What is the Future Freight Scenarios Study?

The Future Freight Scenarios Study looks at the impact the trend to larger international container ships could have in New Zealand. In 2012, only three percent of New Zealand’s import and export container movements were on ships bigger than 4,000 TEUs (twenty foot equivalent units). This year that figure has risen to 35 percent. The study explores the impact of this trend in the future, and the possible move to a hub and spoke port network that may result.

A hub and spoke port network is a network where some ports service international container ships (hub ports), while other ports do not have international ship capability (spoke ports), but act as feeders to the hub ports. This type of network is akin to New Zealand’s existing airport network.

The study considers:

  • what the trend towards larger ships could mean for freight costs
  • whether the road, rail and coastal shipping networks would require investment to add capacity to avoid bottlenecks
  • whether there would be any impact on New Zealand’s wider economy.

What are the key findings from the study?

The Ministry considers the following key findings to be the most important:

  • The study affirms the importance of taking a national and multi-modal perspective on the future of freight in New Zealand
  • Larger container ships coming to New Zealand present opportunities, but also risks
  • As the trend to larger ships continues in New Zealand:
    • domestic freight costs need to fall, if all cargo owners are to benefit
    • likely bottlenecks on the road, rail and coastal shipping networks need to be addressed
    • competition in ports and shipping is key to ensure cost savings are passed on to cargo owners
    • competition across the freight sector is important to encourage initiatives (such as the use of technology) that increase efficiency and lower costs.

Other key findings from the study are:

  • The trend towards larger international container ships in New Zealand offers potential cost savings for exporters and importers. But these savings are likely to be outweighed by higher domestic transport costs. These costs would increase as some cargo would have to move further within New Zealand to access a hub port.
  • The increase in the domestic freight (measured in net tonne kilometres[1]) associated with containerised exports and imports could be significant, and would be in addition to the increase in domestic freight predicted by the Ministry of Transport’s 2014 National Freight Demand Study.
  • The status quo scenario (of ten international container ports and ships of up to 4,500 TEU (twenty-foot container units)) offers the best return in a benefit-cost analysis. The projected benefit-cost ratios of all other scenarios (relative to the status quo) are less than one, and in most cases are less than zero. This means that most scenarios bring costs rather than benefits.
  • Despite the status quo scenario being the overall lowest cost option, in reality that scenario is unlikely to continue. Larger ships are already being introduced into New Zealand, and these ships are likely to call at fewer ports. This will drive the need for port upgrades and road and rail improvements.
  • Location will determine which cargo owners benefit. Cargo owners in, or close to, a region with an international port will benefit, as long as cost savings from international shipping are passed on to them. Domestic freight and logistics services providers will also benefit, because the increased freight task means increased business for those providers.

How was the study done?

The study set out to provide a “whole of New Zealand” assessment of the impact that different decisions in the shipping and port sectors could have on the freight system and the economy. The Study used a three-part approach:

  1. Use of scenarios – the scenarios model ten plausible futures for the port and shipping sectors. Each scenario models the impact of a different ship size, and a different port sector configuration. The scenarios progressively increase the largest ship size (from 4,500 TEU to 8,000 TEU), and move from the status quo of ten international container ports to a full hub-and-spoke port network.
  2. Freight movement modelling - to see how domestic freight flows could change under the different scenarios, and what implications those changes could have for freight costs, and the need for infrastructure investment.
  3. Economic assessment - benefit-cost ratios calculated for each scenario, and economic modelling was used to see any impact on Gross Domestic Product (GDP).

Why did the Ministry commission the study?

The study is the Ministry’s contribution to improving sector decision-making on the issue of planning for larger ships. The study provides impartial and whole-of-system information, which can be used by infrastructure investors and cargo owners across the freight system.

The Ministry commissioned the study as part of giving effect to the Government’s response to the New Zealand Productivity Commission’s International Freight Services Inquiry. The inquiry noted a number of challenging questions affecting the future shape of the freight system. These included how best to plan for larger international container ships.

The Productivity Commission said the question of how best to plan for larger international container ships should be resolved by market participants. However, the Commission recommended the Government help private sector decision-making by providing improved information.

Who did the study for the Ministry?

Deloitte was commissioned by the Ministry to do the study in 2013, using data from 2012.

Does the study suggest a role for the Government to intervene in port investment decisions?

