Tuesday, October 16, 2018

Chasing the “Holy Grail’ of Economies of Scale in Shipping

In liner shipping, the pursuit of Economies of Scale (EoS) through bigger and bigger ships is something like the pursuit of the Holly Grail. Thirty years ago, the largest containership would just pass through the locks of the Panama Canal and it had a size of roughly 4,700 TEU (known as a Panamax-size ship).[1] Today, the size of the largest containership is five times that, i.e. about 22,000 TEU. What are therefore those EoS, and are they as important as carriers tend to believe?

Economies of Scale (EoS) refer to the situation where unit costs (i.e. cost/dwt or cost/slot), in other words the costs relevant to pricing and competitiveness, decline as ship size increases. This decline is more pronounced in the case of shipbuilding costs, manning costs and fuel costs. Simply put, you don’t need twice the amount of steel in order to build a ship twice the size, nor twice the crew to sail it, or fuel to move it. In the case of shipbuilding (capital) costs in particular, the above figure speaks for itself when it comes to the relationship between cargo-carrying-capacity (CCC) and ship dimensions: The almost doubling of CCC, from 3,500 to 8,000 to 15,000 TEU requires only moderate increases in ship dimensions and, most importantly, draft. This shouldn’t surprise us: The amount of steel I need to build a ship increases linearly while CCC increases in the cube of dimensions.

The bottom part of the figure (borrowed with many thanks from the Port of Hamburg) is even nicer: The larger ship (March 2018) is the CMA CGM 'Antoine de Saint ExupĂ©ry': 400 meters long, 59 meters wide, with a container capacity of 20,776 TEU. In her gut (May 1968), like Jonah in the gut of the whale, is the "American Lancer": 213 meters long, 26 meters wide, with a container capacity of 1,200 TEU. The Antoine is just twice as long and about twice as wide as the Lancer, but it can carry 17.3 times more cargo (20,776/1200)! What better example could one need to explain economies of scaleThe question however is: can our ports continue to cope with this kind of gigantism? Should they? My answer is clear and unswerving: They can (could) but they shouldn't. 


[1] The size of a panamax ship was determined by its beam which could not naturally exceed the 33.53 meters width of the Miraflores locks of the Panama Canal. As the ‘beam to length’ ratio of a ship is fairly fixed ( in heavy weather, a ‘sausage’ type ship could easily break in two if, when loaded, it found itself at the top of two wave crests), the maximum size of a panamax containership was about 4,700 TEU. At a beam of 33.5 meters, the ship can carry 33.5/2.5=13.4, or 13 containers across (counting containers astern is an easy way to impress your interlocutor, when asked about the size of a ship…).

Thursday, March 22, 2018

General Rate Increases (GRI) in Liner Shipping: Do they matter?

Advance Price Announcements (GRIs) in liner shipping have long been a bone of contention among shippers and competition authorities alike. Grudges include lack of transparency and the “usefulness” of public announcements by and large.

Liner rates are complex structures that include various, often obscure, components, such as BAFs, CAFS, etc. Regarding public announcements on the other hand, and as the argument goes, if carriers only wanted to inform their clients of future price increases, they could do so directly (e.g. by letter or email), without recourse to public announcements in the Press. Economic theory suggests that, in a cartelized market, advance price announcements by one producer (carrier) might lead to actual price increases by its competitors.

Recently, the European Commission and the Russian Competition Authority (Federal Antitrust Service -FAS) have instigated investigations, adopting “remedies” that virtually annul any possible impact of GRIs on actual freight rates.

But was this effort necessary?

New econometric research appearing in MEL shortly shows that the impact of GRIs on actual prices, if any, is minimal and if it exists it exists only under specific market conditions. Moreover, assuming GRIs could have some effect on competition, they constitute explicit collusion and economic theory says that such collusion is attempted only when the ‘conspirators’ are unable to sustain for long tacit collusion (which is the real concern of competition authorities).

Much ado about nothing therefore? Shouldn’t we be spending our time instead on the grave consequences of alliances and of shipping industry concentration?

I (and many shippers and consumers) think so.


Friday, February 23, 2018

Djibouti, Dubai and China: Containers overboard!

Following a long legal dispute with the concessionaire (DP World of Dubai, UAE), the Government of Djibouti decided today to unilaterally terminate the concession and seize the Doraleh Container Terminal (DCT), operated by DP World. From what it is known, the dispute concerns the government’s wish to renegotiate the concession agreement; and no doubt, DP World understands what this means… But there’s more to this dispute that meets the eye.

In view of its geographical location on the Horn of Africa (Gulf of Aden; see map), and its function both as a gateway port to Ethiopian trade and as transshipment hub, Djibouti is a very strategic port and a modern day Cerberus, watching the entrance to the even more strategic Red Sea.

