“Through the (y)ears …”

Here are some warnings we passed along to readers months and months ago.

I. “Upon further review …

“Just this week, in a FINANCIAL TIMES article summarized by an Asian reporting service and forwarded to us by e-mail, here’s what’s being said:

“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 time 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 ultimate savings will depend on vessels operating with capacity loads.”
[Reprinted from our Vol. II, Art. 1 commentary — and posted on January 3, 2005]

II. “Berth of the Blues”

“Katherine Yung of the Dallas Morning News had some very interesting observations about megaships over the weekend. She described the size, the amenities and the operational capabilities of one of the newest to call at the Port of Long Beach, the MSC Texas, and her report requires thoughtful consideration by American consumers … As Ms. Yung reports, there are some drawbacks that are not generally considered:
• “Ships of this size consume 20 tons more fuel each 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 pumps, 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 through the Panama Canal.
• “They take four to five days to unload, instead of two to 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 on and so forth.

“Will the shipowners provide this funding? Of course not. U.S. taxpayers and consumers will.”
[Reprinted from our Vol. IV, Art. 24 commentary — and posted on August 24, 2005]

III. “Choppy Waters”

“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.”
[Reprinted from our Vol. V, Art. 12 commentary — and posted on October 28, 2005]

IV. “Less is More”

“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 vessels during periods of decline, thereby cancelling out the economies of scale these vessels are supposed to provide …

“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 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.”
[Reprinted from our Vol. V, Art. 13 commentary — and posted on October 31, 2005]

V. “Down Memory Lane …”

“‘The last thing you want is for the port to act as a bottleneck. Instead, ports must facilitate the rapid throughput of cargo … Many ports are now focused on megaships, but you can’t handle all of the growing traffic in big TEU vessels. Much of the movement toward larger ships and the ports’ competition for that traffic involves ego and the corporate fanning of feathers …

“‘There is a significant impact on the transportation infrastructure when ships with 6,000-plus TEUs call at a port. It places a great deal of pressure on the terminal, as well as the connecting highways and rails. It creates a peaking pressure, or spikes, in container throughput. Economically, megaships will best be served by limiting the number of ports at which they will call. You lose the economies of scale when load factors are not there.’ — Commander Jon S. Helmick (1997)”

“‘It’s a good news/bad news story … The ideal is to bring the containers off the ships and put them on rail. But the question is, what happens when vessels get too large? We have seen the same thing in other modes — whether in the length of trucks, railcars, flatcars, containers or planes. There comes a point when large vessels create problems. We may be at that point now with ocean vessels.

“‘Larger ships mean fewer ports of call, which means shippers have to transport containers over a longer distance to get to a port. There is also the question of putting all our eggs in one basket from a risk standpoint. What if the ship breaks down? … Eventually, bigger ships may end up losing business to smaller ships.’ — Don Cameron (1997)”
[Reprinted from our Vol. VI, Art. 20 commentary — and posted on February 15, 2006]

VI. “Empty Promises”

“‘The deluge hasn’t hit yet, but we will see more and more vacant space on these ships,’ said Mark Page, director of research for Drewry Shipping Consultants of London … 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 3 ½ years of overcapacity …

“Several factors are weighing on the industry, according to the TIMES. ‘Chief among them is the growing evidence of economic cooling in the U.S. and other countries, coupled with rising prices and interest rates. Signs of inflation, particularly red-hot energy costs, led Federal Reserve Chairman Ben S. Bernanke to pronounce the price trends ‘unwelcome’ and the U.S. economy ‘in a period of recession’. ‘With more money going to gasoline and other basics,’ the article stated, ‘less cash might be available for other things, including the imported products that arrive by shipload each day.’”

“Don’t say we weren’t warned.”
[Reprinted from our Vol. VII, Art. 37 commentary — and posted on June 26, 2006]

VII. “Hurry up and wait!”

“In Vol. II, Art. 1, we reviewed what the FINANCIAL TIMES had to say about the doubts being expressed by industry leaders regarding the future need of mega container ships … 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 …

“An 8,100 TEU mega-ship, we suggested, would require somewhere around 6,480 TEU (80% capacity) before it could even consider getting underway. This ship, we reasoned, wouldn’t sail until sufficient cargo was taken aboard, otherwise the carrier would be better off with the vessels in mothballs. Two 3,240 TEU vessels, on the other hand, would be fully loaded (6,480 TEU) and en route in that same time frame, and would be 100% profitable for the owner. It seemed logical to us, therefore, that the use of smaller vessels would be a more effective way to run a shipping line. A friend of ours disagreed with our assessment, however, and advised us that, come hell-or-highwater, container ships set sail on time. It was the clock that mattered, he argued, not capacity.

