Friday, April 12, 2019

Chinese port investments and ‘debt-trap diplomacy’: Real or fake news?


Since 2013, when President Xi Jinping announced his grandiose vision of a shared future through better connectivity, the amount of Chinese foreign investment has been mind-boggling. Various consultants have estimated this to be in the neighborhood of  €250 billion whereas, according to Bloomberg (see map), more than €300 billion has been invested in Europe, during the last 10 years.

Particularly in Europe, investments are not limited to infrastructure but comprise such heterogeneous things as nuclear power stations, theaters, historic buildings, football teams, restaurants and more. Many, if not all, of these investments are ‘baptized’ “BRI investments” to the extent that, for some observers, BRI has become synonymous to “money”.

It is not unreasonable, therefore, that the cash-strapped countries of the European South have been quite ‘eager’ to engage in a dialogue with China, starting with Greece and Spain and followed, recently, by Italy.  This development has evoked the dismay of the European North (Germany in particular[1]), as well as of a part of the Chinese citizenry, which is questioning the usefulness of investments in far away places, in the wake of rising unemployment and the cooling of economic activity at home.[2]

A part of western concerns on BRI investments consists of what has come to be known as debt-trap diplomacy. The Sri Lankan Port of Hambantota has often been quoted as a case in point. The practice is not unknown to certain western ‘financiers’, however, and in short it consists of extending excessive loans to borrowers, usually under onerous terms, when the lender knows (or should know) that the debtor will be unable to repay. The alleged aim is to extract economic or political concessions from the debtor country and/or to eventually swap debt with equity; i.e., in our case, the lender takes over control of the port. Some others argue that China might be buttressing repressive regimes, exploiting developing countries in a neocolonialist manner through high interest rate loans, and most of all seeking to coerce countries to align with China’s key strategic and military objectives.

President Xi’s vision, however, is quite the opposite: […]BRI aims to replace estrangement with exchanges between different civilizations; replace clashes with mutual learning; and replace a sense of superiority with coexistence; it aims to boost mutual understanding, mutual respect and mutual trust among different countries. In this light, the BRI is seen as a path towards global peace […].[3]

Whether accusations such as the above are true or not, in the case of BRI investments, remains to be seen. So far, the majority of such concerns and criticism originate, understandably, from China’s competitors, it is anecdotal, published in dubious outlets, or lacking scientific verification.[4]

For instance, loans to Sri Lanka (Hambantota) were rather concessionary (2%), while the country’s largest debt is to Japan and not to China. The case, to my view, was one of wide Sri Lankan public sector corruption rather than anything else. As regards China herself, in all honesty she should have known that, with the port of Colombo just around the corner, the prospective of Hambantota was meager at most.

The case of the Port of Piraeus is not much different either: At the time of writing, the Greek government rejected a €600 million port investment plan on grounds of archaeological finds. Also at the time of writing, a mounting Chinese disillusionment with the port of Piraeus has led China to start looking at the Italian ports of Trieste and Genoa. Since it was leased to COSCO, however, the port of Piraeus has become one of the fastest growing container ports in the world, soaring to the 36th place in global container traffic rankings, from the 93rd in 2010. The port has only 10 Chinese staff but employs 1,000 Greeks, and it has created more than 10,000 indirect local jobs.

One thing is for sure though and this was made crystal clear by President Xi Jinping at Davos in 2017: 

If America decides to retreat from its global responsibilities, China would gladly pick up the slack.

HE Haralambides




[1] Interestingly, in this period, Germany has received 10 times as much as all the others together (with the exception of the United Kingdom).
[2] The IMF growth forecasts for 2019, for China, are down to 6%.
[3] Quoted by Yang Jiechi, Member of the Political Bureau of the Central Committee of the Communist Party of China and Director of the Office of the Central Commission for Foreign Affairs. China Daily, 30 March 2019.
[4] To address this ‘lack of substantiation’, for a number of years now I am trying to engage Chinese academics and high-level researchers in investigations like: which ports should be included in the New Silk Road? With which ports should China partner in Europe and West Africa? How should Chinese industry ‘relocate’ in the wake of a continuously developing New Silk Road? What ship types (and sizes) should better serve the New Silk Road? Etc. Much of this research has already been published.