As a result, Chinese interests in this port-city  are also very strong: China Merchant Holding International (CMHI) has developed and financed the new Doraleh Multipurpose Port (DMP), next to the defunct old port, so as to relieve city congestion and turn the old port and its waterfront into a business and recreational district. A Free Trade Zone is also being planned by CMHI next to DMP.

As competitors, DP World and CMHI do not quite see eye to eye, and doubtful if they could both ‘fit’ in the tiny state, even if they wanted. Moreover, it is becoming increasingly known that UAE is deploying naval forces in the neigh of Djibouti, while China has already been promised a naval base there.

In conclusion, let me say for one more time: “trade and infrastructure” go a bit further than just counting containers and making port rankings; quite a bit actually...  


Wednesday, October 25, 2017

Back to the roots for container shipping?

The Journal of Commerce recently reported that NVOCCs are gaining a greater share of the container market, in part because carriers have pulled back from relationship-building. Nothing could be more true. But in actual fact, the thing carriers have pulled back from is “integrated door-to-door- logistics”. And this is why.

Containerization has gradually led to the commoditization of the ocean (port-to-port) liner service: All carriers have more or less the same ships, sail at the same speeds, call at the same ports with the same frequency and charge fairly similar spot tariffs. Thus, for the shipper, a slot is a slot is a slot and -other things being equal- he should normally care little if his container arrives in Rotterdam on a Maersk or NYK ship. He should also care little if his container arrived in Vienna from Hamburg, Rotterdam or Antwerp.

This situation has led to excruciating competition among carriers who -in the 1990s- realized that survival meant differentiation. They thus started to invest in the other components of the supply chain, such as container terminals, distribution centers, road, rail and air transport means, as well as in a miscellany of other value-adding services, such as bar-coding, assembly, documentation, customs clearance etc. 

I remember, during my years at NOL/APL Logistics, managers telling me that they would advise a shirt manufacturer, all the way from his production line in Shenzhen, to the shelf his shirts should be placed on in downtown New York. I remember consignees in Rotterdam telling me that carriers were texting them four times a day to inform them on the whereabouts of their container. A quality carrier, at that time, had a global sales-force which, for some, was representing 25% of their running costs, if not more. Today, in the carriers’ cost-cutting strife, this has dropped to zero. “There is no one to talk to”; complained to me one shipper. “Well”, I replied, “you should have known better my friend. But there is never too late. You have saved more than enough from the shipping industry’s rock bottom tariffs. And if you now want higher quality; predictability; traceability; lower inventory- and supply chain costs, like in the past, I am afraid you will have to put your hand deeper in your pocket…”.

 Moreover, investment in logistics services and related infrastructure allowed carriers to become more asset light, thus more agile in coping with the vagaries of the business cycle. The example of global forwarders and 3PLs was very convincing: They suffered the least from the 2008 economic meltdown just because they didn’t own any ships but were able to ‘buy’ capacity as and when required.

There is considerable research evidence to support my statement: The return on investment (RoI) of global forwarders is much higher (and stabler) than that of carriers, just because the former can “ride the business cycle”, chartering in and out at will,  while carriers are stuck and burdened with shipping tonnage, ‘sinking’ with it in every market downturn. After all, carriers realized, there was no real need to actually own the ships, which could be easily chartered-in by the KG funds of the rich German dentists… 

Finally, in addition to service differentiation, carriers’ vertical integration along the supply chain also served in increasing both the complexity of operations and the sunk costs of aspiring new competitors (carriers). This was particularly effective whenever shippers were convinced, through effective marketing, that an integrated service is the only way to better serve their transport requirements.

In the past 10 years, this situation has started to change. Carriers appear to be returning back to core business, shedding the idea of vertical integration in favor of better horizontal integration (alliances) and dominance in the sector (shipping) where they have the comparative advantage. Partly, this return to roots has been the result of the weakening or banning of liner conferences, and the low freight rates and service unreliability that have ensued as a result.

In the “Erasmus Report” (freely downloadable from my ResearchGate profile), for one more time as a heretic amongst my colleagues, I had warned shippers and the European Commission that the banning of conferences from European trades would lead to greater carrier consolidation (3 alliances today control world container trades) and service unreliability. They didn’t listen...

