LACK OF SLACK?
Our results show that it is the ‘unexpected’ and ‘unanticipated’ -e.g., a natural disaster; a war; a tsunami; or COVID19-that poses the greatest risk to carriers: Intense competition amongst them, geared to short-term profit maximization, coupled with the fine-tuning of capacity management within alliances, does not allow them the luxury of affording built-in buffers, or slacks, that could ‘absorb’ the unexpected. Not unexpectedly therefore, COVID19 has been the greatest risk factor of all times, mitigated –quite profitably one should add—by the joint capacity management of global shipping alliances. (Open Access: https://lnkd.in/dV9mkY7Y)Maritime Economics and Logistics
My blog provides commentary and opinion on current developments in the global economy; international trade; shipping; ports; terminals; transport; and maritime logistics, including important business research findings, as reported quarterly in the 'Maritime Economics and Logistics' Journal (www.palgrave.com/41278). © HE Haralambides, all rights reserved.
Friday, July 28, 2023
Monday, June 19, 2023
MEL SPECIAL ISSUE: PORT-CITY SYMBIOSIS
Before, ports used to be ‘city ports’, particularly in cities blessed with a river. Growth in trade and ship sizes eventually obliged them to move downstream, in river estuaries, where more space was available. Cities thus became ‘port cities’. Of recent, we observe port activity returning back to the hinterland in the form of inland terminals and dry-ports. However, the relationship between the port and its city, or vice versa, has never been easy. The port needs autonomy, the city requires ‘control’.
Moreover, both port and city need to develop their port and urban plans, and this requires land which can be demanded and contested by both. Can a city and a port coexist in harmony? Carola and Maurice try to answer this through the compilation of eight excellent papers in this new MEL Special Issue. Congratulations and thanks to both guest editors and all the contributors to this new MEL milestone.
HH
Monday, May 29, 2023
PUBLIC TENDERS IN PORTS: COMPETITION ‘IN’ OR ‘FOR’ THE MARKET?
I have written on this issue before but, again, here is an excerpt from my new work, to appear shortly.
The type of competition we choose to adopt among our concessionaires is important. In many submissions to the European Commission, I have favoured
competition ‘in’ the market, vis à vis competition ‘for’ the market, the latter
being the Commission’s preference, mostly based on arguments regarding market
size.
To explain. Ports are often referred to as
the classic example of the so-called natural monopoly case, whereby possible
market failure can justify government intervention. Under certain conditions
(level of demand, cost structures and technology), a market with two or more
firms can produce sub-optimal economic outcomes (for example a certain port may
be too small to have two tug operators), whereas a single firm might produce
the required output more efficiently. For this reason, governments often decide
to move away from a multi-firm competitive environment (competition “in” the
market), towards a monopolistic, albeit regulated, situation (competition “for”
the market), whereby only one concessionaire is selected through competitive
public tendering.
I have always argued that such public
intervention in commercial decisions is wrong. And it is wrong for two reasons.
First, the sometimes-widespread corruption
in the public sector may result in ‘photographic’ tenders favouring a specific
bidder (often the current incumbent), effectively shutting off international or
even national competitors. Thus, it is not uncommon for public tenders to end
up with only one interested bidder, while the correlation between single-bid
contracts and corruption in the public domain is statistically significant[1].
Finally, the opening of the market for public contracts is one area where WTO
is dragging its feet for years now, without much progress.
Second, governments, and the public
administration by and large, are by far the least competent actors to decide on
‘market size’, or on the financial ramifications for private firms who would
like to take calculated risks and enter a market. This is because governments
lack both the information required for such decisions --a typical case of asymmetry
of information[2] and
the legitimization to decide themselves on the fortunes of private risk-takers.
The same is true when it comes to the efficiency of the regulatory role of the
public administration (port authority): often, the latter has neither the
professional competence (accounting, finance, etc.) nor the information and
statistics required to assess the highly complex accounts of the
concessionaire; accounts that, often, are submitted in purposely complex and
lengthy form, intended to confuse the assessor.
