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Chief Executive's Annual Meeting Presentation

Geoff Vazey

Chief Executive

Ports of Auckland Limited

Annual Meeting Presentation

Thursday 21 October 2004

Good afternoon.

Strategy

As the Chairman has indicated, the environment in which we operate continues to change, largely in response to global trends. It is important that we understand these changes and respond appropriately.

Ports no longer stand by and wait for cargoes to come through the door. Ports are an integral part of a complex supply chain between producers and international markets, and their attractiveness to cargo often depends on logistics factors beyond port boundaries.

Entire supply chains are in competition with each other and a port's competitive edge is increasingly found in its ability to contribute to the smooth flow of cargo along the supply chain in which it participates. Currently, the short-term cut and thrust of competitive plays has overshadowed the long-term nature of the port's business.

Ports of Auckland has a clear strategy to achieve ongoing growth in this dynamic and very competitive business environment. Our strategy is:

1. To deliver innovative logistics solutions both inside and beyond our port boundaries.

2. To deliver superior service at the seaport.

3. To ensure that we have the required capacity and capability to serve our customers many decades into the future.

Our strategy is producing good results. I will now track performance for the year against these three strategic platforms and outline what we are doing for the future.

Strategic platform 1: Logistics solutions

Prioritising import containers for same-day or overnight delivery to local importers significantly enhanced our competitive advantage during the year. We are now seeing import containers arrive at local importers often the day the ship berths. This is a significant advantage for Ports of Auckland over the services via other ports.

Our inland port at East Tamaki is an essential part of our overnight import delivery service. Containers are trucked from the seaport at night for delivery to local importers the next day. The year saw an 18% growth in volumes through the inland port, with new customers using the site. We are giving consideration to extending the East Tamaki site.

Development of our Wiri inland port is well under way and it will be operating by the middle of 2005. Cargo owners and the freight community are already expressing interest in this new inland port. It will be served by both road and rail.

After-hours container trucking is resulting in smoother container flows. We achieved a further 27% increase during the year and now a third of all containers trucked to or from the seaport are transported after hours. This has been achieved in just three years, as a result of establishing the East Tamaki inland port, 24-hour seaport access, our entry into the empty container business, and our work with transporters to gain acceptance for our electronic container processing products.

Good land-side access to the port over the long term is essential for the viability of the supply chain in which we participate and for our continued business growth. Rail and road are both important.

Roading improvements all help. Already the vastly improved off-ramp through Grafton Gully has enhanced port access from the southern motorway.

However, rail is how much of the future increases in volume will be handled. Ports of Auckland has a state-of-the-art rail exchange that has capacity to handle much more rail traffic.

Toll Rail is working with us to bring about increased movement of containers in and out of the port by rail.

One key project is the servicing of our new Wiri inland port with a Toll Rail shuttle train. This shuttle train will increase the capacity of container movements to and from the seaport, provide very early delivery from ships to importers in Auckland, and lessen the future demand on roads.

The Chief Executive of Toll New Zealand, David Jackson, has said, and I quote: "This is typical of the development we envisaged for our rail business and we look forward to getting under way with not only the Wiri project but other opportunities with Ports of Auckland as they arise." Unquote.

As evidence of the commitment to these developments, Toll Rail and Ports of Auckland have today signed a letter of intent for the Wiri shuttle service. We are extremely pleased with this development. It is one of a number of projects that we have under way to ensure the port has good rail options available to customers.

A Chair in Logistics and Supply Chain Management was established during the year by the Company and the University of Auckland Business School, as the Chairman mentioned. The new Chair will provide academic leadership in co-operation with industry in an area crucial to New Zealand's economic success.

We strongly believe that this work, which is aimed towards optimising New Zealand's supply chain with the world, will result in business growth for Ports of Auckland - to the benefit of our stakeholders, the Auckland region and the country.

Strategic platform 2: Delivering superior service at the seaport

Today's containerships are like ocean-going conveyer belts. They need to get into port, complete their significantly larger container exchanges, and get on their way as quickly as possible. The requirement for excellent service is a given in this competitive industry.

Significant productivity enhancements were achieved during the year, with an outstanding 20% improvement in ship turnaround times at the Axis Fergusson terminal and a 4% rise in crane productivity across both our container terminals. At Axis Fergusson, which serves the largest, new-generation containerships, we are able to put as many as five cranes on one vessel, three of them in permanent twin-lift mode. Our twin-lifting straddles are also helping to achieve high productivity rates.

High customer rankings during the year are direct international confirmation of our quality performance. A major shipping line ranked Auckland first among six Australasian ports and fifth among all 16 international ports on the 4100-TEU containerships. Another global shipping service has rated us top out of eight New Zealand ports.

We greatly value this affirmation from our customers.

Our advanced electronic products and systems contribute significantly to our ability to provide superior service to customers. Innovative systems and services, and electronic information flows extend through the Company's container logistics chain. They provide importers, exporters, freight forwarders, shipping lines, and road and rail transporters with a container flow visibility that is unrivalled in New Zealand ports.

New developments during the year include a bureau service for Customs reports that consolidate information from all the ports in New Zealand. Uptake has been very encouraging, with over 10 shipping lines on board already.