But the truth is that carriers have lost the logistics battle against global forwarders for another reason:
Being asset light, 3PLs adjust easier to demand and thus weather the downturns of the economic cycle. In the opposite, carriers, in their strife for survival, build increasingly larger ships, which they are unable to fill, and then sell, wholesale, capacity to their competitors (3PLs). To me, this looks like giving someone the knife to stab you in the back. Is this a clever strategy? I wonder…

HE Haralambides
(Article first appeared in the Journal of Commerce, 24 Oct 2017)

Friday, April 28, 2017

Globalization, public sector reform, and the role of ports in international supply chains

[for the full article, click here]

The first rough brushstrokes of this paper
 were put 20 years ago, mostly in the later part of this paper, concerning the issue of port reform. At that time, I was working for ILO, on the labor aspects of structural adjustment programs, as well as for the European Commission (Commissioner Kinnock), on matters of European port policy.

Since then, the text has expanded substantially to include globalization, containerization, the mega-ships controversy, port competition, transshipment, financing of ports, port labor, and general port management issues. Most of the latter issues derive partly from my recent experiences as president of the port of Brindisi: a provincial town of southern Italy (Apulian Region) which taught me the problems of economic dualism, underdevelopment, and north–south divides in the best possible hands-on way.

Readers are 
strongly advised not to skip my frequent footnotes, which I hope many will find most entertaining. Many of my countless revisions, improvements, updates, and additions have appeared earlier in various forms, including posts on my blog, and some are also included in these footnotes.

Finally, it is not without some satisfaction to see, through this review, that almost everything I was predicting all these years on the evolution of ports towards entrepreneurial entities, and the 
diseconomies of scale posed by mega-ships on ports, shippers, and the supply chain, have come true in 2017.

Friday, March 17, 2017

One-Belt-One-Road (OBOR), China-EU trade relations, and (geo)political ‘positioning statements’

I have updated my ever-developing OBOR presentation, following countless discussions with senior policy makers in Europe and China. 

Inputs are provided on European trade and investment policies; TPP; Regional Comprehensive Economic Partnership (RCEP); Persian Gulf Ports; Africa; Mediterranean; Iran; Russia; India; Pakistan; as well as certain (in my view) "missing links" in the Caspian and Black Seas. 

I also touch upon Global Shipping Alliances, mega-ships, and Panama and Suez Canals. Finally, some thoughts on European port policy and on the financing of ports are offered. To be continued (of course)...

(The presentation is freely downloadable from my ResearchGate profile)

Friday, January 27, 2017

India, Russia and the Persian Gulf: A new OBOR in the making?

The Chinese One-Belt-One Road (OBOR) initiative is a US$ 1 trillion plan, with an estimated economic multiplier of 2.5. However, since the initiative was first announced in 2013 by President Xi of China, only 5% of this budget has been spent. There are as many plans as interested countries, and China is talking to most of them.

This impressive transport network consists of a “Belt”, i.e., overland transport connecting China to Europe through Central Asia; and a “Road”, i.e., a maritime return-route from southern Europe, through Suez, back to Asia. The Mediterranean Basin is therefore ‘central’ in this network which, looking at Chinese investments in Australia, central- and south America, could be easily extended to a global around the world transport system. Such a development assumes more concrete credence, after president Trump’s withdrawal from the Trans-Pacific Partnership (TPP) and, possibly, from NAFTA too in the near future.

Although Arabian Gulf ports are not yet part of this network in any visible way, the Region’s importance cannot be underestimated, as seen also by Chinese investments in Oman, Qatar, etc., as well as India’s interest in the Iranian port of Chabahar, so as to ‘bypass’ the (for her worrisome) Pakistani port of Gwadar, developed by China.

In short, and particularly for ports in the Upper Gulf (MAK, Umm Qasr, Bandar Imam Khomeini), the region could constitute a (land) alternative to Suez, at the same time connecting the Gulf to the Mediterranean Sea. In addition, a ‘port system’ such as this, would and could serve the vast hinterlands of Iraq, Iran, Turkey, all the way up to Moscow, thus connecting to OBOR (Belt) through Russia’s North South Transport Corridor (NSTC).

Could such a scenario be feasible in the short- to medium term? The answer is 'yes', and much of the infrastructure is already there. The only thing it will take is a firmer understanding that progress and welfare are better achieved through economic cooperation rather than political conflict. HH 

Tuesday, January 17, 2017

Davos 2017

Sergio Ermotti (UBS): "We ought to listen to what people say: The benefits of globalization are clearer to emerging economies than to developed countries"

[excerpt from my new book, written 20 years ago]:
[...] The western world has been losing out in this zero sum game, as it has proven to be after all. The West’s initial enthusiasm with globalization and trade liberalization was based on a false premise: i.e. that its saturated economies and increasing returns to scale industries could only survive if and only if the West could expand the international market for its exports. Unfortunately, this didn’t happen. Instead of producing ‘here’ and exporting ‘there’, Foreign Direct Investment (FDI) started to flow ‘there’, producing ‘there’ and, often, re-importing back ‘here’. Profits of European multinational companies have not been repatriated in a way that would allow us to sustain our welfare systems and way of life, developed over decades with the taxes of our fathers and forefathers. These systems are now being unraveled in the pursuit of the Holy Grail of cost competitiveness, and as a result of a mentality of ‘cheap consumerism’ which, if it does not change, it will be signing the economic death certificate of, at least, Europe... HH  

Thursday, January 12, 2017

Mother, should I work in a port?

