The Big Ship Squeeze
The Big Ship Squeeze
Excerpt from: American Shipper | By: Eric Johnson | November 25,2015
There is a phenomenon in municipalities throughout North America where privately-owned sports teams expect public entities to build gleaming stadiums in which their teams will play.
In most instances, private ownership groups place the burden of stadium infrastructure investment and construction on public entities and paint it as a mutually beneficial situation.
On the one hand, businesses in the cities in which these stadiums are built derive economic benefit from game-day activity, not to mention the more intangible aspect of civic pride. The cities also capitalize on leasing the facility to the team. On the other hand, the teams benefit from using brand new infrastructure without any upfront investment, and with only the cost of a lease as an ongoing fixed expense.
This scenario might sound familiar to shippers, carriers, and port authorities. There is a theory that the liner industry’s drive to massively increase the size of its vessels over the last decade has placed an undue burden on the public sector, since it is often publicly funded ports that are tasked with building the infrastructure to keep pace with the biggest class of vessels.
In May, the International Transport Forum (an agency within the Organization for Economic Cooperation and Development) released a report detailing what it considered to be the impact of mega-vessels.
While much of the report focused on the diminishing returns that these larger vessels provide in supply chain cost benefits to shippers and carriers, a more controversial stance was ITF questioning whether the public sector was being disadvantaged by the need to create infrastructure to accommodate the larger ships.
“A substantial share of the dredging, infrastructure and hinterland connection costs are costs to the public sector in many countries,” the report said.
In October, the author of the report, ITF’s administrator for ports and shipping, Olaf Merk, described that message at the TPM Asia conference in Shenzhen in clear terms.
“There is public policy in place to stimulate development of mega-ships, but there doesn’t seem to be a lot of benefit to the public,” he said. “It’s a sort of public subsidy of mega-ships.”
Merk noted, as he did in the report, that while containerships have always grown in size over time, they have become bigger at a faster rate than in the past.
“The benefits of mega-vessels (i.e. lower vessel costs per TEU) are offset by increased handling costs per TEU,” he said. “Combine those two curves and you reach a point where the total transport chain costs actually start going up. Have we reached that point? Are we beyond that point? And the vessel cost savings are theoretical, because they assume the vessels are filled.”
The counterpoint to this argument is that even if the public sector is subsidizing public port infrastructure that benefit has trickled down to consumers. The report suggests as much.
“The main beneficiaries of mega-ships are supposed to be the container-shipping lines, but mega-ships have fueled ship overcapacity that has depressed freight rates and profit margins of shipping lines,” the report said. “In this indirect way, mega-ships have contributed to lower maritime transport costs that might have benefitted shippers and consumers.”
But Dan Smith, principal with The Tioga Group, a supply chain consulting firm, said the benefits to cargo owners might only be short-term.
“The mega-ships have benefitted cargo owners and [non-vessel-operating common carriers] by creating overcapacity, which has driven down rates,” he said. “But those same cargo owners and NVOs have been paying higher drayage rates and congestion fees due to mega-ship impacts. If the rates come back up, cargo owners and NVOs will be net losers.”
Andy Lane, a Singapore-based port consultant with CTI Consultancy, made the argument at TPM Asia that existing terminals can’t be considered unduly burdened by mega-vessels when they’re not even being close to fully utilized.
“Assets that are only 48 percent utilized, I’m not sure how that lines up with ‘congestion,’” Lane said.
During his presentation, Lane showed a chart estimating that the 12 largest cargo ports in the world by volume are only using 48 percent of their capacity in terms of throughput per quay crane. By improving the average productivity of those cranes from 28 moves per hour to 32 moves per hour and increasing the number of hours the cranes are in use by roughly 25 percent, the 12 gateways could unlock $800,000 in revenue per container crane—an estimated $1 billion across all the quay cranes at those collective ports, according to Lane.
“There’s plenty of capacity there,” he said. “We’re just not making use of it.”
Smith disagreed, stating that “ignores the cost of additional labor and overtime hours to unload the same cargo volumes in a more condensed time span. Mega-ships achieve economies of scale on the water but create higher unit costs on land. The impact of terminal diseconomies is being reflected in declining terminal operator profitability, which will ultimately result in increased terminal cost to the carriers.”
He added that simply adding cranes to existing terminals to meet peak mega-vessel demand is no answer either.
“My question is why public entities should bear the cost of creating excess terminal capacity to accommodate mega-ship peaking and [vessel-sharing agreement] confusion so ocean carriers can protect their bottom lines?” he said. “In 2006 U.S. ports handled nearly the same volumes as at present, but with less labor and less congestion. The U.S. has about 85 container terminals and they average about two cranes per berth. If we need four cranes per berth at half those terminals to handle mega-ships, that’s 85 new cranes, or $850 million, even disregarding the terminal improvements needed to support them. Basically, the ocean carriers are asking for public subsidies.”
But Lane said that so-called mega-vessels (ships with capacities of 10,000 TEUs and above) should not be solely blamed for the congestion issues at ports worldwide, with a few exceptions. Mega-vessels are responsible for just 22 percent of the container volume in Asia, Lane said.
“Hard to say then that mega-ships are responsible for the meltdown,” he said, though certain ports may have it worse than others in this regard. “In Los Angeles and Long Beach, [for example,] 80 percent of volume comes from 20 percent of vessels so that is a bit of a mega-ship issue.”
According to Lane, when it comes to congestion, there is another dynamic at play.
“What causes the cargo surge is the mentality of loading ships at the end of the week in China [after factories work all week],” he said. “That’s what causes the peak in China and the [feeder] ports in Asia. This has existed for years, and big ships exacerbate this. If we persist with bigger ships, we maybe need to revisit this mentality.”
