From Ship to Terminal: How Naval Logistics Burst into Grain Transhipment


The original article is available on the link

Konstantin Tkachenko, Natalia Kuzio,

The agricultural sector draws representatives of all sorts of businesses like a magnet. Four years ago, Smart-Holding industrial and investment group decided to conquer grain transhipment in volumes tangible for the market. At some point, the Group saw that, against the backdrop of the missing government support, shipbuilding business was shrinking and no longer required such huge production facilities. Then a decision was made to reorganize and condense the shipbuilding clusters. It was decided to create full-fledged transhipment terminals based on the unutilized capacities of the shipyards. In particular, Nikolaev shipyard of Smart Maritime Group (formerly Chernomorsky Shipbuilding Yard or ChSY) has taken this path. The shipyard is creating a production and logistics hub in an industrial park format with an emphasis on cargo transhipment. Having invested USD 6 million at the first stage, Smart-Holding set up a moderate-sized grain terminal on the premises of the plant. In the first year, they operated jointly with a partner company, but quickly got their hand in the business and switched to independent operation.

Now, the terminal operates successfully. In the best year, the volumes of transhipment here grew up to 500,000 tons. Appetite comes with eating – they do not stop at what they have achieved and are ready to handle twice as much. In parallel, the Group is working to create an industrial park on the territory of the plant. Together with Alexander Yurkov, the CEO of Naval Logistics (the project’s management company), we talked about the stage of the project implementation, the development of grain transhipment and plans to enter river logistics sector, as well as discussed how shipbuilders feel working in the agricultural business. Alexander, why did you decide to switch from shipbuilding to the grain market?

Alexander Yurkov: We have not left the shipbuilding business. We preserved the shipbuilding facilities and compactly condensed them in the corresponding cluster. This was dictated by an objective agenda – the centres of shipbuilding shifted to China and South Korea, and Ukraine gave up on full-fledged naval shipbuilding programmes (ChSY was mainly designed for military orders). Then we first started looking at grain transhipment. As we had no experience, we involved a partner and began operating as stevedores. The partner company was selling a package rate at our terminal and we were just loading the ships. In essence, they were in full contact with a customer and handled cargo acceptance, warehousing, accumulation, quality and quantity assessment, while we only dealt with transhipment.

During our operation in this format, we learned how to deal with transhipment, we managed to gradually renovate our warehouses, portal cranes, and organized a mechanized way of unloading rail cars and vehicles. In November last year, we completed the acquisition of real estate, which allows us to deal with land issues – either to rent it or to buy it out. After that, we can talk about creating an investment product for our future residents. We now provide a full range of services, including laboratory testing. Initially, you did not want to provide a full range of services due to lack of experience in the industry, or are there other reasons?

Alexander Yurkov: Due to lack of experience, in the first turn. When working jointly with a partner company, we observed how everything was operated, we studied feedback, analysed what we like and what we do not like. Thus, we realized how to optimize the production costs, how to make the production process more efficient, etc. Only having learned the nuances we decided to do it ourselves. In the first year of operation, you transhipped 500,000 tons, then the volumes dropped to 300,000 tons. What is the reason for that?

Alexander Yurkov: The first factor is very subjective. The company we cooperated with sometimes received negative feedback. They were also gaining their own experience, and some customers did not return. The second factor is objective one. The competitive environment grew up substantially, the situation become heated up, especially in Nikolaev, and the export market changed in favour of a larger deadweight.

Previously, the segment of vessels in the range from 3,000 to 24,000, we operate with, was quite large. Together with our partners, we were able to maintain our market share. In 2018, it was forced to retreat by vessels of Handy size class and above. The trade war of the USA with China began. Many large consignments of grain went to China, India, and Southeast Asia. Consequently, our flow waned. It is more difficult to compete in this segment due to the specific characteristics of the terminal. When choosing a terminal, a trader will most likely focus on the one where it is able to operate faster. If Yuzhny and Odessa are fully occupied, why would it bring [its cargoes] to you? Is it because of lower rates?

Alexander Yurkov: Lower rates, among other reasons. Yet, it is not only limited to that. From the point of view of overland logistics, Nikolaev is more interesting, I would say, much more interesting than Kherson. In addition, our advantage is that we can offer segregated storage. We have many unused warehouses on the premises left from the times of the shipyard, which we converted into bulk ground-level warehouses for grain. Additionally, we have a block of warehouses where one can store 45,000 to 60,000 tons of grain at a time.

The offer of 13 completely autonomous sections, where cargoes of various quality for different customers could be received, is something that silos cannot do, because they have “non-personalized” storage. This enables our customers by their supplies to manage the quality of the shipload that is being prepared, 24/7. When designers were making a concept of a future large terminal for us, we deliberately gave preference to large ground-level storage facilities rather than silos. We assumed that we would have two or three large customers for whom it would be essential to have segregated storage with an option to manage quality by themselves. In short, everything is for the customer! Speaking about overland logistics, how is grain mainly delivered to Naval Logistics?

Alexander Yurkov: It was always in different ways. From the very beginning, 30% was coming by rail, and 70% by road. Then, the share of railway supplies became equal to supplies by road. Last year, railway accounted for about 70% of overland logistics.

We work with different types of commodity: grain crops, oilseeds, oilseed cake/meal, other processed products. We also learned how to quickly unload freight cars. In case of block train shipments, we can unload up to 90 rail freight cars per day. We have two of our own diesel locomotives (TGM-23 and TGM-4), with which we carry out shunting operations. What did you have to revamp and re-equip for the grain terminal? How much did it cost?

