Bigger Is Not Better

One of our first commentaries in 2005 was Vol. II, Art. 2. We wrote it in early January of that year, and over the past year or so, events have justified the warnings issued by folks like Nolan Gimpel, Neil Davidson and Zim’s now-deceased Tommy Stramer.

We titled that Vol. II, Art. 2 article, “Fully Loaded” and we called attention to a disturbing report in Singapore’s FINANCIAL TIMES revealing that container ships had been operating at somewhere between 75% and 85% capacity. That range of numbers is significant because that’s known to be the break-even range for profitable container ship operations.

Several months earlier Mr. Davidson had predicted that carriers would have a very difficult time filling their new megaships …“thereby cancelling out the economies of scale these ships are supposed to produce”. When it came right down to making a profit, Mr. Davidson proved to be a real prophet.

Just a few days ago, an advisory from India had this to say about “economies of scale”: “The very idea of introducing the extra large carriers into the container shipping fleet was to exploit fully the economies of scale. When cargo volumes have shrunk and the global economy is weakened, there is no possibility of filling up such large slots and, therefore, such ships would not be able to take advantage of the economies of scale in the current environment.

“For ordinary ailments, physicians do not prescribe high potency drugs. Only when life is threatened are high potency drugs administered to save lives. Shipowners of very large and ultra large ships do not seem to have many options left but to swallow such bitter pills to save shipping from a calamitous fall.”

But that writer wasn’t prophetic enough. There are no options left. Like Humpty-Dumpty, shipping has already suffered a calamitous fall. The so-called “current environment” is history. Those admitted thousand or so laid-up container ships will never operate again. Some will be utilized as temporary warehouses, but all will soon see the scrap yard. The bitter pills now being swallowed by carriers will not save this terminally ill patient.

Our hypothetical illustration in Vol. II, Art. 2 did the arithmetic. Here’s what should have been obvious, but was being ignored by most shipping authorities:

• “An 8,000 TEU megaship 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 the same time frame, and would be 100% profitable for the owner.
• Or three smaller 2,160 TEU container ships could be fully loaded (6,480 TEU) and en route in the same time frame, and bringing 100% profit to the 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 in order to deliver goods to distant consumers.

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

There were other outsiders, like us, who had no difficulty in seeing the drawbacks of megaships. In our subsequent Vol. IV, Art 24 commentary, “Berth of the Blues”, we quoted what Katherine Yung of the Dallas Morning News had to say about the folly of relying on megaships:
• “Ships of this size consume 20 tons more of fuel per day than the next-biggest carriers.
• It takes about 15 to 20 minutes to bring a ship of this size to a standstill, which adds almost half an hour to every maneuver.
• These giant ships can only be brought into port during daylight and when the wind falls below 10 knots.
• Only three U.S. ports can handle them — Long Beach, Oakland and Seattle.
• They can’t even fit into the Panama Canal.
• They take four to five days to unload, instead of two or three.
• They require the use of taller, bigger and more expensive cranes than those found in most ports.
• They require longer berths than those found in most ports.
• They force major railroads to make adjustments, such as running longer trains on nonstop routes across the West.
• And if, ‘In the next few years, all these ports will be overrun by these ships’, enormous amounts of funding will be required for dredging, berth expansion, equipment upgrading, bridge and highway replacement projects, and so forth.

“Will the shipowners provide this funding? Of course not. U.S. taxpayers and consumers will.”

Ironically, the ultimate winners could very well be the sheep that were being sheared – the highly vulnerable U.S. taxpayers and consumers. The shipowners are going bust, the megaships are heading for the scrap yards, and we are no longer reading about “economies of scale”. Today’s headlines deal almost exclusively with an impending global economic catastrophe, and as we’ve been suggesting to anyone who would listen, the only way to avoid that terrible event is “to turn the unemployed American loser into an employed American winner. A 21st century U.S. Emergency Shipbuilding Program is the way that will be done. Nothing else will turn the tables, and the logic of it all will eventually restore hearing to deaf officials.”

If those deaf officials would only take the time to read some history they’d eventually encounter The Merchant Marine Act of 1936, legislation which empowered the U.S. Maritime Commission to establish the Long Range Shipbuilding Program in 1937. It was a move that proved to be the beginning of the end of the Great Depression.

In the years between the two World Wars, ships in the U.S. merchant fleet had become non-competitive commercially because of technological advances in hull construction and propulsion machinery. Inactive U.S. shipyards had become stagnant and it was felt that rebuilding the commercial shipbuilding capacity in the U.S. was in the nation’s best interest.

The Maritime Commission began by devising a program to build 500 merchant ships of new designs, and it was this shipbuilding program that became known as the Long Range Program. The well-known and widely used C1, C2 and C3 type ships had their beginnings in this program.

With merchant vessel losses in the Battle of the Atlantic far exceeding the capability of British shipyards to build such vessels, the British Merchant Shipping Mission ordered replacement vessels from U.S. and Canadian yards. That was the beginning of the Emergency Shipbuilding Program that has merited our attention. Between the years 1940 and 1945, this program, under the direction of the U.S. Maritime Commission, turned out almost 6,000 cargo ships and provided jobs for hundreds of thousands within the U.S. yards and for many millions of supporting workers offsite.

The rapid growth in production in the early years of the war was achieved in spite of the labor shortage in the coastal cities and towns where emergency shipyards were being built. To offset this lack of skilled labor, recruiting was directed toward rural communities in the belief that men accustomed to keeping farm machinery operating would become adept at building ships. Such a rapid migration of workers and families toward coastal communities led to a pressing need for housing, schools, medical facilities and other essential services. Along with the labor force needed for the construction of new shipyards and ships, additional skilled workers were required to build and staff facilities within the growing communities.

In Volume XIX, Art. 17, we wrote: “Naval and maritime records narrate the achievements of Liberty Ships (‘Ugly Ducklings’), Victory Ships, C-1s, C-2s and C-3s, probably the most familiar of the many cargo designs built in U.S. yards, but dozens and dozens of different types were actually turned out during those years. Maybe a hundred or more. Who knows. Those many and diverse types of cargo vessels – and warships – were built and delivered by U.S. shipyards that sprung up almost overnight, and the massive and miraculous shipbuilding effort took place in about a half dozen years. Our single, simple, patented container ships, on the other hand, could be punched out like ‘cupcakes’ in existing yards, in an ‘emergency program’ that would create about 50 million new jobs and end our economic tailspin … Employed Americans are the master link in the international supply chain, but unemployment has disabled that chain. Everything is shutting down and history shows that similar periods of destitution have produced tragic events.”

[Mr. Obama is now at another G-8 meeting where the main concerns are the two latest hoaxes … health care and “global warming”. But unemployment? Forget about it. They don’t have a clue.]