Ships are Too Big for the Lean Market!

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The shipping industry has seen its worst recession in half a century and the mega-container ship is a major part of the struggle.  The quarter mile long Benjamin Franklin, the largest cargo ship ever to dock at a U.S. port, is an example of the problems that plague the shipping industry.  Five mega vessels were supposed to follow the Benjamin Franklin to create a Trans-Pacific shipping juggernaut however, there was very little demand for so many ships which led to the Franklin itself making its last U.S. port visit a few weeks ago. Ship owners are realising that bigger ships are not always advantageous, especially with the benefits of sailing and docking big boats diminishing with time.

With the onset of the global financial crisis in 2008, the logic that exploiting economies of scale in the shipping industry could reap huge profits began to falter.  Despite the collapse in the global trade volumes, ship owners continued to commission more big boats.  Currently, there is a significant gap between the increase in global shipping capacity and the growth in demand for ships.  Consequently, with a high percentage of boats being docked, the price of shipping a container fell by almost half.

Today, as the economies of scale from mega boats have reduced, building smaller boats with better engines offer more savings.  However, the risks are quite high as these vessels carrying containers create a concentrated floating risk that can dock only at a few of the world’s biggest ports.  Further, such boats become prime targets for cyber attacks, terrorism, in addition to facing a dearth of qualified personnel to operate them leading to high insurance premiums.  Yet, the biggest costs associated with these vessels are on the ports that accommodate them as they require new cranes, taller bridges, environmentally perilous dredging, and wholesale reconfiguration of container yards, among others for effective servicing.

In addition, mega-vessels have been the cause of traffic jams not just in the waters.  Often, under prepared ports are overwhelmed by the thousands of containers they need to offload. The expense in worker overtime and cargo delays can be significant for what are limited port visits by these vessels.  However, it is not just these upfront costs that are daunting.  The rate of expansion of world trade has slowed considerably, with many countries including emerging economies relying more on domestic consumption than export led growth.  Despite these circumstances, ship owners have not steered clear of big boats as they fear falling behind the competition.  As a result, global capacity of mega-vessels is still on the rise. Mergers and consolidations might offer a chance to shippers to keep the big vessel business going but eventually, even they will have to accept that the era of super sized shipping has begun to list.

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Source: Bloomberg

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