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Cablegate: Sri Lanka: Colombo Port Struggling to Keep Its Dominance In

VZCZCXRO1912
RR RUEHBI RUEHCI RUEHLMC
DE RUEHLM #1134/01 2281101
ZNR UUUUU ZZH
R 161101Z AUG 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 6629
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 1270
RUEHKA/AMEMBASSY DHAKA 0351
RUEHIL/AMEMBASSY ISLAMABAD 7334
RUEHKT/AMEMBASSY KATHMANDU 5449
RUEHKP/AMCONSUL KARACHI 2232
RUEHCG/AMCONSUL CHENNAI 7926
RUEHBI/AMCONSUL MUMBAI 5575
RUEHCI/AMCONSUL KOLKATA 0356
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 03 COLOMBO 001134

SIPDIS

SENSITIVE, SIPDIS

STATE FOR SCA/INS AND EEB/TRA/OTP
STATE PASS USTR FOR ADINA ADLER
COMMERCE FOR JONATHAN STONE
MCC FOR S. GROFF, D. TETER, D. NASSIRY AND E. BURKE
TREASURY FOR LESLIE HULL

E.O 12958: N/A
TAGS: ECON EINV ETRD EWWT CE
REF: 06 COLOMBO 2114

SUBJECT: SRI LANKA: COLOMBO PORT STRUGGLING TO KEEP ITS DOMINANCE IN
SOUTH ASIA

1. SUMMARY: Due to congestion, low productivity, increasing
freight rates, and security concerns caused by the conflict, global
shipping lines have begun bypassing Sri Lanka in favor of India's
emerging ports. In the last six months, shipping costs from Colombo
have nearly doubled to $600 per TEU and four major global shipping
lines -- Maersk, Hanjin, Norasia, and United Arab Shipping Company
-- have diverted services to India. Exporters, whose price- and
time-competitiveness depend on the Colombo port's transshipment hub
status, are getting worried. Shipping lines that have long valued
Sri Lanka's location and formerly low-cost operations are also
concerned. As 95% of Sri Lanka's external trade is seaborne, the
Colombo port's declining competitiveness will also adversely affect
the island's attractiveness for manufacturing investment. Port
officials are aware of the challenges and believe they can meet them
with a planned port expansion. However Sri Lanka cannot afford
further delays in this major project, inefficiency caused by
security concerns, or loss of container traffic to competition from
Indian ports. End summary.

2. (U) The port of Colombo serves as the region's primary maritime
transshipment hub due to its geographical position in the Indian
Ocean's East-West navigation lanes. Today it is rated as one of the
top 35 ports in the world. It currently handles 3.1 million
containers per year, the largest volume in the subcontinent, and is
near capacity. Of this, 75 percent are transshipments bound
primarily from India and Southeast Asia to Europe and the
Mediterranean. In the first quarter of this year, the port's local
export volume increased 5 percent and transshipment growth by 10-15
percent.

PORT EXPANSION PLANNED, BUT DELAYS LOOM
---------------------------------------

3. (U) The port of Colombo is comprised of two terminals. The Jaya
Container Terminal (JCT) is government-owned and operated, while the
South Asian Gateway Terminal (SAGT) is privately owned by a
consortium of local and global shipping, commerce and finance firms.
To maintain its status as a leading transshipment hub, the port is
undergoing a $700 million expansion that will triple capacity to
accommodate around 12 million TEUs (standard 20-foot equivalent
unit/container) each year, enabling it to become the logistical
gateway to the Indian subcontinent and the Middle East. The Asian
Development Bank is financing the project's $300 million dollar
breakwater. The Colombo Port Expansion Project began in late 2006
and is targeted for a 2010 completion (reftel).

4. (SBU) Shipping lines, however, are skeptical that the new "South
Port" will be completed on time due to delays in construction. The
existing port infrastructure has not been sufficiently upgraded to
keep up with the increase in volume and has resulted in lower
container-handling efficiency and increase in operational costs.
These are prompting shipping lines to change their routes to
directly call in India instead. With more productive and less
costly ports such as Mumbai and Chennai developing in India, Sri
Lankan exporters are worried that Colombo is losing its status as a
major shipping entrepot and its niche in the global market.

ENHANCED SECURITY MEASURES SLOW PRODUCTIVITY
--------------------------------------------

5. (SBU) In the last six months, four major global shipping lines --
Maersk, Hanjin, Norasia, and United Arab Shipping Company -- have
diverted services to India. American President Line and OOCL will
join the exodus in the coming weeks, according to the country
manager of a major shipping line. The port's congestion is a result
of low efficiency, inadequate infrastructure, and the closure of one
of its two entrances. In October 2006, the Sri Lankan Navy closed
the northern entrance to protect the inner harbor from attacks by
the Liberation Tigers for Tamil Eelam (LTTE). The Chairman of the
Ports Authority, Saliya Wickramasuriya, told Econoff that this move
decreased total port productivity by 33 percent. Overall, Colombo's

COLOMBO 00001134 002 OF 003


current berth productivity -- its ability to move a certain number
of containers per hour -- is around 50. The privately-owned SAGT
moves 27-30 containers per hour, while the JCT moves 15-18 per hour.
As the $155 port tariff per TEU is the same for both terminals,
shipping lines prefer to establish contracts with SAGT, depending on
time compatibility with their vessels' routes. Both terminals are
subject to increased police checks of vehicles and container
inspections which significantly slow the container turn-around time.
By comparison, Chennai's berth productivity is 130, and Singapore's
is 100.

