Right All Along (A reprint of Vol. XIX, Art. 39 – 4 years ago today)

In our previous commentary, “Slumbering Elephants”, we offered a reprint of an advisory entitled, “How to come out of the crisis”. The author of that advisory pointed out that Drewry Shipping Consultants had suggested the two most radical and painful measures, with the more painful of the two being “… to lay up all the ultra large containerships of 10,000-TEU and above”.

“Laying up such brand new very large containerships from the shipyard to the backyard as slumbering elephants is indeed the most painful decision shipowners seem reluctant to take,” the writer stated. “A very recent report suggests that 735 ships of 41 million DWT have already congregated in Singapore port.”

We attached a bracketed comment to that last paragraph: [Tommy Stramer R.I.P. foresaw those white elephants. Remember?]

Well, in case you don’t recall that reference, we noted Mr. Tommy Stramer’s concern about the drawbacks of gargantuan containerships in our Vol. II, Art. 14 commentary of February 2, 2005. Although the former and now-deceased President of Zim American Integrated Shipping Services Co. couldn’t anticipate today’s approaching depression – nor could anyone else – he saw the likelihood of ports approaching “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”.

Mr. Stramer must have had a crystal ball, but his warning fell on deaf ears.

Even before Mr. Stramer spoke out, however, our November 2nd, 2004 commentary, “A Fitting Solution”, had included warnings by Nolan Gimpel of Axiom Consulting and by Neil Davidson of Drewry Shipping Consultants. Mr. Gimpel stated that “… mega-ships strain the capacity of inland infrastructure, terminal operators and rail and truck carriers,” and Mr. Davidson foresaw that carriers would have “… a more difficult time filling these large vessels, thereby cancelling out the economies of scale these ships are supposed to produce”.

Speaking of “economies of scale”, yesterday’s advisory had this to say about that fascination:

“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.”

Shortly thereafter, our Vol. II, Art. 1 commentary, “Upon further review …” anticipated those failings by quoting portions of an article appearing in the FINANCIAL TIMES:

“Future Need of Mega Container Ships Questioned” was the headline.

“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.”

Our very next commentary, Vol. II, Art. 2, “Fully Loaded”, looked further into the situation because it had been revealed just a few days earlier that container ships had been operating “… at somewhere between 75% and 85% capacity, and lest this information pass unnoticed, let’s look back at what maritime authorities were trying to bring to our attention. That 75% – 85% capacity figure has a great deal of significance because, depending on the source, the break-even figure for container ships falls somewhere in that range.” We cited Mr. Davidson’s observations again and continued with the following hypothetical illustration:

– “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 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 the 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 reasons 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 costs to the consumer.
– Consumers will rely upon the agent using the quickest and least costly means of transit.

“When money talks, people listen.”

Not really. At least they haven’t listened yet. Deaf ears, remember.

Industry outsiders, however, have no difficulty in seeing the drawbacks of megaships. In “Berth of the Blues”, our Vol. IV, Art 24 commentary, we quoted some rarely considered failings pointed out by Katherine Yung of the Dallas Morning News:
– “Ships of this size consume 20 tons more fuel per day than the next-biggest carriers. [There are about 44,000 gallons of diesel fuel in 20 metric tons, and if, ‘In the next few years, all these ports will be overrun by these ships’, each wasting more than a million gallons of diesel each year, what kind of an effect will this reckless squandering have upon the cost of fuel at the pump, do you suppose? Do the math and pity the poor truckers.]
– It takes 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.”

But this whole stupid megaship idea has now come full circle. Dreamy-eyed shipowners and analysts have egg on their faces, and deservedly so. Every one of their goliaths will see an early grave, and the ultimate winners after all could very well be the sheep that were being sheared – the highly vulnerable U.S. taxpayers and consumers.

We are no longer reading about “economies of scale” because the failing “economies of nations” are what dominate today’s headlines. The only way to avoid a worldwide economic catastrophe, ironically, 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.