Friday, March 22, 2019

COSCO’s 25,000 TEU ‘Goliathan’ and the ‘Sweating’ Port

Yesterday, COSCO let on its plans of constructing a 25,000 TEU megaship amidst a lot of industry criticism (including Maersk), mostly from people who fail to understand (or do they?) that, in container shipping, not everything is dollars and sense; most definitely not in China. Although the Chinese economy is letting off steam since 2016, it is no secret that China intends to become the world’s leading maritime nation par excellence, in shipping, ports and shipbuilding. In this sense, it was not by accident that China announced, also yesterday, that «such ships ‘befit’ the country’s Belt & Road Initiative (BRI)». My personal forecast is that, in three years’ time at most, COSCO will have overtaken Maersk as the world’s largest container carrier.
However, megaships and high frequency of service mix a very explosive cocktail and filling the big ship is easier said than done. Fortunately, carrier cooperation through global shipping alliances has come to the rescue, but will COSCO (and others of course) be able to fill such ships by itself if its alliance with CMA CGM comes under attack next year?[1] We shouldn’t forget that, for EoS to be had, the ship must sail full; otherwise, economies of scale become diseconomies of scale.
Years back I had shown that there are significant EoS to be had in shipbuilding, up to Panamax-size vessels (about 4,700 TEU). After this point, the unit cost curve flattens, with only marginal gains to be had (see Fig. 1). Following the thinking of Kendall (1972)[2] of almost half a century ago, I have also shown (see Haralambides 2017[3]; Fig. 4 on p. 12) that in situations where the ship has to be turned around within a fixed time frame, say within 48 hours irrespective of her size, it costs more to handle a container arriving on a large ship than one arriving on a smaller one. In other words, cargohandling time per TEU is higher after a certain ship size, and this is a distinct “port diseconomy of scale”.

          Fig. 1: EoS in Shipbuilding (Source: Haralambides & Associates)
It is not so difficult to understand why: As crane productivity cannot be stretched much beyond 30 moves/h (it actually declines after a certain crane density[4]), the only way to serve a larger ship in the same time (48 h) is by adding more and bigger (in terms of air draft and outreach) cranes. However, increasing crane density reduces crane productivity, among others nullifying the advantages of having bigger hatches.
Stopford (2008)[5] arrived at a similar result, this time however for total costs per slot in the Atlantic trades. Stopford’s unit cost curve starts to flatten at a higher tonnage (about 8,000 TEU), given the significant EoS to be had in ship operations and propulsion. After this point, however, there are only 4% savings, all the way to 18,000 TEU ships (Malacca-max).

Big ships impose substantial demands on port capacity, without, however, paying commensurately for this demand. For instance, where before we could accommodate simultaneously three Panamax vessels (i.e. three berths) along one kilometer of quay-wall, today we can host there only two mega-vessels of the latest generation (about 400 m long). Berth utilization obviously goes down and so does the utilization of ship-to-shore (StS) cranes, for bigger ships mean lower call frequency.

All this would be fine, as long as carriers were bringing more traffic to the port with their larger vessels. But this doesn’t happen either. As Fig. 2 shows, call size is only moderately correlated with vessel size.

Fig. 2: Ship size vs. call size
More importantly, one needs fewer bigger ships, and fewer port calls, to serve a given amount of yearly demand. Thus, the infamous UNCTAD connectivity Index[6] goes down and, with it, the contribution of shipping to trade and development. Here too, berth and crane utilization decline and this impacts on the capital costs of the port and of the terminal operator. In addition, a reduction in the frequency of carrier itineraries (i.e. number of services), caused also by slow-steaming, impacts the inventory costs of traders, thus defying the very principles of supply-chain optimization, and this is a clear diseconomy along the supply chain. Finally, filling up the bigger ship in Asia is easier said than done. To do so, the ship must call at more Asian ports than what her size would warrant, often picking up containers at random and at short notice, without due consideration to the importance of proper stowage planning. As a result, ship and terminal stowage planning at the other end (Europe/North America) often becomes a nightmare.
HE Haralambides