Instead, the role of the public
administration should be to set the rules of the game; to determine the
conditions and quality of the services it requires (including any Public
Service Obligations) and then leave it up to the private sector to decide for
themselves if the market is big enough, if they see profit prospects, or if
they would like to go bust. But this ought to be ‘their own’ decision, because
it is ‘their own’ money, and, in the end, ‘their own’ neck on the block.
HH
[1]The Economist (2016). Rigging the bids. Nov. 19, 2016.
[2]Akerlof,
G.A. (1970). The Market for “Lemons”: Quality, Uncertainty and the Market
Mechanism. The Quarterly Journal of Economics, Volume 84, Issue 3,
August 1970, Pages 488–500. https://doi.org/10.2307/1879431.
Saturday, March 11, 2023
Carbon Emissions Trading and Shipping: A game changer
The inclusion of shipping in the European Union’s Emissions Trading System (ETS) is a game changer for ocean transportation.
The World Bank foresees that the Carbon
Emissions Trading (CET) market may develop into the world's largest commodity
trading market, expected to exceed $3 trillion in the near future. The Bank
also expects CET futures, as well as the carbon finance market as a whole, to
replace oil as the world's largest market.
We show that the link between carbon
emissions trading and shipping is strong, particularly between CET and dry bulk
shipping. The link becomes stronger during periods of external shocks, such as
Brexit, Covid-19 and China-US trade frictions.
But how can our results be
intelligently used by shipowners for greater profit? How can they support the environmental
sustainability decisions of shipping companies? And how can governments include
shipping in emissions trading systems?
This pioneering research (published Open
Access in Energy Economics) took three years to complete. Sincere thanks are due to the funding
organizations that allowed us to carry out the work. These were:
1. National Natural
Science Foundation of China
2. The 111 Project of
China
3. The Postdoctoral
Research Foundation of China
4. The Liaoning
Revitalization Talents Program
5. The Liaoning
Natural Science Foundation
6. The Dalian Academy
of Social Sciences
7. The Dalian
Federation of Social Sciences (Key Project)
HH
Friday, January 27, 2023
SHIPPING ALLIANCES AND THE MAERSK-MSC 'DIVORCE': WAS THE REGULATOR RIGHT AFTER ALL?
MSC’s orderbook in particular is spectacular, five times that of the more conservative Maersk Line. This explains their ‘divorce’: Maersk has decided to invest along the supply chain while Mr. Aponte (MSC) will continue doing what he, and his father before him, did best: “shipping”. In other words, the two companies decided to invest their fathomless profits of the COVID-19 years in what each was best at: Door-to-door supply chain integration for Maersk; competitive ‘port-to-port shipping’ for MSC. The two strategies are not compatible, as they lead to two different cost structures: substantial investments in a global network of sales effort around the world, for Maersk, targeting the individual shipper, and ocean transport cost competitiveness for MSC, renowned over the years for its acquisition of new and secondhand tonnage at competitive prices.
My point here is different, though: The two graphs tell us that shipping alliances may have not been very successful, after all, in managing capacity, and regulators may be proven right in considering the (COVID19) price hikes just a “matter of demand and supply”. This could be the second reason for the Maersk-MSC divorce. Or not?
Wednesday, May 11, 2022
Optimizing global maritime supply chains: What is a ‘Dual Transaction’ in a container terminal?
In the thrust of nations towards ever higher competitive advantage[1], container terminals play a pivotal and indispensable role. Technological advances and competition amongst them, have forced terminals to raise their efficiency to remarkable levels. This was not always the case: there were times, during the protectionist years following WWII, when inefficient ports were tacitly encouraged by local exporting interests, seen as protection from foreign imports. These were the days of the general cargo freighter, often known to spend half of her time in port, waiting to berth, unload and load[2]. Seafaring was fun during those days. Today, the ship is turned around in two days and the terminal may be 50 kms or more from the city. Even if public transport did exist, the youngster would rather relax in his airco berth, or by the pool, or playing a game of snooker with his mates. At any rate, he would again be back home in a couple of weeks[3].
