transshipment throughput handled at ASEAN ports showed healthy volumes. See UNCTAD (2009). 2. 106 Ministry of Transport Malaysia statistics. 107 Ibid. 108 The projection by Ministry of Transport, Land and Maritime, Republic of Korea and Korea Maritime Institute was presented at the ASEAN Maritime Transport Working Group Meeting in Kuala Lumpur on xx July 2010. 109 Much of this is attributed to the gradual opening up of Vietnam’s economy from a centrally-planned one to a market-driven economy, and its accession into World Trade Organisation in 2007. See Abbott, P., Bentzen, J. & Tarp, F. (2009). Trade and development : Lessons from Vietnam's past trade agreements.. World Development. 37(2). February 2009. 341-353. 110 Clarksons forecasted in mid-2010 that container trade would continue to be under pressure with vessel charter rates at historically low levels. Although it was optimistic of a growth in the trade in 2010, its optimism is a guarded one : it cautioned against a ‘fragile’ recovery on account of shaky global economic recovery and excessive tonnage in the trade. See Clarkson Research Service (2010). Shipping Review & Outlook. Spring 2010. 24. 111 Other megahub ports are Shanghai Port (China), Hong Kong Port (SAR China), Busan Port (South Korea) and Rotterdam (Netherlands). For succinct discussions on megahub ports and their concepts and dynamics, see Imai, A. et al (2010). The economic viability of container mega-ships. Transportation Research Part E: Logistics and Transportation Review. 42(1). January 2006. 21-41. See also Dekker, S., R. J. Verhaeghe, R.J. & Pols, A.A.J. (2003). Economic impacts and public financing of port capacity investments: The case of Rotterdam port expansion. Transportation Research Record: Journal of the Transportation Research Board. 1823(2003). 55-61. 112 Claksons wrote in its report on container trade released in October 2010 that ‘the vibes are reasonably positive and lines seem to agree that things will continue to improve next year (2011). Such is its bullishness of a recovery in the trade in 2011 that it expressed confidence that freight should advance ‘closer to historical averages and even beyond in some cases’. The report also stated that the outlook for 2011 remains supportive of some of the positive expectations held at the start of 2010. See Anon. (2010, October 20). A less eventful conclusion to the year is expected... Shipping Intelligence Network 2010. Retrieved October 25, 2010 from Clarksons website : http://www.clarksons.net/sin2010/markets/Market.aspx?news_id=30609 113 Copious amount of literature has been written on the economic boom and potential of the so-called BRIC (Brazil, Indian, Russia, China) countries, four emerging economies whose astounding economic growths have taken the world by storm in the last decade and have contributed immensely to the boom in global container trade. See for example Wilson, D., Kelston, A. & Ahmed, S.(2010, May 20). Is this the ‘BRICs decade’? BRICs monthly. 10(3). Retrieved October 26, 2010 from Goldman Sachs website : http://www2.goldmansachs.com/ideas/brics/brics-decade-doc.pdf 114 Ibid.

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115 The concept of SLOC accords the world’s strategic waterways, such as the Straits of Malacca and the Straits of Hormuz, the status of ‘‘maritime highways’’ that facilitate the vast trade flows critical to global economic prosperity. Such passages are exposed to various elements that threaten their security and access. These elements include military concerns involving threats emanating from the conflicts between nations and from sea mines as well as nonmilitary elements including natural disasters, navigation-related accidents, pollution, piracy, terrorism, and the ‘‘creeping jurisdiction’’ of regional States. 116 The mechanism consists of three components, namely : (i) a forum for cooperation under the to act as the main avenue for user states and like-minded parties to meet and cooperate with the littoral states, (ii) a package of six projects by the littoral states with proposed funding and participation by the user states and other interested parties, and (iii) the setting up of the Aids to Navigation Fund. The Cooperative Mechanism provides a platform for the littoral states, user states and other stakeholders of the Straits to participate in activities and exercise corporate social responsibility to ensure navigation safety and environmental protection in the sealane. The six projects are : (i) Removal of wrecks in the Traffic Separation Scheme, (ii) Co-operation and capacity building on Hazardous and Noxious Substance (HNS) preparedness and response in the Straits of Malacca and Singapore including the setting up of HNS Response Center, (iii) Demonstration project of Class B Automatic Identification System (AIS) transponders on small ships of less than 300 GRT which are currently not required to do so under the Safety of Life at Sea or SOLAS Regulations, (iv) Setting up of a tide, current and wind measurement system so as to enhance navigational safety and marine environment protection, (v) Replacement and maintenance of 17 aids to navigation, and (vi) Replacement of aids to navigation damaged by the 2004 Asian tsunami. 117 Malaysia has put in place plans and equipment to combat oil spills in its waters. It has an oil spill control stockpile in SOM which has been effectively mobilized on a number of occasions to combat oil spills. Malaysia is party to international conventions intended to minimize and prevent oil pollution from shipping, namely the International Convention on Oil Pollution Preparedness, Response and Cooperation, 1990 (OPRC Convention and Annex I, II and V) and the Convention on the International Regulations for Preventing Collisions at Sea, 1972. At the national level, there is an oil spill response program based on the National Oil Spill Contingency Plan, under the operation of the Malaysian Department of Environment with the Malaysian Marine Department functioning as the on-site commander. 118 The International Maritime Bureau reported 38 attacks (actual and attempted) attributed to pirates in the straits. Thanks to increased efforts by the maritime enforcement agencies of the littoral states, including Malaysia’s Royal Malaysian Navy and Malaysia Maritime Enforcement Agency, the number of attacks fell to 12 the following year. 119 International users consider the Straits an international sea-lane to which they have a right to use, as provided for in Part III of the United Nations Convention on the Law of the Sea (UNCLOS) 1982) on transit passage of straits used for international navigation. 120 The Star (2010, October 22). Economic growth slows in Q3 but still robust. B11. 121 Tenth Malaysia Plan. 122 Ibid.

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