No. The study does not suggest a preferred scenario, or a course of action for the Government. The study does not provide a blueprint for the future.

The Government has no interest in directing the port and shipping sectors in how it should plan for larger international container ships. The Government is interested in assisting private sector decision-making by providing improved information, as the sector resolves how best to plan for larger ships. The Government is also committed to providing land transport capability that reduces as far as possible the costs of domestic freight.

What does the Ministry intend to do with the study?

The Study is intended to increase information available to the freight sector, as the sector considers how best to respond to the trend to larger international container ships. As a consequence the Ministry encourages the sector to consider the study and use its results.

The study will also help inform the Government in considering how to address land transport needs, brought about by the increase in domestic freight associated with increased hubbing.

The Ministry has made the study available on its website for use by the freight sector, and those with an interest in freight. The Ministry will raise awareness of the study during a wide range of sector engagements and events in 2015.

The Ministry encourages the sector to challenge the study’s assumptions and engage in debate on the wider issues about the future shape of New Zealand’s freight system.

What is the link between the Future Freight Scenarios Study and the National Freight Demand Study (released in July 2014)?

The Future Freight Scenarios Study looks at the impact the trend to larger international container ships could have in New Zealand, while the National Freight Demand Study (NFDS) provides a snapshot of New Zealand's current freight task - and a forecast of what New Zealand's future freight task will look like over the next 30 years.

The Future Freight Scenarios Study uses data from the National Freight Demand Study.

Both studies help to build a clearer picture of the future of New Zealand’s transport infrastructure and freight sectors and broader economic implications for the sector, operators and the general economy.

Are increased numbers of larger international container ships coming to New Zealand likely to disadvantage New Zealand?

No, not if the private sector and Government take action to lower domestic freight costs and increase efficiency in the port and shipping sectors.

The study confirms that larger international container ships offer cost savings for exporters and importers. They provide an opportunity for cargo owners to provide cheaper goods, through lower international sea freight costs.

The opportunity to lower costs of goods is why market initiatives are currently underway to hasten the arrival of larger ships. These initiatives are important, and the Government supports these initiatives, as the New Zealand Productivity Commission found that average international sea freight costs in New Zealand are 21 percent higher than in Australia.

At the same time, the study identifies that for some cargo owners, there is a risk that the increase in domestic freight costs (from the concentration of international shipping services on fewer ports) could outweigh the savings in international shipping costs. The further a producer, or importer, is from an international container port in New Zealand, the more likely the cost savings from larger ships could be eroded by increased domestic costs.

What actions are currently being taken to address the risk of higher domestic freight costs?

Whether this risk eventuates depends on actions taken by the private sector and Government to lower domestic freight costs and increase efficiency. Already a number of initiatives are underway to do this, such as:

  • inland port and intermodal logistics hub developments that provide a way of consolidating cargo and moving it cost-efficiently to and from international container ports in New Zealand
  • the Government’s investment in the Roads of National Significance (RONS)
  • the Government’s investment in the KiwiRail Turnaround Plan
  • regulatory changes to allow larger trucks where roads are capable of accommodating them.

Also, New Zealand’s freight system is constantly evolving. If a scenario developed such that some cargo owners were disadvantaged because of increased domestic costs due to the trend to larger ships, the market is likely to respond.

For example if cargo owners in the lower North Island were disadvantaged by a trend to hubs in the upper North Island, they could choose to contract international shipping to provide freight services on smaller ships calling at a more local port.

Is the study a criticism of the recent agreements involving Kotahi, the Port of Tauranga and the Maersk Line?

No. The study is not a criticism of the alliance between Kotahi and the Port of Tauranga, or the parallel agreement between Kotahi and the Maersk Line.

The study clarifies that larger ships offer exporters and importers a way to reduce their international shipping costs. Although the study suggests that not all cargo owners will benefit, those in regions with hub ports are likely to do so. However, to realise these gains, some ports will need to invest in upgrades and harbour dredging to become big-ship capable.

The Kotahi/Port of Tauranga and Kotahi/Maersk agreements facilitate this by providing investment certainty for the Port of Tauranga and other participants in these agreements.

The study uses 2012 data as its base. But is this data still relevant, given changes since then?

The study uses data from the National Freight Demand Study 2014 and data from the Freight Information Gathering System - both for the 2012 year.