The ripple effect of this schedule dynamic is that ships sail on the weekends from China, then arrive collectively at Southeast Asian hubs, and then at ports in North America and Europe since most services sail at relatively similar speeds.
Robbert Jan van Trooijen, chief executive of the North Asia region at Maersk Line, agreed with Lane’s premise, noting that factories in Asia are effectively running seven days a week anyway.
Van Trooijen highlighted two other factors that create uneven cargo flow. He said 60 percent of monthly cargo gets shipped in the second half of the month because sales people realize they need to meet their monthly targets as the month’s end draws nearer. As a result, “end month calls tend to be oversubscribed and early calls tend to be undersubscribed,” he said.
Van Trooijen said another factor at play is that shippers tend to wait out carrier rate increases.
“Just before a GRI goes into effect, there’s a cargo rush,” he said. “And right after, shippers withhold cargo and wait for carriers to come off those higher rates. It’s a good bargaining tactic, but from a cargo-flow perspective, it’s not effective.”
These operational impacts on port congestion are somewhat of an ancillary issue to that of mega-vessels and the burden they place on the public sector.
ITF’s Merk said the driving force behind port authorities and their associated governmental entities investing in mega-vessel port infrastructure is a fear of being passed over for ports that do invest.
“Some ports try to look at the shorter term benefit of getting a few percent of market share from competitors,” he said. “The larger issue is whether they actually want this, or are fine with this development.”
Merk suggested that port clusters might need to work together more closely to avoid overlapping investment in port infrastructure. In recent months, such alliances have formed between Seattle and Tacoma, east coast Florida ports, and a group of Mediterranean ports.
“If ports work together, they actually have a lot of power and can be the influencer on carriers,” he said. “It’s not realistic that ports say ‘this is the limit’ [on vessel size]. More realistic is that ports and public interests set a limit on what is publicly paid for versus what carriers ought to contribute.”
These so-called alliances could also make the distribution and consistency of vessel calls better throughout a cluster.
“Mega-ships have redefined the word ‘peak,’” he said. “It’s comparable to restaurants, where a whole busload of customers comes in at the same time and wants to be fed at the same time. Restaurants would prefer a more spread-out approach to customers. And ports with one weekly mega-ship call, what goes on in the terminal is conditioned by this one call.”
Much of the ITF’s report is centered on the Asia-Europe lane, where the most recent generation of vessels serve due to a lack of suitable port infrastructure (and often demand) in other lanes. And the report found that services deployed with the latest generation of vessels don’t necessarily call at fewer ports—the implication being that each of those ports must individually build infrastructure to allow the larger ships to call them.
“The introduction of a new generation of containerships has for the moment not led to a further port concentration: a similar number of ports are included in strings of 18-19,000 [TEU] ships, as compared to 15-16,000 [TEU] ships,” the report said about the Asia-Europe trade. “This might be related [to] sluggish demand that makes it challenging to fill up the very large containerships. Additional explanations might relate to the complexity of filling very large ships and the prohibitive costs of feeder legs or land transport legs needed in case there is no direct port call. It is the question if the current period is a transition period towards more port concentration, or if the current situation could be considered an equilibrium situation.”
The report gets specific about what infrastructure projects port authorities must undertake to serve these ships, including dredging, bridge adjustments, lengthening quays, crane investments, yard space, and more.
In one example, the report delved into depth constraints at Germany’s Port of Hamburg.
“The largest container vessels currently calling at the port can only do so during tidal windows that allow a maximum draft of 14.8 meters inbound,” the report said. “Outside these windows, the maximum draft allowed would only be 12.8 meters. Despite this, the largest containerships with a draft of 16 meters cannot call at the port fully loaded with the current capacity of the Elbe River. The beam of such ships is also increasingly a constraint, especially for river ports like Hamburg at which ships cannot pass by one another at some stretches of the river Elbe. The size of this type of vessel is a constant challenge for the harbor master’s office and such calls require a lot of beforehand planning. Hamburg Port Authority has invested in a sophisticated IT system to be able to overcome this challenge.”
The report noted that dredging to accommodate the ships, aside from the cost impacts, often brings with it major environmental opposition.
“Dredging is a sensitive issue in many places. In Hamburg, court cases initiated by environmental [non-government organizations] have delayed the planned dredging of the river Elbe, and have gone up to the European Court of Justice. Many dredging works not only deepen access channels, but also widen these. Dredging costs can be substantial and depends on different factors, e.g. the kind of soil. The external costs of dredging [such as the monetary value of environmental impacts] are more difficult to estimate,” it stated.
Amid this all, terminal crane productivity has risen, though the report noted “there are limits to increasing crane density.”
“Since 1975, the workload required by terminals to service containerships has risen by 709 percent, the average workload performed by each crane has increased 382 percent, but the number of quay cranes deployed to work a ship has increased by only 87 percent,” the report said. “Whilst terminal operators have been able to deploy additional cranes they have at the same time had to increase the utilization and performance of individual quay cranes by nearly fourfold.
“To achieve this terminals have either increased the proportion of time each quay crane is working whilst a ship is in the port, or have increased the number of moves each crane performs per hour. The ship-to-shore workload has become increasingly concentrated as the length-beam ratio has reduced,” the report added.
Merk suggested there is some finite aspect to this all.
“The sector regulates itself,” he said. “Shipping lines seem to be starting to realize that perhaps the maximum ship size has been reached. They realized that in the tanker industry—the theoretical size of a tanker is much larger than what is actually on the market. This could also happen with containerships.”