Adriatic ports after the storm

Adriatic ports after the storm
By Clare Nuttall in Koper and Glasgow May 18, 2020

Koper, Slovenia. February 2020. Outside Slovenia’s largest port, Luka Koper, on the country’s small sliver of Adriatic coast, huge cargo ships queue along the horizon. Dockside cranes tower above the pretty cafes and souvenir shops along the seafront, and an elderly man dives into the water for his morning swim just metres from where a huge container ship is unloading. 

The port is at the centre of city life in Koper, which has been a port city since Roman times when it was known as Insula Caprea, or Goat Island. The former island city, now part of the mainland thanks to a causeway built two centuries ago and extensive drainage works, is less than 20 km from the larger port of Trieste, just across the Italian border.

They are among five major ports all clustered around the top of the Adriatic Sea: Trieste, Ravenna and Venice (Italy), Koper (Slovenia) and Rijeka (Croatia). Their location in the northern part of the sea makes them gateways to serve not only their own countries but those of Central and Northeast Europe, in particular for Chinese imports arriving in the Mediterranean via the Suez canal. 

Before the coronavirus (COVID-19) pandemic disrupted global trade and supply chains, the ports of the northern Adriatic were expanding. Much of the existing traffic through ports in the region is with China, which has aroused Beijing’s interest in developing one — or possibly several — of the north Adriatic ports. 

Trade between China and the EU averages over €1bn a day, according to European Commission data (though a drop is anticipated in the first half of 2020 due to the coronavirus pandemic). In 2018, the EU’s imports from China alone amounted to €394.8bn. China holds first place among exporters to the EU, and is the bloc’s second-biggest export market.

This makes the ports in the region interesting for China as part of the Belt and Road Initiative (BRI), Beijing’s ambitious strategy to connect Asia with Europe and Africa by facilitating trade along land and maritime corridors. 

A changed world 

But in the three months since February, the world has changed. Global trade, including between China and Europe, is expected to see a dramatic slump in the first half of this year as the coronavirus pandemic causes shutdowns in production and sends global supply chains into disarray.

Earlier this year when the coronavirus was mainly a Chinese problem, questions surfaced about the viability of investment plans connected to the BRI and based on trade with China; now the questions concern globalisation itself. 

There is also speculation that the crisis could force China to put some investments on hold at least for now — even before the pandemic Chinese growth was slowing somewhat — though at the same time Beijing is seeking to use the crisis to underline its soft power. This point is made in a report by New York-based consultancy Rhodium Group, which explores whether the crisis will be a “booster or brake” for the BRI. It finds that loans to BRI destinations were already slowing before the pandemic, which went on to put a huge strain on Chinese businesses and the economy. 

“This means intense pressure on the domestic financial system, which is colouring the cost-benefit assessment of commitments overseas,” says the report. However, it adds: “At the same time, opportunities for China to play a saviour role worldwide have boomed, and China’s money stretches further as conditions around the world deteriorate and desperation sets in. There is obviously a foreign policy impulse for Beijing to make use of these circumstances, burnishing its investment portfolio at the same time as it bolsters China’s diplomatic image as a dependable development partner."

Meanwhile, Felix K. Chang, senior fellow at the Foreign Policy Research Institute (FPRI), writes of the “demand for demand”: If the world is plunged into a long period of low economic activity, that will negate the need for new BRI infrastructure. 

“With global demand savaged for at least one year and, after a short recovery, perhaps dulled for several more, a quick return to booming global trade seems unlikely. But that is precisely what is needed to ensure that new BRI-financed infrastructure is sustainable. Otherwise, any new BRI-funded road, railway, port or airport would merely compete against existing transportation infrastructure, which could make both unprofitable. That, of course, would leave borrowers worse off,” Chang writes in a paper published by the FPRI. 

He hones in specifically on Italy, as both the first European country to experience a huge COVID-19 epidemic (as of mid-May Italy had reported 223,095 cases and 31,368 deaths), and the first G7 member of the BRI. “Today, with a new recession likely, Italy may require some sort of help from the rest of the European Union to refinance its debts before it can generate any meaningful demand of its own. China may have hoped that Italy — with Europe’s third-largest economy — would be a cornerstone for the BRI. But for now, Beijing may have to be satisfied with Hungary, which remains keen on a BRI-financed railway to Serbia,” argues Chang. 

Six-month wonder? 

