Could China take all in Haifa Bay?

Haifa Port / Photo: Eyal Izhar, Globes

The privatization of the old Haifa Port has attracted many local and international potential bidders, with strategic interests at stake.

Last week, one of the most significant and precious cargoes in its history was unloaded at the Port of Haifa. The cargo itself comprised only iron, "firefighting equipment", and electronic products, but its exceptional added value derived from the location from which the ship arrived - the United Arab Emirates - and especially the timing, three days before an online investors' conference hosted by the Government Companies Authority headed by Yaakov Quint and the management of the Haifa Port, in advance of its privatization tender.

So, what do they do? They leverage the peace agreement between Israel and the Emirates to publicize the tender, and provide national and international coverage of the first cargo ship from Dubai to dock officially in Haifa. As background, they add a few vague quotes from unnamed Dubai businessmen to the effect that Haifa Port is "the gateway for cargo to the Arab world" (in the distant future), and get enthusiastic headline coverage - deemed "historic" - from all of the world’s news agencies.

These machinations were impressively successful, as evidenced by the phalanx of serious shipping, logistics, and investment entities from Israel and around the world that signed up for the investors' conference, held the other week in advance of the port's privatization.

The competitive threat: There’s a new player in Haifa Bay

Presumably, the companies and consortia that have expressed interest in the tender are well acquainted with the maritime transportation business. But, the ability to compete against the new Haifa Bayport container terminal, to be operated by Shanghai International Port Group (SIPG) of China, pits the old Haifa Port against a force that marshals the world's largest shipping resources and has almost unlimited financial stamina.

The Chinese concern is also not trying to hide the fact that about $3 billion (including equipment and leasing costs) has so far been invested in the new Haifa Bayport project, with the aim of integrating it into the Chinese government's Belt and Road Initiative (BRI, also known as the One Belt One Road program or OBOR ), which has goals beyond the conventional one of profit.

For the skeptics, here are a few statements made by SIPG’s president at a conference in China in January of this year, outlining the big picture:

"The maritime route of the OBOR project covers almost 70% of maritime cargo traffic... construction and development of ports along the route will help promote economic integration throughout... The new Haifa Bay terminal uses semi-automated loading technology and is designed to handle an annual capacity of 1.06 million standard 20-foot containers (TEUs) in the first phase. After construction, the planned capacity for the entire port area is 1.86 million containers per year. It will be the newest and most advanced port in the Mediterranean... The completion of the port by SIPG is an important initiative of China, designed to actively connect it to the New Silk Road project."

The "Chinese connection" to the Haifa Port privatization tender offer is not limited to the new neighbors in the Haifa Bayport, (which commences operations next year). SIPG is connected to the global "beehive" of Chinese state companies that are managed from above, including some of the largest shipping companies in the world, such as COSCO, which are also customers of the old Haifa Port.

China is also considered a world leader in "semi-automated" port technology. Haifa Bayport’s infrastructure is already installed, and includes huge remote-controlled cranes ready to handle the largest container ships in the world, autonomous smart power supply systems, robotic transport systems, 5G wireless communication networks, and more.

All this will force the future winner of the tender to operate the old Haifa Port to enter into an expensive rivalry - just to close the technological gap between it and the new Haifa Bayport. Not to mention an advantage in current costs that will most likely be reflected in the prices offered to those same customers by the two adjacent ports.

Total Chinese control of the Haifa Bay quays - will the Americans approve?

On the other hand, bidding to operate the old port is a sensible move for "beehive-affiliated" Chinese companies partnering with Israeli entities, for which it could open a trove of business treasure. It’s therefore not surprising to discover that on the list of companies registered for the investor conference, two such representatives appeared openly: state-owned infrastructure giant China Railway Engineering Corp. (CREC), and the ports management division of the privately-owned Hutchinson Group of Hong Kong. A third entity appears on the list indirectly.

Conference registration does not necessarily indicate a concrete intention to participate in the tender in the future; it is sometimes only for putting out feelers and intelligence-gathering on the competition. It’s also not inconceivable that a significant proportion of those interested, including those from China, were represented at the conference by intermediaries, such as large law firms, consulting firms, and large financial entities that handle the shipping industry. Many such entities appeared on the registrant list.

The two Chinese companies that officially registered for the event differ from one another. Hutchison Port Holdings is a huge company that manages a capacity of about 86 million containers a year and owns and/or manages six ports in China, six in Europe, and another eight in South America, Australia, Asia and the Middle East.

The Hutchison Group has a number of holdings in Israel. Already during the CEO's 2004 visit to Israel, interest was expressed in participating in the privatization of either the Haifa or Ashdod port. Hutchison is a private company, but this has not stopped the US administration from operating in the background to block its bid for the Sorek seawater desalination plant.

The second group is CREC, a government company with more than $100 billion revenue in 2018, focused on transport and rail engineering. CREC is one of the New Silk Road project’s most important operational arms, but it has no declared ports and shipping activity. However, Chinese state-owned companies are often like a Russian "Matryoshka" doll: you buy the outer shell and get a lot of surprises inside.

