In International Shipping News 04/06/2015
Are container ships getting too big, too fast to justify the savings that shipping lines expect from economies of scale?
A new study by the Organization for Economic Cooperation and Development suggests that operating cost benefits to ocean carriers may not be as valuable as originally assumed for the new round of megaships being ordered by companies like Denmark’s A.P. Møller–Mærsk A/S, Switzerland’s Mediterranean Shipping Co. and France’s CMA CGM.
The research and policy-coordination group says the ships have led to overcapacity and steep price cutting that will put financial pressure on container ship operators for several years.
“The development of the world container fleet over the last decade is completely disconnected from developments in global trade and actual demand,” the OECD report says, citing research by McKinsey & Co. that estimates a 20% gap between shipping capacity and demand that will persist until at least 2019. “The effect of this overcapacity is low freight rates, which will undermine the profitability of the container shipping sector.”
The study says any economic benefits the carriers have gained in the operations have come at a cost to cargo companies that have struggled to handle the large container volumes that are being concentrated at ports. “The benefits of megaships are smaller than the costs that they cause to the whole transport chain,” the report says.
The OECD estimates the new ships bring carriers $25 in operating cost savings per container, adding up to about $200 million in operating benefits a year starting in 2017, when the current crop of giant ships that have been ordered are delivered. Meanwhile the annual costs of improving ports, harbors, equipment and transport networks to accommodate the larger ships could be up to roughly double that, the OECD estimates.
The capacity of container ships’ size is typically measured by the number of 20-foot equivalent unit containers, or TEUs, a vessel can carry. More than 90% of all goods traded internationally, measured by value, are transported in containers, putting the container shipping industry at the center of global commerce.
The expansion of container ship capacity, which accelerated in the mid-2000s, has put vessel capacity ahead of the handling capabilities at many ports, particularly in the U.S. The country’s largest ports, including Los Angeles, Long Beach and other spots located on the West Coast, have the water depth and handling equipment to receive ships with nearly 15,000 TEUs, while East Coast ports such as those in New York and New Jersey, top out at just over 9,000 TEUs.
Since 2011, large carriers have commissioned ships to be built with 18,000, 19,000 and even more than 20,000-TEU capacities.
Maersk Line, the shipping subsidiary of A.P. Møller–Mærsk, confirmed an order this week for 11 ships with more than 19,000-TEU capacity and MSC took delivery of two such ships this year, and will take six more by the end of the year.
The thinking is that by crowding containers onto fewer vessels, the carriers will save on fuel and labor costs, while concentrating more loads into fewer port calls also will save time and operating costs.
But the OECD argues that the expanding use of these ships is far out of scale to demand. The OECD report says container ship capacity will reach 20 million TEUs in 2015, four times the capacity of 2000.
The supply-demand imbalance has sent rates sliding this year. The latest Shanghai Shipping Exchange rate measure showed the average cost of shipping a TEU between Asia and Europe averaged $742 for the first five months of 2015, down 36% from the $1,151 average for the first five months of 2014.
The OECD report says the troubles at ports in handling such large ships also cut into the economic savings.
“Most of the cost savings of upsizing of container ships are realized at sea, because it is here that the fuel cost savings take place,” the OECD writes. But the big ships can only spend a week at ports on trans-Pacific or trans-Atlantic voyages before the costs there start to outweigh the economic benefits on the water, the OECD wrote, and one week doesn’t allow enough time to unload all of the containers on such a ship.
Cost savings on bigger vessels also depend heavily on the ships being filled, the OECD wrote. An 18,000-TEU ship must be 91% filled to match the efficiency of a fully-loaded 14,000-TEU ship, but the utilization rate on some ships on the Asia-North Europe trade lane can run as low 65%.