However, Elen Twrdy, head of the Department of Transport Technology at the University of Ljubljana’s Faculty of Maritime Studies and Transport, points out in an interview with bne IntelliNews that infrastructure investment is a long-term game, and while it’s still unclear what the shape of the recession will look like and how long it will last, the current crisis, while deep, may not have a long-term impact. As a crisis caused by heath problems rather than problems in the financial or economic systems, some economists believe it will be followed by a rapid rebound once a vaccine is found. 

Twrdy acknowledges that it’s difficult to say how serious the impact of the pandemic will be, but once it's finally beaten, “we will forget about it and the traffic will be normal again. Infrastructure investments are for the long term.” On the other hand, she warns, other issues that are slower to unfold could alter the case for investment in the longer term, in particular climate change that could affect both global trade and shipping routes. 

On May 15, Twrdy’s prediction was at least partly realised as Slovenia became the first country in Europe to declare the epidemic to be over. 

While it’s still very early days, developments such as this — together with passing the peak of the epidemic in Italy, and the easing of lockdowns in much of Central and Southeast Europe — give hope that an end to the crisis is in sight, and allow attention to turn to future plans and strategies. 

Before the pandemic, throughput data from the North Adriatic ports showed total volumes steadily rising at Koper and Trieste since the international economic crisis a decade ago, and at Rijeka since Croatia finally emerged from recession in the mid-2010s. 

Source: Ports' data/bne IntelliNews

The North Adriatic ports have sought to market themselves by pointing out that docking in the area then transferring cargo to road or rail can considerably cut journey times to Central and parts of Northern Europe compared to sailing around the continent to the North Sea or Baltic ports, with associated cuts in costs and pollution. For example, the Port of Venice stresses that 97 kg/teu of carbon dioxide are saved by choosing the Port of Venice rather than a northern European port to transport containers from Asia to Munich.

For China, initially the focus in the region was further south as China Ocean Shipping (Group) Company (COSCO) had already two terminals at the Greek port of Piraeus four years earlier. In 2016, COSCO acquired 51% of Piraeus in a €280.5mn deal. The port was seen as a Chinese gateway to Central Europe via the Balkans, and over the last few years China has been investing in road and rail infrastructure across the Balkan peninsula, through projects such as the upgrade of the Belgrade-Budapest railway. 

Despite this, Beijing has now turned its attention to ports in the northern Adriatic, a move that has already resulted in Italy becoming the first G7 nation to join the BRI, and discussions about the development of an Italian port — most likely Trieste — as part of the BRI. 

Italy initially proposed the port of Genoa but China was more interested in Trieste due to its location on the axis from the Baltic to the Adriatic seaports. A memorandum of understanding (MoU) between the two countries was signed in March 2019 as a first step towards greater co-operation on investment, trade and infrastructure. The European Commission expressed concern about the MoU (even though some of its eastern members are already members of the BRI), but Italy saw it as a chance to boost its trade and investment links with China. 

There were media reports at the time that Italian officials had claimed China made a “mistake” when choosing to work with Piraeus, and was looking for alternatives. 

However, Frans-Paul van der Putten, senior research fellow at the Clingendael Institute, says Beijing appears keen to develop ports in both Greece and the northern Adriatic. 

“Regardless of whether Chinese companies enter into a lasting commitment with one of the North Adriatic ports, China seems quite determined to keep developing Greek as well as Adriatic ports as gateways to Central Europe, as a long-term aim to strengthen China-EU trade in goods and to increase Chinese influence over the main trade routes,” he tells bne IntelliNews

Confirming this, in November 2019 China and Greece agreed to go ahead with COSCO's €600mn investment aimed at turning Piraeus into the biggest commercial harbour in Europe, and enhancing its role in trade between China and Europe.

At the same time, the Adriatic ports also anticipate a future increase in traffic, and several are in the midst of expansion plans.

Luka Koper has secured permission to increase the capacity of its container terminal to at least 1.5mn twenty-foot equivalent units (teu) annually, which is due to be completed in 2021. Work on a new roll-on roll-off berth for car-carriers is also underway. 

An even larger project is the expansion of the Koper-Divaca railway that links the port to the Slovenian capital Ljubljana, then on to Central Europe. At €1bn this is the country’s most costly infrastructure project ever. 

In a sign that the pandemic has not altered Ljubljana’s commitment to this long-term investment, on May 8 state-run company 2TDK selected ten firms and tie-ups to proceed to the next stage of the tender to expand the line. The bidder eventually selected will be responsible for building a second line of the railway that winds its way through the rugged countryside, hugging the side of mountains and through narrow rocky channels, all contributing to the high cost of the project that has made it a controversial decision for Ljubljana.

