Thursday, November 15, 2018

The impact of alliances on container shipping and ports


[Short excerpt from my submission to the European Commission in the context of its public consultation on the evaluation of the consortia block exemption regulation].

Please cite this document as:

Haralambides, H.E. (2019) "Gigantism in Container Shipping, Ports and Global Logistics: A time-lapse into the future". Maritime Economics & Logistics, (21):1, pp 1-63, February 2019].
_________________


I have often remarked that gigantism in container shipping has been induced by both port competition and shipping alliances. Indeed, without the possibility to use each other’s ships, no carrier by himself alone would be able to achieve a capacity utilization high enough to justify the use of present day mega-ships, while at the same time offering the frequency that shippers require.

But carriers have gone a step too far: At the time of writing, three alliances[1] carry 80% of global trade. Such consolidation, in an industry that is already highly concentrated, is bound to finally attract the scrutiny of the regulator who, with the final consumer in mind, is likely to encourage more competition rather than further consolidation. If this happens, i.e., if container shipping becomes more open and competitive in the future, and if alliance agreements regarding vessel sharing, investment planning, etc. are scrutinized more closely for their compatibility with competition law, as I expect, the joint filling of the ship will become more difficult and ship sizes shall by necessity decrease, together with an increase in the number of ports of call. Low prices would then be achieved through more competition rather than big ship sizes. This is the more so when it is doubtful if the economies of scale in shipping are passed on to the final consumer, as required by the consortia block exception from the provisions of competition law in Europe.

A voice from the past: the ‘second scenario’[2]
There are a number of macro-trends that, in addition to the above, might advocate for smaller ships and more port calls; particularly the latter. In a nutshell: (a) Transshipment costs and if they can help it shippers prefer to have their goods as close to them as possible; (b) Consolidation and distribution use land infrastructure without paying full costs for the private use of a public good; (c) The external costs of hub-and-spoking (congestion; pollution; accidents) may at times be as high as 2% of European GDP.

I thus argue that transshipment, warehousing and distribution don’t come cheap, as our enthusiasm with logistics often assumes. It is good to keep this in mind and thus make sure that the costs (internal and external) of logistics operations are paid in full, including the costs of using public infrastructure. The latter, because (to a large extent) infrastructure is no longer a public good and thus the user-pays principle should in principle apply.



[1] 2M: (MSC, Maersk, HMM); Ocean Alliance: (CMA-CGM, Cosco Group, OOCL and Evergreen); and THE Alliance: (Hapag Lloyd, NYK, Yang Ming, MOL, K-Line).
[2] Haralambides, H.E. (2000) ‘A second scenario on the future of the hub-and-spoke system in liner shipping’. Latin Ports and Shipping 2000 Conference, Lloyd’s List, 14-16 November 2000, Miami, FL., USA.

Saturday, November 3, 2018

Hub-and-Spoke systems in container shipping

Mega-ships and mega-ports are the two faces of the same coin: the one ‘feeds’ and reinforces the other, and the one cannot exist without the other. I prepared this infographic in an effort to explain to a wider audience, in as simple a manner as possible, the ‘concept of hub-and-spoking’ (HS), in other words the intrinsic relationship between mega-ships and mega-ports.

The HS idea is quite enticing as a start: Simply put, “it is cheaper to ‘shuttle’ between hubs with a bigger ship and then distribute, rather than call directly at smaller ports, with smaller ships, serving a smaller demand”.  A mega-ship can realize significant economies of scale as long as a) it sails full; b) spends most of her time at sea. To achieve both objectives, she must limit her ports of call to a minimum number of hubs, such as ports 1, 2, and 3 (calling also, however, at some additional ports such as 4 and 5). Port 2, let us say Singapore, is a ‘consolidator’: It attracts cargo, destined for Europe (or North America), from places as far away as Australia, Indonesia, Philippines, India, etc., and it has it ready, at its modern terminals, waiting to be expediently picked up by the mega-ship as soon as the latter arrives. Remember: such a ship cannot wait much and if it has to, before too long she may be looking for another, more efficient hub.

Port 1 in Northwestern Europe, let us say Hamburg, is a ‘distributor’ and the process is reversed: Our mega-ship arrives, drops its ‘call size’ (i.e. the number of containers destined for that particular port) within a tight time-window, and departs. What happens next, i.e., how Port 1 shall manage to distribute to its hinterland, as efficiently as possible, a huge inflow of thousands of containers, is not our ship’s concern; rather, our ship looks at this challenge as a NIMBY (not-in-my-back-yard) question.