Simply put, efficiency means two things: Either we
strive to achieve a certain output (i.e., number of containers handled per
annum, or ships hosted in our berths) with as low a cost as possible; or, given
a certain endowment of port resources (i.e., cost), we struggle to maximize the port’s
output. The methodology commonly employed in this type of efficiency
assessments is known as Data Envelopment Analysis (DEA): a mathematical
programming approach, producing ‘frontiers’ of best practice (i.e., top
efficiency), against which all other firms (in our case port terminals) can benchmark themselves; a procrustean bed, so to speak[4].
Whatever the case, cost control is the paramount
consideration of port management. One of the ways to achieve this is to
minimize the movement of containers and their handling-equipment in and around
the terminal. A few examples might suffice: Minimize the turnaround time of
ships (how many ship-to-shore cranes can I deploy on a large ship before I
start realizing diseconomies?); Minimize container rehandles in the stacking
yard (if a container departs in two hours, you may not stack other containers
on top of it); minimize the distance between the berth and the
stacking yard; minimize the distance an external truck must travel between the
gate and the place where it must drop its export container; minimize the time a
truck must wait in the parking lot before it can enter the terminal to pick up its
container; and so on.
If one wants, and one must want, problems could become even
more challenging: Stack containers in the yard according to the stowage-plan of
calling ships; i.e., optimize ship stowage-planning and yard-planning
simultaneously and well in advance, adjusting terminal-planning according to
ship operations in previous ports. Yard-planning is an operations research
(OR) challenge but, even in the largest of terminals, like Shanghai, Rotterdam,
Singapore or Los Angeles, the problem has been efficiently solved through the
development of advanced IT software. But if yard-planning is a challenge, stowage-planning
may be an even bigger one: A stowage plan needs to take into account not only
the ship’s port-rotation, but also a) stability considerations during loading
(the clearance between the ship’s keel and the seabed, these days, may be less
than half a meter, and if loading along rows is not even, touching the seabed
could be disastrous); b) alliance-members’ dedicated bays on the ship; c) crane
density; d) different sizes of containers; e) dangerous goods, and more. If stowage-planning
and yard-planning are ‘challenges’ in themselves, trying to optimize them simultaneously is
an OR nightmare. It is not by accident that my brightest students (in math and
OR) work at PSA, DP World, Hutchinson and other global terminal operators.
But still we haven’t explained what are ‘dual transactions’
in container terminals.
There are two types of external trucks visiting a container terminal: those who
bring export containers from the hinterland, to be loaded on arriving ships;
and those who come to pick up import containers, already unloaded and waiting
in the container yard. Usually, in both cases, one of the two legs of the trip
is unproductive: the ballast leg, as we would say in shipping. A truck
drops the container at the terminal and returns empty; another goes empty to
the terminal to pick up an import container. This type of inefficiency -if we
could call it that- not only leads to higher transport costs but, these days,
it causes things even more important: these
are the negative externalities of land infrastructure use, i.e., pollution,
congestion, and road accidents. It would be interesting at this point to make a
small diversion.
The drive to efficiency, as we said above, has to do with
maximizing output (e.g., number of containers handled) given a certain
endowment of resources (cranes, land, people). Today, however, there is a new factor entering
the efficiency calculation: This concerns the minimization of negative externalities from
port operations, such as sea and air pollution, noise, disturbances of sea
ecosystems, accidents, impacts on local communities and on commercial
activities (e.g., fishing, aquacultures, etc.), conflict with urban development
plans, road congestion around the port and so on; the list goes on[5].
All these are called ‘negative output’ of port operations and reducing them is
equivalent (or it should be seen as equivalent) to increasing ‘output’.[6]
[7]
The question of course here, as in all cases involving negative externalities,
is how to price them, who should pay for them and how, and what would be the
impact of higher prices on trade and welfare. But let us finish our diversion
here and return to our dual transactions.
Can a hinterland consignee know which trucks take export
containers to the port so that he can ‘book’ one to pick up his waiting import
container and bring it to him? And can the truck going to the port to pick up
an import container know who, in the hinterland, needs a truck to carry his
export container to the terminal? Technically, this exchange of information
shouldn’t be too difficult to organize, and a simple APP could take care of it.