It faced strong opposition mainly because of questions over transparency and the huge cost. A 2017 referendum endorsed the project, but the result was later annulled after a successful appeal by Vili Kovacic, a pensioner and leader of the Taxpayers Standing Our Ground group. Kovacic claimed irregularities such as using budget funds to finance the referendum campaign influenced the outcome of the vote. Slovenia’s then prime minister, Miro Cerar, stepped down immediately after the Supreme Court announced its verdict in favour of Kovacic. 

Slovenia then held a second referendum on the €1bn project. This time there was an extremely slim majority against it, but turnout was so low that it missed the 20% threshold for the referendum to be successful, so the project eventually went ahead. 

In Croatia, Minister of the Sea, Transport and Infrastructure Oleg Butkovic talked in December 2019 of a “renaissance” on the Croatian coast, with plans to invest €100mn in Croatian ports. 

At the largest Croatian port, Rijeka, the Croatian subsidiary of Manila-based International Container Terminal Services Inc. (ICTSI) announced in 2019 it is investing in new infrastructure to turn Rijeka into the first terminal in the northern Adriatic that can accommodate ships of up to 20,000 teu.

The Port of Rijeka’s strategic goals for 2030 are to “exploit its potential and advantages of its position on the Mediterranean and Baltic-Adriatic TEN-T corridors, remove bottlenecks and upgrade the previously identified infrastructure projects within the European Union transport sector,” says a document published by the port authority. Other options it plans to explore are further expansion of the port, building a container terminal on the nearby island of Krk and new infrastructure to receive large cruise ships.

Meanwhile, Italy’s VGate Srl outlined proposals back in 2018 to build a multi-purpose terminal 2.3 km offshore at the port of Chioggia, which comes under the Port of Venice authority.

​In addition to the potential major Chinese commitment to Trieste, Hungarian government decided in 2019 to pick Trieste for its new port and logistics base at a cost of €60mn-100mn. Currently Koper is the main maritime gateway for Hungary, handling over three-quarters of its container trans-shipments. 

Not a zero-sum game 

However, Twrdy believes Hungary’s decision to build the logistics base in Trieste doesn’t harm Koper — just as the Koper-Divaca project is still viable whether China choses to develop Trieste or not. In fact, Twrdy says in a telephone interview with bne IntelliNews, given the efforts to develop both ports, “maybe it will be even more interesting to build the missing link between Koper and Trieste, and connect this platform with the second track [of the Koper-Divaca railway] and with Slovenian Railways.”

Just a few months after the MoU between China and Italy was signed, a Slovenian delegation visited China in June 2019 to sign up to the BRI. During the same trip, a co-operation agreement was signed between Luka Koper and China’s Ningbo Zhoushan Port Group, with a focus on intermodal transportation. Ningbo is the largest operator of ports in Zhejiang Province on the East China Sea coast.

Chinese companies have also expressed an interest in the Croatian ports of Rijeka and Zadar. 

“I don’t see a clear sign that the Chinese government and Chinese companies favour one of the regional ports over the others,” says van der Putten. “Just like Piraeus is not the only Mediterranean or European port in which COSCO has invested, it seems that China is interested in developing at least Rijeka, Koper and Trieste as potential hubs on the route between China and Central Europe. If none of these ports possesses a definite advantage over the others, a decisive factor in the future could be Chinese FDI in a terminal (should such an opportunity arise: not co-financing of port improvement but rather acquiring a controlling stake in a container or other terminal) and/or a close diplomatic alliance at the national government level.”

The North Adriatic ports are also significant due to their position at the southern end of the Baltic-Adriatic Corridor, one of the most important trans-European road and railway axes across Central Europe. 

Even before the current crisis, it was unclear where Chinese investment in the area would be directed. However, says Twrdy, “They definitely will come to Trieste or near to Trieste because the cargo that goes from the ports of the North Adriatic to Central Europe is the shortest way.” 

According to Twrdy, the decision is likely to depend on the infrastructure both in the port itself and in the hinterland. Currently the latter is better in Italy, as the second track of the Koper-Divaca line is not yet built. However, she adds, “both ports [Trieste and Koper] are in great positions, have great potential and the Chinese will definitely have a big influence … because they have a lot of cargo to be transported. Maybe if one port is too small they will choose two or three in the North Adriatic to be their gateways to Europe.”