The event was also attended by the Thessaloniki Port Authority of Greece, which has close ties with the giant shipping corporation China Merchants Port Holdings (CMPort). This company, by the way, is a major shareholder in SIPG, which will manage Haifa Bayport from next year. So, is everything all in the family?

Assessments within the shipping industry are that the US administration is exerting heavy pressure on Israel to prevent Chinese companies from being included in the tender, and prevent the creation of Chinese "contiguous control" of the whole of Haifa Bay. The US Embassy in Jerusalem and several other federal bodies were on the list of registrants for the event.

So, what are the chances that a Chinese company will indeed win the tender? If the consideration is purely economic, it is doubtful that there will be many contenders that can outbid Chinese state company offers. But such companies also require Israeli defense establishment approval as a precondition for participation in the tender. In the light of tense China-US relations, it Is not certain that such approval will automatically be forthcoming. On the other hand, the Israeli government has a strong pro-Chinese core, led by the Minister of Finance, so this scenario cannot be ruled out.

The tender to privatize the sleepy old Haifa Port is gradually changing from selling off an underdog port into a fascinating arena of local, regional and global power struggles. Stay tuned for upcoming episodes.

Here come the Israelis: The transportation sector is interested

The investors' conference list of registrants also included some well-known players from the automotive world.

Dubai's DP World has already announced its intention to participate in the tender together with Israel Shipyards shareholders Shlomi Fogel and the Schmeltzer family. In his distant past, Fogel was a car importer (Lada), while the Schmeltzer family controls Israel’s largest leasing group as well as franchises for brands of light and heavy vehicle from China.

The infrastructure arm of Israel’s Allied Group was present at the event. Allied is, among other things, a Volkswagen Group importer and also a major Port of Haifa customer for vehicle transport. Allied is a multidisciplinary group with strategic investments in all market sectors, including infrastructure; operating the Haifa Port in partnership with an international company could complement its portfolio very well.

The conference was also attended by Taavura Holdings, parent company of the Livnat family's businesses, which include importing trucks and buses and overland haulage. Taavura is also a strategic player in cement; Haifa Port is one of Israel's major gateways for cement imports. Taavura may also view controlling the port as a strategic complement to its transport and infrastructure activities, as well as opening the way to international expansion.

Also in attendance was George Horesh’s Union Group, Israel's Toyota importer with extensive holdings in Israeli trade. Horesh is considered to have close ties with the Japanese maritime transport industry.

The Unger family, owners of a large international shipping company for vehicles and general cargo transport, and importers of the KIA brand to Israel, were also present. The company is well acquainted with all players in the Israeli shipping market and it is possible that it has now identified new opportunities for trade and/or the establishment of cargo terminals that will serve its fleet which operates throughout the region.

As stated, each group has different interests in owning the Haifa Port, that may come to light in the future, and they at least have an interest in what will develop. What all do have in common is liquidity that allows them to bid in a tender worth about a billion shekels, without applying for a bank loan.

Not a great time to offer a problem port

The timing of this tender offer is problematic. The global shipping and ports industry is still hemorrhaging, although activity and profitability for certain industry sectors have begun a gradual recovery, but other critical sectors are still struggling to keep afloat.

So, for example, the once-profitable cruise line and passenger terminals sector is still stagnant. The oil tanker sector is suffering from overcapacity and under-utilization due to low demand, worldwide. The automotive industry lost a third of its global sales volume this year, as reflected in the decline in sea freight volumes. A good number of major international shipping lines are still "running on empty" - what’s known in the shipping industry as "blank sailing". The result: many ports and cargo terminals around the world are looking at a foggy business horizon.

In the long run, the Covid-19 crisis will pass (hopefully) and whoever buys or leases a port is looking decades ahead. But the old Haifa Port has unique characteristics that make its case particularly difficult. Set aside for a moment the fact that it is uncomfortably close to the Lebanese border, and serves as a target during security tensions. Only recently, Hezbollah leader Hassan Nasrallah threatened, "I know the Port of Haifa better than I know the Port of Beirut."

We’ll also ignore the fact that the Haifa Port is also a strategic military port for the Israeli Navy (and others), and therefore its future civilian operators will have to navigate a maze of security and operational restrictions, including defense establishment approval of international companies wishing to enter into partnerships.

We won’t even mention the albatross of complex labor relations with port workers, the heavy financial obligations to existing workers that are built into the tender, nor the ambitious price.

The real problem is that the old port will soon be competing for the same cargo capacity with three other ports, led by the new Haifa Bayport - only ten minutes away and set to be transferred Chinese state-owned operator SIPG from next year.

From Idan Ofer to George Horesh: A Who’s Who of who’s interested in the Port of Haifa tender

Published by Globes, Israel business news - en.globes.co.il - on October 26, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Haifa Port / Photo: Eyal Izhar, Globes
Haifa Port / Photo: Eyal Izhar, Globes
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