A Short Course in History (A reprint of Vol. XXIV, Art. 26 … Three years ago today)

Up until two years ago, shipping lines – and international financiers as well – were spending money like drunken sailors on unspeakably large container ships. It was like there was no tomorrow.

A friend of ours – let’s call him “Boysie” – reminded us that breaking even on each trip isn’t the main concern of those who own container ships. Owners are constantly striving to streamline operations – primarily with time-saving measures – in order to make possible an extra “turn” every year. That trip – that extra “turn” – was the year-end bonus that would fatten the bottom line.

By demanding higher speeds in newbuilds, shipping line owners had rightly calculated that the extra knots meant that less time would be consumed per trip and that those extra knots would guarantee time for that extra turn they were hoping for every year. And it worked out that way. Of course it did. It was good business. It was good logic. It was “economies of scale”.

But a funny thing happened on the way to the forum. Many of those big-and-fast newbuilds are now being laid up in places like Singapore, Subic Bay and Rotterdam because the world’s economy – although most maritime officials still refuse to admit it – took a turn for the worse. The kind of “turn” that the experts failed to anticipate.

But a new scam – er, scheme – was offered for public consumption. It’s called “slow-steaming”. Somehow – we’re being asked to believe – cutting down the speeds of the bigger-is-better leviathans to about 12 or 14 knots is what really fattens the bottom line, cuts fuel consumption, promotes a “green” environment, etc., etc., etc.

The fact that an extra $ 100 million was spent (blown!) to build each one of the new, speedy leviathans doesn’t enter into the equation. Forget about that. Just think about how the reduction in speed saves on the cost of fuel, etc., etc., etc.

And, by the way, slowing down the speed of ships, thereby adding several extra days to every trip, makes it possible to require the service of an extra ship on that ocean run. That extra ship is taken from among the hundreds that were laid up by our failing economy, of course, and the expenses incurred by operating that extra ship? Those costs are also left out of the equation.

Did we say “logic”? What logic? Time is money. Killing time is killing money. On January 5th, 2005, in our Vol. II, Art. 2 commentary, “Fully Loaded”, we compared the advantages that smaller ships had over larger ones:

“At Narvis World 2004 when Neil Davidson of Drewry Shipping Consultants called attention to the operational and commercial limitations that reduce the effectiveness of mega-ships, he pointed out that carriers will have a more difficult time filling these large vessels, thereby cancelling out the economies of scale these ships are supposed to produce. Mr. Davidson had done his homework. It’s simple math so let’s look at a hypothetical situation.

– An 8,100 TEU mega-ship requires somewhere around 6,480 TEU (80% capacity) before it could even consider getting underway. This ship, of course, would absolutely not sail until additional cargo was taken aboard. It would be cheaper to put the vessel in mothballs.
– Two 3,240 TEU container ships, however, would be fully loaded (6,480 TEU) and en route in that same time frame, and would be 100% profitable for the ship owner.
– Or three smaller 2,160 TEU container ships could be fully loaded (6,480 TEU) and en route in that same time frame, and bringing 100% profit to the ship owner. Bear in mind that in these latter two cases product would be arriving at destinations much earlier.

“Other important aspects will weigh heavily in this scenario.
– The smaller vessels are not restricted to just a handful of U.S. ports.
– No expensive dredging projects are necessary to accommodate them.
– No excessive freighting will be required to deliver goods to distant consumers.

“There are other ‘industry insiders’ who will also have a say in the matter. Shipping Agents have a lot at stake and will have good reasons to shy away from these restrictive and inflexible mega-ships.
– Time is always a major factor. Smaller ships, fully loaded and underway days in advance of mega-ship departures, assure quicker delivery of goods.
– Lost time will force competing agents to choose the quickest, least costly vessels.
– When mega-ships offload at ‘king-ports’, the cost of additional freighting to ultimate destinations will reduce an agent’s profits and increase costs to the consumer.
– Consumers will rely upon the agent using the quickest and least costly means of transit.

“When money talks, people listen.” –

That’s what we wrote on January 5th, 2005, and it occurs to us that if we had a handle on things a half-dozen years ago, why didn’t the leading lights in the industry put two-and-two together? Let’s face it. They did. But when they added things up they did the math with a cavalier attitude. Their crystal balls told them that growth in international trade – spurred on by U.S. consumers – would continue skyward, and under those circumstances enormous loads transported over the oceans in enormous, speedy container ships would produce the greatest amount of profit. And this business of dredging those U.S. ports in order to accommodate the thirsty appetites of U.S. shoppers? Let the ravenous, well-heeled Americans foot the bill.

To those ship owners, the math was simple. Great demand (from U.S. residents) + great supply (paid for by U.S. residents) = great ships (paid for by U.S. residents) + great dredging projects (paid for by U.S. residents). What could be simpler?

Here’s what could have been simpler. Instead of using their math books to determine where international trade was headed, those maritime stalwarts should have consulted their history books. The sky was not the limit. Many economists even then were writing about the rising unemployment rate in the U.S., and the likelihood of a recession, and even another Great Depression, were topics that were beginning to get the attention of level-headed economists.

Those “economies of scale”? Neil Davidson was right, wasn’t he?