THE SHIPPING SURVIVAL GUIDE: Juggling efficiency with bigger container ships

As the prices paid to move cargo over long distances have plummeted, shippers have turned to ever-larger ships in search of volume-driven savings. But that strategy is putting a massive financial burden on the ports needed to service them, creating friction between shipping interests that depend on one another to survive. Both sides are looking to information technology improvements for relief.

Jebel Ali Container Terminal 1 (Image © DP World, UAE Region)

Shippers of containerized cargo know exactly how to lower their costs: move more cargo per ship. As a result, the industry is scheduled to welcome its first 20,000 TEU (twenty-foot equivalent unit) ship in 2018 – a leviathan so big that few ports in the world will be able to service it.

For shippers, the motivation for bigger ships is a simple question of economics. “The cost of moving a box from Hong Kong to New York in 1973 was about US$5,800 per box; today it is about US$2,500 per box,” said Richard Larrabee, former director of port commerce for The Port Authority of New York and New Jersey, a decline made possible by rapidly escalating volumes of cargo moving on larger and larger ships.

Growth in demand for containerized shipping is historically strong, projected to increase by 6% to 7% this year, according to RS Platou Economic Research, a division of the Oslo, Norway-based RS Platou Group, a leading international broker and investment bank serving the offshore and shipping markets. Meanwhile, Tokyo-based International Association of Ports and Harbors (IAPH), a nonprofit organization, reports that global cargo levels in 2013 reached more than 651 million TEUs. While the growth rate in demand for space is respectable, ship capacity grows in tandem, with an estimated 1.6 million to 1.9 million TEU of new shipping capacity scheduled to hit the water in 2015, a net fleet expansion of nearly 7%.

But “container shipping is a low-margin industry,” said Keith Svendsen, vice president, Operations Execution, Maersk Line, the global container division of the A.P. Møller-Mærsk Gruppen, a Danish conglomerate. “In 2014, only Maersk Line and three other lines reported significant positive earnings before interest and tax margin. The industry’s margin as a whole averaged 3.1%. Profitability is, to a high degree, dependent on the industry’s ability to lower costs and increase efficiency. The main lever is economies of scale, illustrated by the increase in vessel size.”

SIZE MATTERS

As ships grow bigger the channels, ports, facilities and associated logistics services must grow as well, a reality that is creating friction between shippers and the facilities that serve them.

“I believe the defining trend is the owners’ pursuit of optimum ship size, which appears to be toward bigger carrying capacities and lower unit costs,” said Shashi Kumar, professor of International Business and Logistics and academic dean at the United States Merchant Marine Academy (USMMA).* “Everything else is driven by this: the widening of the Panama Canal and improvements to the Suez Canal; new investments in ports and terminals; dredging deeper channels; and even the motivation (for carriers) to form alliances.”

Port facilities and terminal operators complain that ship owners have forced them to bear the brunt of the burden to invest, without a sufficient increase in volume to offset the cost.

“These ultra large container vessels put us, as a port operator, under pressure,” said Mohammed Al Muallem, senior vice president and managing director, UAE Region, DP World, a global container handling specialist with more than 65 marine terminals in Dubai, one of the seven United Arab Emirates. “On the one hand, they help shipping lines to reduce unit costs. But they also require the port industry to invest in longer berths, deeper drafts and bigger cranes to translate on-water economies of scale to land.” DP World has invested more than US$6 billion over the past five years, Al Muallem said, adding capacity and upgrading infrastructure of its terminals, including its flagship Jebel Ali facility in Dubai.

Continue reading the rest of this story here, on COMPASS, the 3DEXPERIENCE Magazine

Permanent link to this article: http://www.apriso.com/blog/2017/09/the-shipping-survival-guide-juggling-efficiency-with-bigger-container-ships/

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