Mega ships: boom or bust?

Are mega ships the way forward? The debate rages on
Are mega ships the way forward? The debate rages on

Ship breakers are watching the evolvement of mega ships with much interest – not in admiration, but as a future source of metal recycling.

If we’re to believe the big container lines, who justify ever larger ships as the remedy for their financial woes, why are so many of them still losing money?

In the size race, Maersk Line led the pack with its Triple-E vessels of 18,000 twenty-foot equivalent units (TEUs). But nearly all of its chief rivals, including Mediterranean Shipping Co., CMA CGM, Evergreen Line and China Container Shipping Lines, have been catching up with their own mega-vessels. Japan’s Mitsui O.S.K. Lines (MOL) recently announced an order for six 20,150-TEU ships, and Maersk, among others, is likely to match that.

These behemoths of the sea are supposed to provide carriers with unprecedented economies of scale, which will yield steady profits while accommodating the surge in international trade projected for the coming years. But many shipping commentators say they create as many problems as they solve.

Herd mentality

Speaking at the Journal of Commerce TPM 2015 conference in Long Beach, California, Philip Damas, director of Drewry Supply Chain Advisors, characterized the lines’ behavior as “herd mentality.” “Once one carrier upsizes,” he said, “all others have to follow.”

The International Transport Forum of the Organization for Economic Co-Operation and Development, warned that the overall transport costs caused by the deployment of mega-ships could be substantial because of the need to make heavy investment in port and terminal infrastructure to handle them.

The ITF report, entitled “Megaships: Trends and Rationale,” says that the cost savings are decreasing as ships get larger, and that the savings of the latest generation are four to six times smaller than the savings from the previous round of upsizing. It said that about 60 percent of the savings come from more efficient engines and not from the size of the ships.

The efficient mega ships

The World Shipping Council, which represents lines with more than 90 percent of global container capacity, issued a separate report defending the efficiency of larger ships and rebutting claims that larger ships and vessel sharing alliances are responsible for port congestion. “While larger ships do require operational adjustments from carriers and from port facilities, larger ships also handle commerce with more energy efficiency and with less environmental impact,” the WSC report said.

The WSC said fuel is the largest cost in container ship operations and that “larger ships are more energy efficient per container transported, and thus their use is economically inevitable…Larger vessels allow ocean carriers to share vessel space and increase the efficient use of the vessels to transport importers’ and exporters’ cargo, while at the same time reducing fuel consumed and air emissions per TEU.”

The carrier report said vessel alliances permit carriers to fill the larger ships and achieve the possible energy savings, and to provide shippers with broader service coverage. “There are carriers in VSAs that would simply not be able to make the investments required to serve every port they cover pursuant to VSA space-sharing arrangements if they had to serve that network with their own assets,” the report said.

Lack of flexibility

On the other hand, “The great problem we have found in other (ship) sectors about the big ships is the lack of flexibility,” said Martin Stopford, director of Clarkson Research Service in London. He said the increase in average new ship sizes has occurred faster than ever before and that global trade can’t handle them. “It should happen only one step at a time, because there are only a few ports that can handle them,”

“The same thing happened in the tanker market when it deployed very large crude carriers. They just didn’t work,” he emphasized.

The problem for global supply chains is that the big ships don’t exist in a void. They must link up with ports, intermodal yards, trucks, railroads, highways and distribution centers – all of which are in danger of being paralyzed by the huge wave of containers that are offloaded from a single vessel.

Damas said the big ships create severe logistical problems for terminal activities, especially during peak periods of activity. A facility designed to process a million TEUs per year might find itself handling fewer ship calls a week, but each call entails a greater number of boxes that must be smoothly transferred to road and rail.

In addition, Damas said, the lack of schedule reliability by today’s container lines makes it harder for terminals to plan their operations in an efficient manner. At the Port of Long Beach, he said, the arrival of a ship exceeding 10,000 TEUs might be delayed by up to 70 hours. The advent of “slow steaming” by carriers, a practice that’s meant to save on fuel costs, only compounds the difficulties.

Companies in trouble

For that matter, who pays for the ships? According to a recent report by Drewry Maritime Equity Research, cash-strapped carriers have been piling on debt at a time when equity financing is getting tougher to acquire. Some have been forced to sell off profitable business units – witness NOL’s recent sale of APL Logistics to Kintetsu World Express, Inc. for $1.2bn. CMA CGM and MSC are among those lines to have sold stakes in marine terminal operations. According to Drewry, “only strong players with healthy balance sheets” will be able to finance the big new ships, “and the remaining will simply have to rely on long-term charters.”

For some carriers, the long-term picture looks dire. Henry Pringle, vice president with AlixPartners, said the Altman Z-Score for publicly traded container carriers indicates the likelihood of bankruptcy for the weaker players. “Things are still pretty tough,” he said. “Many carriers remain significantly challenged.”

Jim Brennan, a partner in the Norbridge consultancy, told a port industry conference that overall system cost savings achieved by mega-ships may be as low as 6.6 percent because the cost of operating a ship at sea accounts for only about 33 percent of total system costs.

The ITF report warned that any further increase in the maximum size of container ships would raise transport costs. “The potential costs savings to carriers appears to be fairly marginal, but infrastructure upsizing costs could be phenomenal.”

The report also cautions that the supply chain risks related to bigger ships are raising concerns about the insurability of vessels with capacities of 18,000 TEUs and up. This reflects concerns raised by marine underwriters at a recent seminar in New York.

Marine insurance

At that seminar Chris Smith, senior vice president, Ocean Marine Insurance & Inland MarineInsurance of Endurance Insurance said that the grounding of an ultra-large container ship with a large capacity cannot be ruled out, and that the loss could be as high as $4 billion.

The OECD unit made a number of policy recommendations. It said countries and ports need to work together to consider the costs of accommodating big ships in comparison to their overall economic benefits. It called on ports authorities, countries and regulators to work together at a strategic planning level to strengthen the collective bargaining position of the landside supply chain and to ensure the proper allocation of resources to accommodate the ever-bigger ships.

The WSC defended its position and noted steady growth in global container traffic, and said larger ships offer the most efficient way to carry it. “Whether 10,000 TEUs are unloaded into a port facility from one ship or two consecutive 5,000-TEU ships, the facility will need to be able to efficiently handle 10,000 TEU…It is also worth reflecting on how congested high-volume ports would be if all containers were transported via small vessels,” the council’s report said. “For example, consider how congested the Los Angeles-Long Beach port complex would be if all 12 million TEU of cargo transported through it {per year} were carried on 2,750-TEU ships.”

Article reprinted from The Bulletin Panama

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