In the size race, Maersk Line has been leading the pack, with its Triple-E vessels of 18,000 twenty-foot equivalent units (TEUs). But nearly all of its chief rivals, including Mediterranean Shipping Co., CMA CGM, Evergreen Line and China Container Shipping Lines, are catching up with their own mega-vessels. Japan's Mitsui O.S.K. Lines (MOL) recently announced an order for six 20,150-TEU ships, and Maersk, among others, is expected to match that latest benchmark.
These behemoths of the sea are supposed to provide carriers with unprecedented economies of scale, which will yield steady profits while accommodating the surge in international trade that is projected for the coming years. But you have to wonder whether they create as many problems as they solve.
Start with the reasoning behind the purchases. Are lines really opting for the giant ships out of economic considerations? Or are they simply following the crowd? Speaking at the Journal of Commerce’s TPM 2015 conference in Long Beach, Calif., Philip Damas, director of Drewry Supply Chain Advisors, characterized the lines’ behavior as “herd mentality.” “Once one carrier upsizes,” he said, “all others have to follow.”
The problem for global supply chains is that the big ships don’t exist in a void. They must link up with ports, intermodal yards, trucks, railroads, highways and distribution centers – all of which are in danger of being paralyzed by the huge wave of containers that are offloaded from a single vessel.
Damas said the big ships create severe logistical problems for terminal activities, especially during peak periods of activity. A facility designed to process a million TEUs per year might find itself handling fewer ship calls a week, but each call entails a greater number of boxes that must be smoothly transferred to road and rail.
In addition, Damas said, the lack of schedule reliability by today’s container lines makes it harder for terminals to plan their operations in an efficient manner. At the Port of Long Beach, he said, the arrival of a ship exceeding 10,000 TEUs might be delayed by up to 70 hours. The advent of “slow steaming” by carriers, a practice that’s meant to save on fuel costs, only compounds the difficulties.
In bringing the big new ships on line, carriers appear to have assumed that the connecting infrastructure would adjust. But to handle the mega-vessels, terminals need more and larger cranes, longer and deeper berths, deeper approach channels and higher levels of crane and labor productivity. “It’s a very long shopping list,” said Damas. “The question is, who pays for all this?”
For that matter, who pays for the ships? According to a recent report by Drewry Maritime Equity Research, cash-strapped carriers have been piling on debt at a time when equity financing is getting tougher to acquire. Some have been forced to sell off profitable business units – witness NOL’s recent sale of APL Logistics to Kintetsu World Express, Inc. for $1.2bn. CMA CGM and MSC are among those lines to have sold stakes in marine terminal operations. According to Drewry, “only strong players with healthy balance sheets” will be able to finance the big new ships, “and the remaining will simply have to rely on long-term charters.”
Maersk Line chief executive officer Søren Skou suggested that mega-vessels might not be the cure-all carriers were hoping for. “The reason why Maersk has been able to reduce costs over the last three years is not because of ‘big steel,’” he said at the TPM conference, noting that just 15 of the line’s 600-ship fleet fall into the record-breaking category. “The Triple-E ship size is not the source of Maersk’s competitive advantage.”
Carriers have seen some recent improvement in their numbers. According to Drewry, in the third quarter of 2014, average unit revenues rose by 2.5 percent over the previous quarter. But the lines will need to display far more sustained growth in earnings before they can be considered economically stable. And even if they’re showing black ink on a quarterly basis, they’re probably still not earning their cost of capital.
For some carriers, the long-term picture looks dire. Henry Pringle, vice president with AlixPartners, said the Altman Z-Score for publicly traded container carriers indicates the likelihood of bankruptcy for the weaker players. “Things are still pretty tough,” he said. “Many carriers remain significantly challenged.”
Meanwhile, concerted action must be taken on the land side so that the economic benefits of the mega-vessels, such as they are, can be fully realized. Mark Sisson, leader of the marine analysis group at AECOM, said container terminals will need to acquire more cranes in order to work the big ships efficiently. A single berth designed for the new generation of ships might require up to 18 cranes instead of the current level of 12. The 5,000-foot-long wharf at the Port of Long Beach’s Pier T previously consisted of five berths, Sisson said. Now it can accommodate just three ships – and the third can’t be served by more than a single crane.
“There are so many pieces that need to work together,” said Marc Bourdon, president of CMA CGM America LLC. A shortfall of investment in landside infrastructure promises to create severe bottlenecks. And U.S. longshore labor significantly lags its counterparts in Asia and Europe, in terms of number of boxes handled per hour. “There’s no reason why we can’t have productivity gains – provided that investments happen,” Bourdon said.
Like it or not, the big ships are here to stay – and they’re getting bigger. Skou said he expects to see a new generation of vessels with capacity of 25,000 TEUs, if not in the immediate future. Still, the complications that arise from the deployment of these monsters – including limitations on inland infrastructure, delays in loading and unloading, fewer vessel calls and downward pressure on freight rates – suggest that carriers might do well to think twice before joining their rivals in a frantic embrace of gigantism.
Next: Is container shipping a commodity?