^ Delwaide Dock at the Port of Antwerp
Image Courtesy of Arminius from nl at https://en.wikipedia.org/wiki/File:Zicht_op_het_Delwaidedok.jpg
How Big is Too Big?
Perhaps it is their length that makes them look mammoth. Or the endless rows of stacked containers. Be as it may, latest generation container ships carry over 19,000 containers of twenty foot equivalent (TEU) size. And by the looks of it, they are about to get bigger.
MSC Oscar is the largest-capacity container vessel in the world at present with a 19,224 TEU capacity. It captured the top spot in January 2015 after ending the short, two-month reign of the 19,000 TEU CSCL Globe. We may well see 21,000 TEU capacity ships by 2017.
Container ships are the veritable work horses of the global economy when it comes to transporting consumer goods. Please note, shipping carries 90% of the globally traded merchandise.
Large ships offer numerous cost and environmental advantages. But these merits seem to be reaching a point beyond which they will offer diminishing returns. Size may well turn into a tumor for many.
The Hunt for Economies of Scale
Enormity of ships is a matter of dates and the trade lanes they ply in. Mega ships of the 1990s and the 2000s can hardly be described as colossal in the present era.
Largest ships operate on the Far East to North Europe route because the route demands large cargo volumes. Also because this lane is long enough for large ships to realize cost savings – any fuel-powered vehicle offers best fuel mileage when operated at constant speed over great distances.
As latest generation large ships make the earlier ones useless along a certain lane / route, the latter shift down to lanes that are ok with them. This process repeats to ‘smaller’ lanes.
Containerization lowered maritime transport costs and boosted global trade to unprecedented levels. Price competition is the main driver of the container shipping sector.
Few operators make hefty profits. Shipping companies therefore look to profit from economies of scale by engaging large ships. If one company orders a mega ships, others have to follow. And there starts the size race!
Observers expect the present generation of container ships to hit 22,000 TEU capacity. Micro optimization will create additional capacity. The length will not exceed the current maximum of 400 m by much. The next generation would be 24,000 TEU or more with length of about 456 m.
Bigger is Not Always Better
Large ships transport more cargo per unit consumed fuel. They are more stable than smaller ships and this adds to their fuel-mileage advantage. Burning less fuel means they emit less pollutants.
Cost of container ships is classed as:
- Capital Costs
- Operation Costs
- Voyage Costs
As compared to the previous generation of 15,000 TEU ships, the capital, operational, and voyage costs of the latest generation 19,000 TEU ships is much lower. But these savings are 4-6 times lesser than those from the previous round of upsizing, the round that gave us 15,000 TEU ships.
Next, 55-63% of these cost savings come from slow steaming. And the use of more efficient engines created another substantial chunk of savings. The size expansion did not contribute much.
Slow Steaming is the deliberate running of ships at less than maximum speed to lower fuel consumption. This is a clever tactic by the shipping industry to prevent laying up ships during the present era of overcapacity.
Now, shipping is a cyclical industry. Owners order new ships when trade volumes are on the rise and freight rates are moving upwards. Brisk shipbuilding creates overcapacity that leads to a slump and drops freight rates.
Although overcapacity is natural, the present disconnect between the growth of global trade and the expansion of container ship capacity is exacerbating the issue to great proportions. These two rates were in sync for the 1996-2007 period.
But while the global financial meltdown dampened global trade, the former continued along its high growth trajectory after 2008. McKinsey estimated this demand-supply divergence at 20% in 2015 and warned it will continue till 2019.
Container ships are longer than tankers, bulk carriers, or cruise ships. The volumes of tankers and bulk carriers are larger though. Between 1996 and 2015, container ship sizes grew by 90% vis-à-vis 55% for bulk carriers and 21% for tankers.
The said economies of scale are also route-specific because the longer the route, the more a ship can save. When the latest ships displace their predecessors to a second-rung lane, the displaced ships lose some of their savings because the second-rung lane is not long enough.
In order to maintain cost advantage in the second-rung lane, the displaced ships have to cut down unrealistically on port time and operate at a high utilization factor.
Utilization factor is the percentage of cargo capacity of a ship actually utilized. A 3-5% fall in utilization erases the cost advantage that the displaced ship has over smaller ships in the second-rung lane.
An 18,000 TEU ship will have to operate at 91% utilization to be more viable than a fully loaded 14,000 TEU vessel. Actual utilization factors are much lower.
When the race begins, shipping companies do not consult other players in the shipping transport chain who may not necessarily favor large ships:
- ports and the river channels and bridges around them have to expand expensively to host larger ships, more intense traffic peaks, and congestions – all this can cost about $0.4 billion a year
- cargo owners require reliable and frequent transport links while mega ships lower this frequency
- traffic peaks introduce congestions and delays for truck, train, and barge operators
- logistics operators and freight forwarders are hit financially by delays and disruptions of mega ships
Select shipping lines dominate the lucrative Far East to North Europe lane. Only these have the connections to muster enough cargo and load-unload it at trans-shipment hubs.
But the size race has made smaller players order latest generation ships. Where will they find the cargo at a time when overcapacity plagues the shipping world and global trade refuses to rise substantially?
Allianz estimates a $1 billion loss for the capsize and sinking of one such ship and $2 billion for its collision with a smaller vessel. Current salvage technology will not help with the salvage of mega ships. And there are scarcely any yards to repair these giants. This makes insurance exorbitant.
Mishap of a mega container ship disrupts supply lines more intensely than the accident of a smaller ship because the former carries more cargo. And their size means they visit ports less frequently and, usually, less punctually.
It might appear that the size race (or rage?) in the container shipping industry will soon end. After all, market cycles in all industries always balance supply with demand.
The incentives and subsidies available for upsizing prevent this. Then again, ports and shipping companies operate in isolation when defining their objectives. The situation calls for a more coordinated and integrated approach.
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