Leaving it at that, the HS freight system is preferable to direct calling, reducing notably transport costs, in spite of the substantial feedering operations which are required (too many studies have convincingly shown this and I won’t attempt to repeat them here). In addition, the ‘consolidation-distribution’ operations around the hub ports create substantial economic activity for transport operators (road; rail; inland waterways; short-sea-shipping).

When it comes to feedering operations, there are two systems in daily practice, depending on the amount of freight volume available: If the latter is adequate, a shuttling system is often used, like the one between hub 1 and regional ports  9-12. When regional cargo traffic is limited, however, a cyclical feedering system is preferred, such as the one between hub 2 and feedering ports 6, 7 and 8. Finally, we also have two types of feeder companies: Dedicated feeders, belonging in other words to major carriers like COSCO, and common feeders, i.e. shipping companies that offer their services to all major carriers indiscriminately.

But we should not leave it at that; not any longer. As I have argued many times since 2000, starting with my “second scenario”:[1]
·       
  • Transshipment costs: a bicycle manufactured in Vietnam and ordered in Madrid may be handled four or five times;
  • Shippers do not like too much transshipment and long distances, preferring to have their containers as close to them as possible;
  • Consolidation and distribution use land infrastructure without paying for the private use of a public good;
  • External costs of hub-and-spoking (congestion; pollution; accidents) may at times be as high as 2% of European GDP;
  • It is doubtful if the economies of scale in shipping are passed on to the final consumer, as required by the exception of consortia and alliances from the provisions of competition law;
  • Mega-ships are becoming an increasing headache to most ports and distribution centers, and a NIMBY approach is no longer acceptable to them and to the taxpayer who finances them;
  • Large ships reduce loop frequency and increase the inventory costs of traders, thus defying the very same principles of supply chain optimization;
  • HS penalizes the legitimate development plans of other ports, particularly as major hubs, now claiming from others efficiency and market-driven port investments, have been financed with public money for most part of their economic life. 

In the last quarter of a century, economies of scale in shipping, distribution and logistical systems have totally changed our lives to the better. But transshipment, warehousing and distribution don’t come cheap, as our enthusiasm with logistics often assumes. It is good to know this and thus make sure that the costs (internal and external) of logistics operations are paid in full, including the costs of using public infrastructure. The latter because (to a large extent) infrastructure is no longer a public good and thus the user-pays principle should apply.

One might counter-argue on the above that, in this way, higher transport and logistics costs would be passed on to the final consumer, as it usually happens with privatization. This may or may not be so, depending on how competitive transport and logistics markets are. But even if it is so, what is certain is that the final consumer will now be paying less taxes to develop ‘private’ infrastructure. 
On balance, he should be indifferent.

HH



[1] Haralambides, H.E. (2000) ‘A Second Scenario on the Future of the Hub-and-Spoke System in Liner Shipping’. Latin Ports and Shipping 2000 Conference, Lloyd’s List, 14-16 November 2000, Miami, FL., USA.

Sunday, October 21, 2018

The “Second Scenario”: Mega-ships and the future of the hub-and-spoke system in liner shipping



The first time I expressed my concerns about the mega-containership phenomenon was in 2000, in my “second scenario”.[1] I could then see 6 macro-trends, reinforcing each other, which could potentially halt the gigantism in container shipping, as well as in mega-hub-port development. These trends were: i) worldwide port development; ii) regionalization of trade; iii) infrastructure development in southern Europe; iv) road pricing in Europe; v) the future of liner shipping alliances; and vi) the impact of information technology.

I was laughed at then, as “the professor with the different opinion”. You see, those were the days when everybody was talking about the Malacca-Max (18,000 TEU) ships and similar creativities, which were listened to, unfortunately impulsively, by many ports. And I was laughed at again, because ships continued to grow unabated, in spite of the fact that my six trends had conspicuously materialized in these 18 years since 2000.

This, however, was not due to a failure of the underlying trends to influence ship-size development, but to failure in regulatory policy; both in terms of our inability to develop a coherent port policy in Europe, and our ‘eyebrow-raising’ leniency towards increasing concentration in liner shipping, in the form of global shipping alliances.

CMA-CGM, Drewry, OECD, and Fairplay[2] now believe that things may have started to change. Adding a note of personal gratification, I am happy to take note of their recent conviction. However, things have started to change 20 years ago; we only didn’t know it; or did we?

HH 




[1] Haralambides, H.E. (2000) A second scenario on the future of the hub-and-spoke system in liner shipping. Latin Ports and Shipping 2000 Conference, Lloyd’s List, 14-16 November 2000, Miami, FL., USA—(you can download the paper from my Academia and ResearchGate profiles).

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. 

HH



[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.

HH




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...  

HH 


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