[The recent New York Times article* reminded me of this photo which I had collated some time ago, appearing in my forthcoming book]
In the earlier days (up to the beginning of the 1960s) general cargo, carried by liner ships, was transported, in various forms of packaging (pallets, boxes, barrels, crates, slings), by relatively small vessels, known as general cargo ships. These were twin-deckers and multi-deckers, i.e. ships with holds (cargo compartments) in a shelf-like arrangement where goods were stowed in small pre-packaged consignments (parcels) according to destination (figure).

This was a very labour-intensive process and, often, ships were known to spend most of their productive time in port, waiting to load or discharge. And although seafaring was great fun in these days [sic], the same cannot be said for casual port work which was rather ill-considered and looked down by society.

As a result of the unpredictability of port work, port management could not possibly employ permanent staff, paying them while idle, and waiting for the next ship to arrive. Labour was thus casual, i.e. employed for as long; as much; and whenever required.

Recruitment of dockers was very different too. Each morning, a number of dockers would present themselves to a union foreman, often a mobster, and he, on the basis of certain ‘criteria’ that had more to do with natural selection rather than anything else, would thumb-in the youngest, the strongest, the favorites of the Union, or those prepared to return a kickback to the Union.
To indicate this ‘preparedness’, the latter dockers used to put a toothpick behind their right ear.[1] The rest would return to their ‘locales’ [sic] and indulge in whatever it was they were indulging in.

Containerization and the new cargo-handling techniques changed all this by taking work away from the waterfront to inland consolidation areas, or to the backyard of the manufacturer who would stuff/strip the container at his own good time. Port labor was thus reduced by 90%, while at the same time labor productivity increased tenfold. Port management had to make generous concessions to docker unions, including the setting up of 'funds' to compensate port workers for the fewer hours they now had to work as a result of automation. In a number of countries, including the US, such 'funds' exist even today, topped up by carriers, and at rates such as $5/ton of cargo handled.

In spite of the reduction in numbers, port union strength has remained largely unchanged and it is not uncommon, in many western ports, to see 'closed shop' salaries well above 100 thousand dollars per year.

Labor 'rigidities' such as the above often lead to large gang sizes, excessive over-manning, little labor mobility and high port user costs. In many ports around the world, the inflexible and monopolistic supply of port labor has effectively discouraged intended private sector activities around the port and has, thus, deprived the latter from one of its main functions, that of being a "growth pole" for the region and the country. 

[1] A beautiful account of the “waterfront” can be watched in Elia Kazan’s 1956 masterpiece “on the waterfront”, with Marlon Brando (soundtrack: Leonard Bernstein), or Mike Newell’s 1997 drama “Donnie Brasco”, with Al Pacino and Johnnie Depp.

* "The Mob’s Last Candy Jar", New York Times, January 8, 2017, p. MB1.

Wednesday, December 28, 2016

The end of private car ownership?

These days every year is the time of predictions and I have never shied away from them. Here are therefore my predictions, not for 2017 but for 2027.

Autonomous (self-driving) cars are here to stay and the plans of manufacturers point at an exponential future growth. Consumers have already expressed their preferences for reading; working; meeting; or chatting on their cellphone in the car, rather than driving.

The internet of things (IoT) is already changing our mobility behavior and, with applications like Uber, as well as GPS navigators such as Waze and Sygic, our car is already connected to all others. This has the potential to alleviate much of our transport externalities, such as accidents, congestion and air pollution, and lead to a much better, and more efficient, use of road infrastructure.

We are using our car only for 10% of its time and that’s a terrible waste; car-pooling (in autonomous vehicles) will increase. Private transportation services will be demand-driven: I will have a car waiting outside my door only when I need it. I won’t need half an hour every evening to find a parking spot in the neighborhood, nor would I need to pay car ownership taxes for having a car gathering rust on my sidewalk. Once it has dropped me off, the car could go and park itself at a specially designated parking area, hopefully outside our congested cities. Residential areas will again become what the word says: "residential".

Considering the above, at some point in the near future, car manufacturing will start declining precipitously. The end of car ownership is here.

Happy New Year 2017 to all.