Strategic platform 3: Ensuring capacity and capability into the future

Ports of Auckland is well equipped and is investing for the future.

We are always ahead of demand for container-handling capacity and careful planning has ensured that capital investment is timed according to need. As a result, we were ready for the recent big ships and we will be ready for the next generation of containerships as well.

Terminal capacity will be increased by 100,000 TEUs when Stage One of the Axis Fergusson extension is completed in mid-2006. Meanwhile, the reconfiguration of container stacks and stacking systems resulted in additional space for over 10,000 TEUs during the year and at this moment we have significant spare capacity.

We can cater for continuing container volume growth many decades into the future. Without expanding beyond our present east-west boundaries, we can increase container-handling capacity at the seaport to handle over 3 million TEUs a year - four and a half times our present throughput. Steps to achieve this include completion of the second stage of the Axis Fergusson reclamation, further stages of reclamation between the two terminals, improvement of land-use and container-stacking systems, and expansion of our inland port network.

Deepening of the commercial shipping lane in the Rangitoto Channel began during the year to widen the tidal window for large containerships. The Parnell grit rock was removed mechanically without the need to blast, which is very pleasing. The main dredging will begin later this month and is expected to be completed in 2006. The cost of the channel deepening and Stage One extension project is $55 million.

You may have noticed a substantial red and white rig just to the east of our Axis Fergusson terminal. This is the pug mill which the contractor is now using. It will greatly speed up the mudcreting production. Soon you will also see a large dredger working in the channel. It will progress the dredging contract at pace.

Auckland is an all-weather port and when the dredging project is completed, large vessels will be able to access the port at virtually all states of the tide.

With respect to the Foreshore and Seabed Bill, I am confident that the work we and other ports have done in explaining the need to responsibly accommodate ongoing occupation of port areas by port companies will result in adequate provision in the final draft.

An extensive upgrade of our IT capability began during the year so that we can continue to roll out advanced e-commerce products for customers and to make further systems enhancements.

People

I will now turn to the subject of our staff. We have a highly skilled workforce that achieves excellent customer service and productivity. We are very pleased with the contribution of our people.

As you will probably know, we are currently negotiating a collective employment agreement with the Maritime Union of New Zealand. The agreement covers 240 of our staff.

The recent four-day strike was very disappointing. The union's public profiling of casualisation was a surprise to us. While our agreement with the union allows us to use up to 25% of the workforce as casuals we have averaged just 10% over the past 10 months.

Overall, however, the relationship with the union is positive and constructive. We expect to finalise the collective employment agreement soon. We continue to focus on increased productivity, flexibility of staffing and a sensible wage increase.

Competitive market

As you will have seen from media reports, the competitive forces in the port industry are intensifying. I can confirm that we are in talks with a major exporter and global shipping line who are currently considering significant changes.

We are in a strong position to attract any container volumes that may be repositioned as a result of these changes:

- We have proven performance on the 4100s, with high customer ratings for our terminal operation, Axis Intermodal.

- Axis Intermodal is New Zealand's largest and best-equipped terminal operator.

- We have the advanced refrigerated-container facilities and technology in place to ensure the cold-chain integrity of New Zealand's exports.

- We have the container-handling capacity right now and we have enhancements to handle increases mapped out over a timeline of several decades.

- Our Wiri inland port will be up and running to provide future logistics solutions and additional capacity beyond the port boundary.

- We are deepening the shipping lane and we already have a safe, all-weather port.

- We have New Zealand's largest consumer population and manufacturing base right on our doorstep, and our speed of delivery to this market is unrivalled.

- We are New Zealand's most well-balanced major port, with a 58:42 ratio of full import containers to full export containers that allows shipping lines to achieve better balance of their cargo flows.

- We have the technology. Our innovative high-tech systems and products, and electronic information systems are consistently ahead of the game.

- Adequate transport infrastructure is in place, with roading improvements already enhancing access to the seaport, completion of further roading projects under way, and spare rail capacity ready for use.

These are all very significant service delivery advantages. But, ultimately, the competitive dynamics will determine the outcome.

Outlook

The Company achieved operational growth during the year. Container volumes at the Axis terminals continued to grow despite some market relocation. Terminal volumes grew 4% compared with 2% for the overall Company as a result of Auckland's thirst for imports and the increasing containerisation of export goods. The 8% growth in transhipments during the year confirms that shipping lines are increasingly using Axis facilities to link their various services.

The first quarter for 2004-05 is in line with expectations, as the Chairman has reported.

While there has been a 2% drop in container volumes, compared with the first quarter last year, the four-day strike and one-off disruption to two other trades due to events in other parts of the world more than accounted for the reduction.

Non-containerised cargoes are up 22% for the first quarter, with volumes of imported vehicles performing strongly.

During the year we lost one contract. That is a reality of the container business for ports and there will continue to be wins and losses between ports. Care does need to be taken not to undermine a port's long-term viability through short-term focus. Ports are a long-term business.

Looking ahead, we are in good shape. Our strategy is clear and we are continuing to achieve against it. We have some important projects under development.

We are focused. We have a good knowledge of the local and global business and we are determined to continue to succeed on behalf of shareholders and other stakeholder groups.

Thank you.

End


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