The impact of dual transactions on terminal management requirements, however,
is considerable, and this is the problem we have tried to solve in this research, the
development of which took us more than three years. This is why[8]:
The terminal management system we have described above,
i.e., stacking-berthing-gate (etc.) operations, now needs to be modified to
accommodate the following dual transaction considerations: a) An incoming dual
transaction (DT) truck cannot wait at the gate and needs to jump the queue; b)
the truck cannot wait either at the queue of the export block to drop its
container; priority should be given to it over the operations of internal
terminal trucks and other handling-equipment; c) when the truck is ready to
move to the import stack to pick up a container, the handling-equipment (e.g.,
bridge cranes, straddle carriers; reach-stackers, forklifts, etc.) should be
ready and waiting and, ideally, the availability of the equipment should have
been planned in advance. So, in short, if optimizing shore and yard operations
jointly (we have carried out research where even gate operations are included
in this optimization) in a nightmare, the inclusion in the problem of dual
transactions makes the problem apocalyptic. This, because now one needs to
develop a heuristic algorithm that jointly optimizes: gate; berth; stowage;
yard; export/import blocks and handling-equipment deployment.
In an effort to address these issues, we have developed a bi-objective
mixed integer programming model that optimizes the allocation of
appointment quotas simultaneously with the deployment of (yard) cargohandling
equipment. The model addresses the challenges posed by the different types of truck
movement in the terminal, i.e., delivery, pickup, and dual transaction. These
require different handling-equipment, involving various deadlines, and multiple
priorities. To estimate the queuing length of external trucks in single or dual
transactions (as well as that of internal trucks), we have set up a novel three-level
vocation queuing model. For the bi-objective optimization, we propose a revised
non-dominated genetic algorithm, to obtain the approximate optimal
solution. Experimental results have proven the efficiency and effectiveness of
our method, which outperforms all similar algorithms. We show that our vocation
queuing model can estimate the prioritized queuing process more effectively in
three respects: a) the 3-level queuing; b) discrete truck arrivals in the
queuing system; c) non-interruption of servers. Our quota optimization design improves
the model’s applicability to real cases, especially in the case of dual
transactions. We finally demonstrate that the method proposed here, if adopted,
could help terminal operators allocate quotas and simultaneously match the
capacity of yard-handling, thus improving truck services, cost reductions and
environmental impacts. The benefits to be enjoyed by port users, because of
higher terminal efficiency, are only too obvious to be discussed.-
HH, May 2022.
[1]
Michael E. Porter (1990) The Competitive Advantage of Nations. Macmillan
Press Ltd., Basingstoke, UK.
[2]
H.E. Haralambides (2021). Containerization and the port industry. The
Elsevier Transport Encyclopedia, Roger Vickerman, Editor.
[3] Haralambides,
H.E. (2019). Gigantism in container shipping, ports and global logistics: a
time-lapse into the future. Maritime Economics & Logistics, 21(1),
pp. 1-60.
[4]
H.E. Haralambides, M. Hussain, C. Pestana-Barros and N. Peypoch (2010) A New
Approach in Benchmarking Seaport Efficiency and Technological Change. International
Journal of Transport Economics, 38.1: pp. 77-96.
[5]
Haralambides, H.E. (2018) ‘Port Management and Institutional Reform: 30 Years
of Theory and Practice’. In: H. Geerlings, B. Kuipers and R. Zuidwijk (eds.)
Ports and Networks: Strategies, Operations and Perspectives. Routledge, Oxford
and New York, 2018.
[6]
Haralambides, H.E. and Gujar, G. (2012). ‘On Balancing Supply Chain Efficiency
and Environmental Impacts: an eco-DEA Model Applied to the Dry Port Sector of
India’. Maritime Economics and Logistics, 14(1).
[7]
The efforts of the European Sea Ports Organization (ESPO) during the last
decade to promote the Corporate Social Responsibility of European ports is
truly commendable.
