“… just another white elephant …”

As far back as October of 2004 we focused our attention on those who were advising against the construction of an excessive number of giant container ships.

• We recalled Conrad Everhard’s reference to megaships at Port Industry Day in 2000: “Public funding of dredging amounts to a subsidy of shipping companies building such vessels.”

• In 2001, James Hartung of the AAPA, criticized the “hub-and-spoke” port concept and alerted officials to problems associated with the use of large container ships.

• In 2004, Mr. Neil Davidson of Drewry Shipping Consultants of London, a critic of the ever-increasing number of megaships, stated : “The bigger the ship, the more transshipment and feedering you need, and that costs money … With ports under pressure to reduce air pollution and traffic congestion caused by trucks, they will not, as they did in the past, automatically build bigger terminals and dredge their harbors deeper each time carriers introduce a new generation of ships. Eventually ports will say, ‘We can’t do it anymore.’”

• Mr. Davidson’s recent observations were more specific: “Operational and commercial limitations … reduce the effectiveness of megaships … A limited number of ports are able to service these larger vessels because of harbor depths … Carriers will have a more difficult time filling these large vessels, thereby cancelling out the economies of scale these vessels are supposed to produce … These vessels are unable to accommodate importers and exporters who prefer more direct, less costly service.”

• Nolan Gimpel of Axiom Consulting warned that megaships strain the capacity of inland infrastructure, terminal operators and rail and truck carriers. The most logical and least costly way to expand without straining our supply chain is to establish smaller container handling ports closer to end users, he said.

• Mark Page, director of research for Drewry Shipping Consultants predicted: “The deluge hasn’t hit yet, but we will see more and more vacant space on these ships … For some time now, we have been receiving far too much in the way of ships and in very large ships in particular. Now, we are looking at three years to three-and-a-half years of overcapacity.”

• “Many ports are now focused on megaships, but you can’t handle all the growing traffic in big TEU vessels. Much of the movement toward larger ships and the ports’ competition for all that traffic involves ego and the corporate fanning of feathers,” said Commander Jon S. Helmick.

Ship owners brushed off these comments, however, and persisted in their efforts to upstage one another. “Economies of scale” was how they justified their actions, and although big ships were bringing headlines, those same ships are now bringing headaches … as predicted.

Just this week, Chris Gillis, the Editor of American Shipper, when introducing his journal’s special “Shipping Research & Analysis” section, called attention to these carrier miscalculations in a letter to his subscribers:

“Dear Reader,” he began. “While container volumes continue to reach new heights, why is it that nearly every liner carrier watched its profit potential dissipate in 2006? The answers point largely to two factors: overcapacity and higher operations costs. To remedy this problem, the carriers have resorted to various cost-reduction measures, such as skipping voyages, slowing or adding vessels to strings to reduce costs, and cutting services altogether. It is still too early to tell whether these activities will actually turn the industry around by the end of 2007. Meanwhile global shippers may suffer service breakdowns until these changes shake out.”

Those two factors, “… overcapacity and higher operations costs”, are exactly what we’ve been emphasizing in our previous commentaries.

John Martin, Consultant and Principal of Martin and Associates, asks, “How far can a container ship go and still be cost-effective? If you don’t have the service to handle the terminal side, you won’t be able to service the ship, and you won’t save anything … People don’t look at it that often, but there is a tradeoff between the size of a ship and the ability to turn it at the dock. You don’t get the economies of scale if it takes too long to service a vessel.”

Santanu Sanyal produced a lengthy article in the summer of 2006 treating a number of questionable areas in this regard.

“Operationally, a megaship will cause congestion,” he wrote. “A new 8,000-TEU vessel will probably disgorge about 6,000 TEUs on the quay-line of a hub port as compared to 2,000 TEUs by a 5,000-TEU capacity vessel. Which means, a megaship has to stay at the berth for a longer period.

“Also, the key trade lanes will see big ships calling at hub ports within hours of one another. Which means, as a megaship stays in the berth there will be several others lining up for berths. The cumulative effect of all this is that there will be congestion.

“There are other issues,” he continued. “The hinterland has to be developed to be able to cater to the requirements of the new capacity vessels … This will push up the cost. In fact, the maritime logistics chain is likely to be overstretched … ”

Tommy Stramer, the late President of Zim American Integrated Shipping Services Co., brought out the same point before his all too premature demise. “I hope there will be changes in the infrastructure of the U.S. ports and railways,” he said. “If changes can be made in such a way as to allow a high turnover of containers in the ports — coupled with the ability to transport these boxes to inland destinations — then our industry will survive. Otherwise, we are going to see ports, more so on the West Coast of the U.S., but also on the East Coast, approach the point where cargo will not be able to go through them, ships will wait outside, schedules will no longer be maintained — and the new ships of 8,000-TEUs-plus will be just another white elephant in the industry.”