Tipping the Scales
We’ve been questioning the myth of “economies-of-scale” ever since carriers began to make use of that phrase. They were convinced that “bigger is better”, and that was all they cared about. It never occurred to them that bigger could only be better if – and only if – their mega-ships were always operating with capacity loads. Always. But bigger isn’t really better, it just looks better.
In our Vol. II, Art. 2 commentary of January 5th, 2005, (“Fully Loaded”), we made an attempt to convince carriers that several smaller container ships were more flexible, more efficient, and more profitable than any single mega-ship. Our comparison between vessel sizes was made long before the industry began to feel the effects of an economic downturn, but now that a worldwide depression is beginning to choke carriers, it’s time for maritime authorities to shed their corporate feathers and do some honest homework. The days of the industry being a “good ol’ boy network” are long past.
Container Shipping Magazine (CSM) is now looking into the “economies-of-scale” question, and has stated that size does not always guarantee a cost advantage. On August 18th CSM wrote:
“Among the vessels we looked at in part one of this series, it was the second largest vessel size – 3,500 TEU – that proved to be the best value for the money while the largest vessel size – 4,250 TEU – was the second most expensive to operate on a per-TEU basis among the five vessels looked at in the study …”-
Well, whattayaknow? 3,500 TEU proved to be the best value. Here’s how we looked at it in 2005:
“When Neil Davidson of Drewry Shipping Consultants called attention to the operational and commercial limitations that reduce the effectiveness of mega-ships, he pointed out that carriers will have a more difficult time filling these large vessels, thereby cancelling out the economies of scale that these ships are supposed to produce. Mr. Davidson has done his homework. It’s simple math, so let’s look at a hypothetical situation.
– 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 aboard. It would be cheaper to put the vessels 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 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.” –
Even earlier – back in 1999 – at a Washington briefing sponsored by the AAPA, James Hartung cautioned that dredging deep-water ports for use as “king-ports” by mega-ships in a hub-and-spoke system of operation, would “… decrease the efficiency of the marine transportation system and skew the economic benefits”.
And then in 2005, the FINANCIAL TIMES gave us a story with this headline:
“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 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 U.S. 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 reorganise 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 and 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.”-
[Did you get the part that said, “To maintain current schedules …”?
And the part that said, “… such vessels will have to sail faster”?
Well, the industry’s foolish response is, “Damn the schedules! Slow speed ahead!”]