Megaships May Be Too Big Not to Fail -View

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September 14, 2016

File photo shows Maersk Triple-E float-out at the Daewoo Shipbuilding & Marine Engineering shipyard in South Korea. Photos: Vladimir Tonie

By Justin Fox

(Bloomberg View) — It was always going to be tough for the world’s container shipping lines — accustomed to decade after decade of growth in the volume of video-game consoles, auto parts, furniture, frozen seafood and all manner of other things transported in boxes across the sea — to adjust to a slowdown in global trade.

What has made it a whole lot tougher is that, not long before trade peaked as a share of global gross domestic product in 2008, container shippers began adding capacity at an even faster pace than they had before. Container traffic has actually held up better than bulk shipping (which is heavy on raw materials like iron ore) and oil tankers, with volume still growing in the low single digits annually. But capacity growth has far outstripped demand.

This is from a 2015 report by the Organization for Economic Cooperation and Development’s International Transport Forum on “The Impact of Mega-Ships.” It makes for fascinating (if pretty wonky) reading now. The gist is that the move to giant ships, with capacities now approaching 21,000 TEUs (for twenty-foot equivalent units, the standard measure of container volume), adds all sorts of costs to the global transport system that may end up outweighing the per-TEU energy and staffing savings from bigger boats. My Bloomberg View colleague Adam Minter already wrote a whole column about these problems; I’ll address them briefly in a moment. But the big question for me is why shippers kept adding capacity even as demand slowed.

See Also: Is Collapse of Hanjin a ‘Lehman’ Moment for Shipping?

One answer is simply that, a decade ago, demand for container shipping seemed to be accelerating. Global container traffic grew 17 percent from 2006 to 2007, up from 11 percent the year before. Big new ships aren’t built overnight, so it’s understandable that the container lines did a bit of over-ordering back in those days. Still, that doesn’t explain why they kept adding capacity even after that demand acceleration didn’t pan out.

Another answer is that adding capacity is just what container shippers do. Here’s a fun observation from a 2012 Boston Consulting Group study that urged shippers to stop adding capacity already:

Traditionally, the industry and key industry observers have measured carriers’ market share on the basis of capacity rather than the freight volumes they actually transport. Therefore, carriers have typically expanded their capacity to strengthen their market position.

A final answer is that the biggest container shipping line, Copenhagen-based Maersk, thought that ordering a set of new 18,000 TEU mega-ships in 2010 could change the dynamics of the industry. In an essay published last week, Olaf Merk, ports and shipping expert at the International Transport Forum and co-author of the mega-ship report cited above, took a stab at explaining Maersk’s reasoning:

For a weekly container service between Asia and Europe — the route on which the largest ships are deployed — ten to eleven ships are needed; a lot of capital that smaller companies would not be able to collect. As the order for the new mega-ships was placed while the global economic crisis was still unfolding, banks were unwilling to lend much to a risky business like shipping, especially the smaller ones with high risk profiles. Timing was excellent, with ship prices low due to overcapacity in shipbuilding yards. The new mega-ships were smartly marketed as “Triple E” ships, providing economies of scale, energy efficiency and environmental performance. They also provided a once in a lifetime opportunity “for the market consolidation that big players hoped for.”

Basically, industry leader Maersk was making a bet that by pioneering giant, super-efficient ships it could take market share from smaller rivals and force some to shut down or sell out. That didn’t work quite as planned. Maersk got its mega-ships, but so did rivals, thanks to new alliances that allow shipping lines to share capacity and government aid. Now, with the Korean container line Hanjin in bankruptcy, some of the consolidation that Maersk and others wanted to see may happen. But it’s happening in an environment of tremendous overcapacity, falling prices and big losses for the shipping companies — which are reacting in part by trying to push their per-TEU operating costs even lower by shifting to … bigger ships.

Read This: Hanjin’s Fall Will Not Fix the Global Shipping Industry’s Ills

I really don’t know how this is going to play out. Airlines face similar dynamics, and tend to alternate between periods of stability and crisis. Airlines do seem to have figured out, though, that ever-bigger planes aren’t really the answer.

For the shipping companies, the logic of size is that stuffing more containers onto a ship means lower running costs per container. An added cost-saver is that the mega-ships are designed for “slow steaming” — traveling at about 17 knots instead of 20 to save on fuel and engine capacity.

For ports, and for the companies moving their goods in the containers, ship size is more of a mixed blessing. For one thing, the ships are just too big for some ports and shipping routes — the newly expanded Panama Canal can only handle container ships of up to about 13,000 TEUs, while the Port of Newark, New Jersey, where container-shipping began, maxes out at 9,200 TEUs. For another, they make shipping, well, lumpier, by reducing the frequency of port calls and increasing the amount of loading and unloading that needs to be done on each call. Part of the genius of container shipping, as Marc Levinson wrote in his wonderful history “The Box,” was that:

as container shipping became intermodal, with a seamless shifting of containers among ships and trucks and trains, goods could move in a never-ending stream from Asian factories directly to the stockrooms of retail stores in North America or Europe.

Slow-moving mega-ships risk reducing the seamlessness and interrupting the never-ending stream. In fact, they already have interrupted it, if you pin some of the blame for the Hanjin bankruptcy on them. And while the shipping industry will eventually work its way through these troubles, and maybe even start ordering smaller ships, even a temporary increase in the friction involved in shipping things around the world has got to have broader economic consequences.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

© 2016 Bloomberg L.P

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