INCREASED COSTS CAUSE RIFT BETWEEN LOCAL
EXPORTERS AND SHIPPING LINES
----------------------------------------
6. (U) In the past six months, shipping costs from Colombo have
nearly doubled to $600 per TEU. Local exporters believe that
shipping lines are unnecessarily upping the freight rates. The
logistical manager for Sri Lanka's Joint Apparel Association Forum
told Econoff that the local manufacturing industry cannot compete
with China and Vietnam if the shipping lines "arbitrarily" tack on
"unwarranted" charges in an "untransparent" manner.
7. (U) Shipping lines counter that overall costs have increased
throughout the region and that Sri Lanka's freight rates are still
comparatively low -- almost 50 percent cheaper than in China.
Shipping lines also contend that increased port operational costs in
Colombo are cutting into their profit margins and must be recovered
by raising the previously-low freight rates. For example, since the
March and April 2007 Tamil Tiger aerial attacks, many shipping lines
have to pay "war risk" surcharges on commodity shipments. Rising
local salaries and the worldwide rise in fuel prices have also
contributed to the higher freight charges. Delays getting into the
Colombo port are also costly, according to the country rep of a
major shipping line; small vessels often must wait one or two days
outside the port, with a cost of $20,000 to $30,000 a day. Thus
shipping companies are finding it more profitable to fill up their
vessels with Chinese cargo, rather than incur high port costs in Sri
Lanka while carrying cargo at cheaper rates.
LESS AND LESS CONTAINER SPACE FOR SRI LANKAN EXPORTS
--------------------------------------------- -------

8. (SBU) Maersk country director told Econoff that many shipping
lines predict that container volume at the Colombo port will level
off in two years, if not decline. Between 2005 and 2006, the number
of import containers increased by only 1 percent and exports by 5
percent. With the European market demanding more goods from China,
and China's exporters willing to pay higher freight rates, cargo
vessels from East Asia heading west are almost full before they stop
in Colombo, leaving little space for Sri Lanka's exports. Today,
there is a shortage of 650 TEUs a week for the Colombo-Europe
sector. Further, more shipping lines are now focusing on UK-India
trade, in which India's container volume is ten times higher than
Sri Lanka's. Direct services from India obviate the need for Indian
cargo to be transshipped through the Colombo port, which can save
around $100 a TEU for the shippers. As a result of these
developments, a rep from Sri Lanka's Joint Apparel Association Forum
told Econoff, Sri Lankan exporters have access to 15 to 20 percent
less space in incoming container vessels than they did a year ago --
further pushing up freight prices.

COMPETING AGAINST INDIA
------------------------

9. (U) With productivity three times faster and operational costs
ten to fifteen percent cheaper than Colombo's, Mumbai and Chennai
are quickly gaining Colombo's customers. India's private sector is
pushing to modernize its ports to provide higher quality shipping
services than Colombo's. Trade volume between China and India is
surging, and within the next four years India expects 18 percent
growth in cargo volumes to Europe. Though Colombo currently handles
23 percent of Indian transshipment volume, more shipping lines are
making direct calls to Indian ports. Sri Lankan exporters are

COLOMBO 00001134 003 OF 003


worried that they will miss the opportunity to capitalize on India's
rapid economic growth, especially if the Colombo South Port
expansion drags on past 2010.

10. (SBU) In response, Sri Lanka's Secretary of Ports and Aviation,
Tilak Collure, confidently told Econoff that these criticisms are
"exaggerated" as shipping lines are always looking at other ports
and that India provides "healthy competition" for Colombo. He
asserted Colombo's geographical location gave it an inherent
advantage over India's ports. Also, he contended, many exporters
would prefer to use Colombo because of its participation in U.S.
port security programs such Megaports and the Container Security
Initiative. Further, the port is also attempting to speed the
expansion process through various strategies such as adding more
berths for feeder vessels to reduce congestion. Sounding less
optimistic, the Chairman of the Ports Authority told Econoff that
though Indian ports are not currently large enough to replace
Colombo as transshipment hubs, they will be a major threat in five
years if Colombo's own expansion plans are not fulfilled.

11. (SBU) COMMENT: India's rapid economic growth will be a huge
boon to the Colombo port if the port can retain its transshipment
hub status. However, if Colombo port fails to keep up with its
Indian competitors, either due to lagging efficiency or delays in
the South Port expansion, then its transshipment status could be
jeopardized. The other major challenge for Sri Lanka is not letting
the security situation impede port operations excessively. This is
difficult, because preventive measures, like the closure of one
entrance, harm efficiency, but a successful attack at the port would
be even more damaging. At stake in all this are not only the
significant revenue, jobs, and related business that derive from the
transshipment business, but also the competitiveness of Sri Lankan
exports, especially those of the critical garment sector.
BLAKE

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