[8]
Li, N., Haralambides, H., Sheng, H., Jin, Z. (2022). A New Vocation Queuing
Model to Optimize Truck Appointments and Yard Handling Equipment Use in Dual
Transactions Systems of Container Terminals. Computers & Industrial
Engineering (2022), DOI: https://doi.org/10.1016/j.cie.2022.108216.
Sunday, February 27, 2022
Introducing the novel concept of 'Composite Connectivity' (of ports)
A lot of ink has been shed lately, both on the concept of (port) connectivity and on the aspirations of many ports to achieve international hub status.
The importance of connectivity in particular, is today assuming greater dimensions in view of the strength of global shipping alliances (GSA), their ability to jointly ‘manage’ the supply of tonnage, and the negative impact such power has had on the frequency of services; the number of companies calling at a port; on containership sizes; and on call sizes.
However, connectivity alone cannot explain the importance (and prospects) of a port as an international hub, its attractiveness to shippers, and its ability to develop new transshipment traffic (no matter how well connected a port is in the Arctic, or in Tierra del Fuego, it will never assume hub-port status). We argue that connectivity needs to be combined with measures of centrality, as these are derived from advanced network theory.
We thus introduce the novel concept of composite connectivity: Through an innovative use of Two-Stage Data Envelopment Analysis (DEA) and complex network theory, we first evaluate the efficiency of ‘basic connectivity’ and use this as input in the second stage, which measures the strength of centrality. To do so, we employ such network theory measures as betweenness centrality, closeness centrality, and eigenvector centrality. The “Composite Connectivity Index” - CCI is thus obtained as the ratio of (our measures of) port centrality to port connectivity. The top nine mainland China ports are used as a case-study.
Our results (and rankings) conform to the general perception on the international importance of the ports of Shanghai, Shenzhen and Hong Kong. The usefulness of CCI as a decision-support tool for ports with hub aspirations, as well as for their financiers and investors is, we believe, obvious.
HH
Sunday, February 13, 2022
Port devolution vs. recentralization: A reversal of conventional thinking?
[articulated from: Claudio Ferrari, Hercules Haralambides and Alessio Tei (eds.) 2022. Regulation and Finance in the Port Industry. Palgrave Studies in Maritime Economics, Palgrave Macmillan, DOI: 10.1007/978-3-030-83985-7_1].
From a historical viewpoint, the strategic significance of the port industry, both for foreign trade and national industrial development, has led many national governments to seek an active involvement in the development and control of port infrastructure. However, the scarcity of public financial resources; the unwillingness of the public sector to assume the market risk of specialization; the limited ability of the public administration to run complex, risky, and increasingly commercialised activities, such as those of container terminals; the interest of carriers in having their own dedicated terminals and, finally, the increasing appetite of the private sector (Global Terminal Operators - GTO) in the often very lucrative port terminal investments, have given way to the devolution of decision-making authority from the ‘centre’ to the ‘periphery’. A period of national port reforms has thus started in the 1980s and 1990s, which is still underway in many countries.
Port reforms range from the simple commercialization of port operations to corporatization, and all the way up to full port privatization. But the private sector’s involvement in port business has often given rise to conflict between port and city administrations, particularly municipalities, many of which still believe that it ought to be themselves the lawful managers of ‘their’ ports [During my years as the manager of the Italian port of Brindisi, I vividly remember, the then mayor of the city, and member of the port’s supervisory committee, never missing the opportunity to declare that ‘he did not participate in committee meetings just in order to raise his hand and vote, but he was coming there to actually manage the port’!].
