Less Is More

That BUSINESS TIMES article of October 26th also had this to say:

“Concerns that the highly cyclical shipping business is finally heading for a downturn have trimmed OOIL and CSCL stocks by more than a third from their April peaks.”

When investor reaction brings about such dramatic downturns as these, you’d think that those with the most to lose would have their ears to the ground. But even with advanced warnings about the strong possibility of a costly downturn, that doesn’t seem to be the case. After it was revealed that container ships had been operating at somewhere between 75% and 80% capacity, Neil Davidson of Drewry Shipping Consultants called attention to the operational and commercial limitations that reduce the effectiveness of mega-ships. That 75% to 80% capacity figure has significance because the break-even figure for container ships falls somewhere in that range. At Navis World 2004, Mr. Davidson pointed out that carriers will have a more difficult time filling these large vessels during periods of decline, thereby cancelling out the economies of scale these vessels are supposed to provide. We did some math and offered the figures as food for thought in an earlier commentary:

• “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 on board. 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 in order 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 reason 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.” [Some people, anyway.]