Since 2012 there have been a number of changes affecting the flows of containerised cargo in New Zealand. These changes include:

  1. International shipping has recently ceased to Port Taranaki. This will mean that the costs in Scenario 1 (status quo) are now slightly understated, as they do not include all costs cargo owners in Taranaki are currently facing.
  2. The Kotahi/Port of Tauranga alliance and Kotahi/Maersk agreement also have the potential to change domestic freight flows in the future. The impact of these agreements on the costs of the status quo is unclear at this point.

The data is still relevant. Changes that have occurred since the study’s base year of 2012 serve to reinforce the acknowledgement in the study that the sector is dynamic and likely to evolve in response to market factors.

Why does the study only focus on international containerised freight?

International containerised freight is the focus of the study because (in the Ministry’s view) the trend to larger international container ships will drive change in New Zealand’s port sector and wider freight system over the next 30 years.

For New Zealand, 28 percent of international sea cargo is containerised, but the value of containerised international sea cargo is 68 percent of all ship cargo.

In contrast, bulk cargo (ie cargo on ships not in containers) is unlikely to be subject to the same trends. This is partly because bulk cargo tends to carry lower value-to-weight commodities (for example, logs, fertiliser and stock-feed). For such products, any benefits from bigger ships are likely to be greatly outweighed by the increased costs of domestic transport.

How will this study help the freight sector with future investment decisions?

The study will add to the body of knowledge that informs the freight sector in its decision-making on planning for larger international container ships. This is important as larger ships will eventually drive change in the freight sector, affecting infrastructure decisions across the ports, coastal shipping, road and rail sectors.

The study also confirms the importance of taking a national and multi-modal perspective to the question of how best to plan for larger ships. For example it has identified that the road, rail and coastal shipping networks will be affected at some point in the future.

It has also made clearer that the trend to larger international ships presents opportunity but also risk for New Zealand.

What are the key assumptions and limitations of the study?

The key limitation of the study is that it does not consider how in reality the market might respond to each scenario. In that sense, it models what might be considered a “worst-case” scenario for domestic transport costs. This has been done because it is impossible to predict how markets might react.

The study also assumes 100 percent of international shipping cost savings are passed on to cargo owners, and this may be unrealistic. If only 50 percent of savings are passed on, then total operating costs increase by an extra three to four percent.

Also, the domestic freight task is overstated to a small extent, as data on empty container movements is poor. The freight movement model assumes one empty move for every full move. However, in reality there will be some level of container reuse and sharing.

In terms of the impacts of each scenario on specific ports, the study also does not consider two important factors. The first is the fact that all ports also have bulk cargoes, and in some cases these greatly outweigh the container traffic. The study does not provide a view on the economic viability of any port.

Finally, the study does not indicate preferences for any particular configuration of hub ports, and so does not consider the key strategic issue of resilience. From a whole of New Zealand perspective, maintaining a resilient ports sector that can continue to operate in the case of shocks is an important strategic consideration.

Why did the Ministry choose the ten scenarios in the study?

The Ministry picked the ten scenarios after workshops with various experts. We based the scenarios on the largest and busiest ports for container freight, and ensured the scenarios provided geographical coverage. The choice of scenarios are not an indication of preference, nor a prediction of the future.

We recognise many possible scenarios exist, but (as with all future scenarios projects) there was a need to restrict the analysis to a practical number of scenarios.

Were exporters consulted in the development of this study?

The Future Freight Scenario Study (FFSS) and the National Freight Demand Study (NFDS) were initially commissioned to be developed and delivered simultaneously. Exporters were consulted in the early stages of the combined studies, to help determine volumes of containerised freight, mode shares and movements between regions.

Soon after, the Ministry decoupled the projects. The NFDS was completed in March 2014.

Deloitte did not consult exporters again after completing the NFDS or during the progression of the FFSS. At that stage, Deloitte consulted the 10 container ports, the international shipping lines, KiwiRail and the NZ Transport Agency. However, data collected from exporters during the initial consultation was used in the FFSS.

In the FFSS, Deloitte modelled scenarios to reflect how freight flows might change as ship size increases and the number of ports servicing international shipping reduces. In reality, where such changes result in inefficient freight movements, exporters and freight service providers will find or create different freight routes.

Because the freight sector could react to changes in freight flows in many ways, Deloitte decided not to ask individual exporters what they might do in response to future changes.


[1] Tonne kilometres is the volume of goods multiplied by the average distance they travel.