Alexander Yurkov: We repaired the warehouses, portal cranes, built a station for unloading of vehicles, a station for unloading of railway cars, installed automatic samplers and weighing systems, equipped the laboratory, and partially “mechanized” the warehouses. On top of that, we made a complete overhaul of the Southern Embankment, 540 meters of the berth, and also renovated the railway tracks. The investment amounted to about USD 6 million. Who is your customer at the terminal today?

Alexander Yurkov: Today these are oil producers that tranship oilseed residues (cake/meal), moderate-sized traders that want to do business, but are limited in their working capital and therefore cannot plan their sales as transnational companies. Those who load small vessels (from 3,000 to 24,000 tons) for short distances (to Turkey, Egypt, the Mediterranean, North Africa and the Middle East). The permitted draft at our berths today is 6.7 m on the Southern Embankment and 9.0 m on the Western one, where we load large-size ships. We load vessels up to 7,000 tons using our own portal cranes (we have 4 portal cranes), and large-size vessels up to 24,000 tons – using hired/third party floating cranes. For the future, we consider dredging of berths to the draft permitted in the Bug-Dnipro-Liman Channel, and upgrade of the loading facilities. And what volumes can you tranship during a year?

Alexander Yurkov: Our equipment is sufficient for more than a million tons. At the recent Grain Ukraine conference, a co-founder of RISOIL S.A. Shota Khadzhishvili said that most of the imported barges that Ukrainian businesses buy today are floating scrap metal. Therefore, local shipbuilders need to focus on building barges. Do you agree with this opinion?

Alexander Yurkov: I fully agree. Indeed, almost the entire fleet that is now on the Dnieper river, except NIBULON’s fleet, is utter scrap metal. Its replacement, renewal is a rather promising task for our shipbuilders. Speaking in general, in my opinion, the only way out for the Ukrainian shipbuilding sector is the construction of small-deadweight vessels and river fleet: barges, tugs, some kind of transloaders, special-purpose fleet, port fleet, etc. And if the state takes part in this process, first of all, by providing affordable financing, that would be great. Have you considered this business area for yourself?

Alexander Yurkov: Yes, we have plans to set up a shipping company, for which we can effectively build a fleet of vessels ourselves. At the first stage, these could be barges, tugs, transloaders for road transhipments. And at the second stage, we consider building a fleet for the Dnieper river. Handling cargoes along the Dnieper river is part of the plan on establishment of an industrial park. Yet, so far, the priority is land issues at the pilot site in Nikolaev. Once we solve them, then we will start moving further on. Tell us more about the industrial park, please. The terminal is just a small part of it, is not it?

Alexander Yurkov: The project of the industrial park at Smart-Holding includes several sites. This is the site of our Nikolaev shipyard, Ochakov port and the area of KhSY that is not utilized in shipbuilding activities. Nikolaev was picked as the pilot site for the project. This is where the project management is concentrated. Part of the area for the terminal here occupies about 30 hectares, and our total area is 200 hectares. We plan to make a full-fledged industrial park on it. By and large, what we are talking about in the context of the terminal and the agricultural sector is one of the services of the park. At the same time, stevedoring service is not limited to handling of grain cargoes. The second service is related to the railway. We plan to build a railway station on our site that could significantly increase the freight turnover of Nikolaev railway junction, including a possibility to also provide services to consignees outside the industrial park. For example, in sea and river ports. We plan to bring in investors – residents of the park and not only grain traders and grain processing operators, but also investors from other industries (like mechanical engineering/machine building, logistics, etc.). But industrial parks in their current status do not have many preferences to offer to potential investors.

Alexander Yurkov: Indeed, we are largely dependent on changes in legislation that regulates operation of industrial parks. That is why participation in legislative drafting, law making is something we should not disregard. And yet, not the whole matter rests on this question. For example, for many Chinese companies this asset is interesting even without legislative preferences, since Ukraine's transit opportunities have high potential. We made a presentation of the industrial park and options of logistics from China to representatives of CRCC and the Chinese chamber of commerce and industry. The interest was very lively. In view of the geographic location, they were also interested in Ochakov site. After bringing in an investor, will you consider grain transhipment as an independent business?

Alexander Yurkov: Not necessarily. Once everything works out well, we will have investors who will be engaged in exports, and grain processing, and our task will be port logistics and other infrastructure services. Who is an ideal customer for this project? Earlier you said that these are multinational companies, but many of them already have terminals...

Alexander Yurkov: Not all multinational companies are now represented in Ukraine, and most of those represented here, as a rule, are not happy about their partnerships with Ukrainian companies.

Working in the format we offer is an opportunity to build a business on your own, to build relations with the authorities and operate without being tied up to the state infrastructure. There is an opportunity to develop securely, to depend in your planning solely on how the market moves, and not on political fluctuations, changes or shifts in power, etc.

Another important competitive advantage of ours is the railway. This is a bottleneck for all ports. Few operators are able to debottleneck it due to the lack of space, while we have enough space to build a heavy-duty train station for ourselves.

There is a possibility for any sort of logistics: by rail, road and river, not to mention the infrastructural development of the site. Speaking about some particular production cycles, we have a possibility to arrange supplies of gas here in a sufficiently large volume, as well as supplies of water. We can also offer waste water disposal, and electricity connection.

When we talked about the development of the part hosting the terminal in terms of agricultural cargoes, we, of course, counted on transnational companies and leaders of the Ukrainian agricultural sector, because they work (provide turnover to the terminal) in a sustainable manner, regardless of the market price. And if these are also vertically integrated companies with their own crop production business, they would be our ideal customers then. In the context of the industrial park’s residents, too. Thank you for the interview!