A reversal of the devolutionary trend can however be observed, increasingly, today, i.e., a recentralization of decision-making powers, through the integration of regional ports under a single authority. The trend is being championed by China, followed by Italy and other European countries. The premise behind this is simple: devolution has led to homogeneity of the port service, meaningless port competition and waste of scarce financial resources[1]. However, basic infrastructure such as that of ports is there to provide the platform on which companies compete, but it ought not be the subject of competition itself. Co-opetition is thus the new port model. In this, the development of basic port infrastructure (berths, terminals, channels, breakwaters, etc.) is centrally coordinated, to maximize regional benefit. The infrastructure is then meant to be used by private (or public) companies, i.e., port service providers such as terminal operators, towage companies, pilot corporations, stevedores, and a miscellany of port-related activity, in competition among themselves[2]. Competition here could be ‘competition in the market’ or ‘competition for the market’, the latter being the preferred model (concessions) of most ports[3]. But, to make this point crystal clear, someone needs to be out there to veto my ego-boosting managerial decision to build a new terminal, just because my next-door neighbour is doing so, or because carriers, in possession of significant market power these days, can successfully play one (container) port against the other.-
HH – February 2022
[1] I
am not aware of a port-city not proud of its port: the need for expansion, real
or imaginary, is always on top of the agenda of every city administration,
particularly during periods of local elections.
[2]
For more on ‘port integration’ and its models see: Shan Li, Hercules
Haralambides and Qingcheng Zeng (2022). Economic forces shaping the evolution
of integrated port systems - The case of the container port system of China’s
Pearl River Delta. Research in Transportation Economics (forthcoming).
[3] I
have described the difference between the two models in earlier communications.
Competition for the market is the preferred model of the European
Commission.
Sunday, October 31, 2021
OFFERING THE KNIFE THAT WILL STAB YOU IN THE BACK
Why do they do this?
«But to fill the ship», they will reply.
«And why can't you fill the ship alone?» I ask, «or together with your alliance partners?»
«Because it is too big», they will say.
«And why is it so big?» I insist.
«But in order to enjoy economies of scale», they immediately retort.
«But to enjoy economies of scale», I continue, «you first must fill the ship, while you know you can't. Are you therefore building megaships as a gift to your competitor?»
Check mate.
Full circle.
Vicious circle.
Nice huh?
In my “Gigantism in container shipping, ports and global logistics” (link below), I have proposed a pricing strategy for liner companies, leveraging on their comparative advantage, which is the ‘ship’. In short, 'charge more for the component of the supply chain where you have the comparative advantage, and less for the one where you must compete'. The overall price of the 'door-to-door' transport should remain the same. But the 3PL will have to pay more now for your ship, and this will give you the competitive edge you seek to enter 'logistics'.
Some carriers have listened; especially those controlling marine terminals. Others have not.
Monday, June 28, 2021
Do shipowners and ports see eye to eye?
The competitiveness of ports has received its fair share of
attention in the scientific literature, perhaps more than many other sectors of
the economy. This, because the crucial role of ports as the indispensable nodes
in fiercely competing global supply chains is becoming increasingly felt by
policymakers.
Factors determining the competitiveness of ports are many,
but their importance is weighed differently by different stakeholders. This is
normal in piecemeal assessments, which often resemble the time-honored fable of the blind men trying
to assess an elephant. For instance, (port) costs may not be ‘declared’ of
equal importance by all stakeholders, with some of them opting for higher
efficiency in port operations, or better access to foreign markets
(connectivity and centrality arguments), or a better hinterland access. At the
end of the day, however, everyone’s interest is to minimize their costs, may
this be achieved from higher operational efficiency, access to markets or from
any of the above.
In the absence of a systems approach, or structural modelling, in the literature of
port competitiveness (a project we are currently working on), the ranking of
paired-comparisons attempted in the full article through the Fuzzy Analytic
Hierarchy Process (FAHP) methodology takes us half way to our final objective.
There is another objective here, however, summarized in the paper’s implicit
questions: Are the criteria used by carriers in selecting a port of call the
same as those valued as important by the ports themselves? Do the two actors,
shipowners and ports, understand each other well? What is the value of a better
‘understanding’? Would shipowners look at the larger picture (generalized
costs), over and above their preoccupation with port efficiency? And would
ports understand that their good fortune of having a
prime port location should not allow them to rest on their laurels, but understand that more
needs to be done to attract the ship? As said, our questions are implicit and
so are their answers. But by showing that ports and carriers do not always see
eye to eye, we have covered a lot of ground towards helping them to eventually
start thinking alike.
HH