In our commentary of November 2nd, 2004, we included these advisories:

“Mr. Nolan Gimpel of Axiom Consulting has stated that mega-ships strain the capacity of inland infrastructure, terminal operators and rail and truck carriers. As terminals run out of space, he added, ports will be required to seek alternate ways of expanding their operations. The most logical and least costly way to expand without straining the capacity of inland infrastructure, terminal operators and rail and truck carriers is to establish smaller container ports closer to end users. The benefits, as stated above, will accrue to all taxpayers and consumers.”

“Neil Davidson of Drewry Shipping Consultants at Navis World 2004 in San Francisco called attention to the operational and commercial limitations that reduce the effectiveness of mega-ships. Mr. Davidson foresees carriers having a more difficult time filling these large vessels, thereby cancelling out the economies of scale these ships are supposed to produce. He also cites the limited number of ports able to service these larger vessels because of harbor depths, and the inability of these vessels to accommodate importers and exporters who prefer direct, less costly service. ‘The bigger the ship, the more transshipment and feedering you need, and that costs money,’ Mr. Davidson said. This is another example of an unwitting subsidy paid to shipping lines by consumers, and emphasizes the need for smaller container handling ports in closer proximity to end users.”

A FINANCIAL TIMES article early in January of this year was summarized in these words:

“Future Need of Mega Container Ships Questioned”

“Doubts have been raised about the future need for so-called mega container ships, capable of carrying more than 8,000 TEU.

“The doubts come at a time when industry insiders expect vessel capacity to increase faster than cargo volumes, the FINANCIAL TIMES reported.

“While giant container ships, which came into service in 2004, are expected to ‘revolutionize container trade between Asia and the US and Europe’, some shipping executives and analysts have questioned the apparent economies of scale offered by such vessels.

“The introduction of these large container ships will require shipping lines to reorganize their services to reflect the longer times these vessels will have to spend in port, the report stated.

“To maintain current schedules, such vessels will have to sail faster to make up for the extra time in port. To achieve this, ‘even with modern, fuel-efficient engines, this is likely to mean extra spending on fuel’. The article added that ultimately savings will depend on vessels operating with capacity loads.”

An October 25th article in the WORLD MARITIME NEWS had this to say about mega-ships:

“Hand-in-hand with the accelerated development in the size of long-haul container vessels must come changes in the structure, design and deployment of the feedership fleet. According to David Tozer, Lloyd’s Register’s Business Manager for Container Ships, some 1,300 new vessels will be required to accommodate anticipated cargo growth in the feeder trades up to 2012. The calculation is based on projections of a doubling in trade volume in feeder and intra-regional operations during the period 2002-2-12. Moreover, around 600 newbuilds will also be needed to replace existing tonnage over the same timeframe, suggesting a total demand in the order of 1,900 ships. Assumptions regarding fleet renewal stem from an analysis which indicated that up to 40 per cent of feederships worldwide were at least 15 years old, suggesting that much of the tonnage involved would be removed from the market by 2010. For 1,900 or so vessels to be introduced into service by 2012 would necessitate an annual infusion of newbuilds at a rate well in excess of current levels.
“In the opening edition of Container Ship Focus, a technical publication produced by LR, David Tozer is reported as taking the view that the lack of efficient, modern feeder tonnage poses a major threat to the container sector, and could potentially compromise the industry’s investment in new, large post-panamax capacity.

“‘There is a clear need for modern feeder designs which are flexible yet targeted, but so far there is little evidence that this opportunity has been realized, and few orders have been placed,’ contended Tozer.

“LR, in association with Ocean Shipping Consultants, has identified a range of feeder designs, each optimized for a particular trading region. Tozer is of the view that the feeder trades could potentially become one of the most important sector for the container industry. ‘But to date there has been a failure to recognize the scale of the future demand. Without proper investment, the lack of capacity could constrain demand and adversely impact on deepsea vessel economics,’ he claimed.

“Recent figures have indicated that around half of all newbuild boxship capacity on order or under construction entails vessels of more than 6,000 TEU. For sure, the overall containership orderbook does have the appearance of being out of balance, with its capacity orientation to a large number of very large vessels. Investment in smaller boxships and feeders has been at a markedly low level, to the extent that a serious demand scenario has developed at the lower end of the size spectrum.”

The BUSINESS TIMES on the 26th of October was even more to the point. From Hong Kong comes the observation that “Container liners, which have ridden a three-year wave of surging Chinese trade, are heading for choppier waters as shipping capacity grows faster than demand. ‘Long-term investors should continue to look for exits from the container-shipping sector,’ said SHK Financial analyst Alvin Chong.” Based on current orders for new ships, Mr. Chong sees global container liner capacity growing14 to16% a year from 2005 to 2007, against the annual demand growth of 8 to 10%.
That annual capacity/demand miscalculation could prove to be a back-breaking financial burden in the coming years. Isn’t it time to do some homework?