“A recent survey published by Drewry Shipping Consultants, however, began with the statement that, ‘Liner shipping reliability is something of a myth’. More than 40% of the 3,300 vessels surveyed arrive at least a day late, it was revealed, and only 57% were punctual. 22% turned up one day late, 7% berthed two days behind schedule, and 12% arrived three or more days late. Drewry maintained that port hold-ups accounted for much of the tardiness.

“[Mr. Davidson may be right after all about the operational and commercial limitations of mega-ships … and we may be right about the mothballs.]
[Reprinted from our Vol. VII, Art. 38 commentary — and posted on June 28, 2006]

The above cautionary reviews are just a sampling of the many predictions that were regularly appearing in journals and periodicals months and months ago. Unfortunately for those of us actually footing the bill for industry miscalculations, these warnings were disregarded by headline-seeking carriers. Here are some pertinent articles seen recently in these same journals and periodicals:

I. “Slow Boats from China?”

“The new vessel sharing agreements between erstwhile rival carriers are being mentioned almost daily in maritime journals, and … cautious international observers and consultants warned that aggressive construction of mega-ships would inevitably lead to over-capacity and pressing financial conditions for carriers. A time would come, those observers predicted, when giant vessels would take too much time to load and off-load … would take too much time to maneuver into ports and tie up at typically small berths … would disrupt the sailing schedules of waiting mega-ships … and would be forced to deliver cargo miles and miles from intended destinations. But the race was on and there was no turning back. The ‘corporate fanning feathers’ was all that mattered.

“But money matters even more. As though the cost of operating awkward mega-ships wasn’t enough of a burden, rapidly rising fuel prices may prove to be the last straw. Only one stop-gap measure remained in carriers’ efforts to keep mega-ship operations from being an unmitigated disaster, and that step takes away one of the perceived advantages of ‘economies of scale’. In discussing this last-ditch measure, an official admitted that by cutting his mega-ship’s speed from 25 knots to 20 knots, fuel consumption could be reduced by up to 50%. But wait a minute. Wasn’t the increased speed of a mega-ship supposed to be what provided significant ‘economies of scale’ benefits?

“[Are those mothballs we smell?]
[Reprinted from our Vol. XV, Art. 14 commentary — and posted on May 5, 2008]

II. “What next? … Paddle-wheelers?”

“‘Slow steaming is the best way forward in the challenging times facing the container industry,’ according to a senior executive at Maersk Line . ‘Just a small reduction in speed has a huge impact on fuel consumption, which increases exponentially with speed,’ the man explained … By slowing the service down by two knots, he explained, operators stand to save $ 1.1 million in bunker costs through one entire rotation. The executive went on to point out that by needing more ships to operate the services, it would absorb a lot of the newbuildings (excess capacity?) coming (unleashed?) into the market …

“Let’s see if we heard him correctly. By adding an extra vessel to the run, Maersk saves money. Right? In fact, according to Maersk’s calculations, $ 1.1 million in fuel costs are saved by adding seven more days to the run along with that extra vessel.

“What Maersk officials have failed to consider, however, is what’s on the other side of the equation. What about the price of that ninth vessel, and the cost for daily operations? Are we supposed to believe that a paltry $ 1.1 million fuel savings every 63 days will offset those costs?

[Are we dealing with bunker fuel or snake oil?]
[Reprinted from our Vol. XVI, Art. 16 commentary — and posted on August 6, 2008]

III. “The Economic Equation”

“When the economy began to waver a while ago, we predicted that the headlong rush to build mega-ships would backfire on carriers and would necessitate the ‘moth-balling’ of a number of those vessels. Yesterday, London-based Drewry Shipping Consultants stated in its ‘Annual Container Market Review and Forecast 2008-09′ that the shipping industry is now going into reverse. ‘With the supply/demand balance weakening, the management of capacity will become crucial for carriers over the short and medium terms,’ the report stated. ‘Cascading of ships to smaller trades will be a key focus for carriers in the next 18 months and the laying up of tonnage is not out of the question.’”
[Reprinted from our Vol. XVII, Art. 5 commentary — and posted on October 10, 2008]

[We’ve been saying it for years, bigger isn’t better … bigger just costs more.]