For years we've been told by ocean carrier executives and consultants that, when it comes to containership size, bigger is better. The more boxes that you can stuff into a ship, they say, the cheaper it is to run that vessel on a per-slot basis. As a result, we've seen over the years a relentless march toward ever-larger ships, with the newest versions boasting capacity of 18,000 twenty-foot equivalent units, and a 22,000-TEU model on the drawing boards.
There’s nothing inherently wrong with the theory of unit economies. The problem with applying it to container shipping is that the cost of operating a vessel is just one piece of a much larger picture. In particular, there are issues of connecting infrastructure to be taken into account. Marine terminals must have adequate cranes and land to accommodate the thousands of containers that are generated by a single vessel. Berths and shipping channels must be dredged to acceptable depths. Railyards must be prepared to handle the surge of boxes being moved in intermodal service. Truck traffic must be controlled if gridlock on local roads and highways is to be avoided.
Ports are scrambling to respond, but only a few can handle the biggest new ships efficiently today. CMA CGM’s 18,000-TEUBenjamin Franklin recently made a series of introductory calls at West Coast ports, including Los Angeles/Long Beach, Oakland and Seattle, although it remains to be seen whether those facilities can handle the ship in regular trans-Pacific service without suffering extreme congestion. Other major U.S. ports, such as Charleston, S.C., and Savannah, Ga., have announced plans to revamp their own terminals to handle the larger ships.
Until recently, you would have been hard pressed to find a voice in the maritime industry speaking out against this trend toward gigantism. Now, however, doubts are beginning to surface – to the extent that some carriers might be rethinking their commitment to the idea.
Start with the impact of the megaships on the balance between supply and demand. Last year saw a record number of deliveries of new ships, with more than 1.6 million TEUs added to total capacity, according to Philip Damas, division director with Drewry Supply Chain Advisors. Speaking at the Journal of Commerce’s TPM 2016 conference in Long Beach, Calif., earlier this year, he estimated current excess capacity at 2 million TEUs. Large-scale ship demolitions, which helped to mitigate fleet growth in past years, are no longer a significant factor, he noted.
The size of the largest containership has tripled since 2000 and doubled since 2009, Damas said. Some 89 percent of the current orderbook consists of vessels larger than the present-day average. Meanwhile, demand for ship space is sluggish.
Carriers have responded by canceling sailings and temporarily laying up ships – even some of the newest and biggest models. Damas said there have been up to 53 canceled sailings per month on the four major east-west routes. And an estimated 5 percent of containerships – accounting for close to 1 million TEUs – sits idle today, generating zero revenue.
That’s hardly the best use for ships that were supposed to be a magic solution to the problem of operating inefficiencies and rising costs. Instead, we’ve seen service suffer, to the point where shippers can’t be sure that a promised sailing will even occur, or if it does, whether their booked containers will be accepted onboard. What’s more, fewer sailings mean fewer options for time-sensitive shippers, whose containers must compete for space and attention with thousands of others.
“I haven’t talked to any customer that insists on [its] container being booked on an 18,000-TEU vessel,” Rolf Habben Jansen, chief executive officer of Hapag-Lloyd AG, said at TPM 2016. “He wants to get good service and a smooth interface.”
What about the argument that bigger ships mean bigger savings for carriers? Jansen urged the industry to exercise caution in the race to build mega-vessels. “You need to work on cost,” he said, “but you should also be making sure that you don’t continue to invest more and more in things that in the end don’t drive the cost down.”
Stephen Edwards, president and chief executive officer of GCT Global Container Terminals, said the plunge in fuel prices has eroded the cost advantage of the largest containerships. “Slot cost in theory is a little bit lower,” he said, “but a whole bunch of others things are more expensive, such as infrastructure in ports. The only time you make it up is when you are at sea.”
In the face of chronic overcapacity, the challenge for service providers today is keeping their rates up. In recent years, we’ve witnessed a string of failed rate increases, with carriers caving in to the demands of big shippers, and slashing prices just to fill those massive new ships. So much for the lure of unit economies.
Don’t expect the big containerships already in service to go away anytime soon. But maybe the 20,000- and 22,000-TEU versions will arrive later than planned, if at all. We could even see a return to smaller, more flexible vessels in key trades. With issues of infrastructure, service and total operating cost to be considered, carriers might well be in the early stages of a 180-degree turn in their thinking.