[1] Review of the EU Consortia Regulation.
[2] Kendall, P.M.H. 1972. A Theory of Optimum Ship Size. Journal of Transport Economics and Policy IV (2): 128–146.
[3] Haralambides, H.E. 2017. Globalization, Public Sector Reform, and the Role of Ports in International Supply Chains. Maritime Economics & Logistics 19 (1): 1–51.
[4] Crane density is defined as the number of cranes per 300 m of quay length.
[5] Stopford, M. 2008. Maritime Economics, 3rd ed. London: Routledge.
[6] UNCTAD’s concept of connectivity is broadly described by the number of weekly services and liner companies active on a certain route. Bigger ships and shipping alliances reduce both the number of services (bigger ships) and the number of (independent) competitors on the route (alliances). For more information on UNCTAD’s Connectivity Index, see Fugazza and Hoffmann. 2017. Liner Shipping Connectivity as a Determinant of Trade. Journal of Shipping and Trade 2: 1.

Wednesday, March 13, 2019

A “missing link” in China’s Belt-and-Road Initiative: Connecting The Caspian- to The Black Sea and Beyond (Rotterdam)


(Turkmenbashi-Baku-Batumi/Poti-Istanbul-Thessaloniki-Constanza-Danube-Rhine-Rotterdam)


The first time I threw around my ideas of connecting the two great seas, The Caspian- and the Black Sea, seeing this connection as a missing (multimodal) link in China’s Belt and Road Initiative (BRI), was in 2016 in Amsterdam (TOC Europe). A roadshow followed (aimed at ‘selling’ the idea to interested parties) to Shanghai, Baku, Kuwait, Tehran, Marseilles, Rotterdam, Venice, Hamburg and Brussels.

Through the Baku-Tbilisi-Kars railway system (BTK), running south of Caucasus, the link would connect the new port of Baku (President Aliyev’s top national priority) to the Georgian ports of Batumi, or Poti, or -why not- the 2.5 billion dollar port of Anaklia, once this project materializes.  

As Baku is at the crossroads of the North-South (Iran-Azerbaijan-Russia) corridor (a tripartite grand project already agreed, signed and sealed by the 3 countries), the interests of Iran and Russia in the project are obvious, as are those of India who wants to use the north-south corridor for her exports to Russia and Europe.

But my plan did not stop at Georgia. Navigating the Black Sea, my Missing Link would extend to Istanbul, Thessaloniki and Costanza and from there, through the Danube-Rhine fluvial system, it would end up to central and northern Europe (Rotterdam) (see map).

I am therefore pleased to report that, at a meeting in Bucharest last week, the Ministers of Foreign Affairs of Turkmenistan, Azerbaijan, Georgia and Romania signed a declaration on the development of the Caspian Sea - Black Sea international transport corridor (CSBS-ITC).



HE Haralambides


PS: A "discerning eye" would have already spotted our next project on my "Missing Links" map: Connecting the Upper Gulf port system of MAK (Kuwait)-Umm Qasr (Iraq)- Bandar Imam Khomeini (Iran) -three ports, in three different countries, at a spitting distance of each other- to the Mediterranean Basin (Lebanon or Syria or both), and from there to the Port of Piraeus and to the EU. The connection of the Upper Gulf Port System to the Caspian Sea (Tehran) would complete the 'big picture', connecting the two projects together, and to the North-South Iran-Azerbaijan-Russia corridor which, eventually, will extend, by sea, to India (Bombay). 

Friday, March 8, 2019

After containerization…


This situation I described in my previous post (cf. “Before Containerization…” below) started to change in the 1960s with the introduction of the “container” and the containerization of the trade between the United States and Europe at first and, subsequently, of the rest of the world (for the full story of containerization, see my 60-page saga "gigantism in container shipping, ports and maritime logistics").

The innovation entailed in the concept of containerization is credited to Malcolm Mclean: an American trucker who thought of separating the tractor from the trailer part of his trucks, standardizing (unitizing) the latter (trailer) so as to be able to be transported—with its contents intact—by various transport means, handled at ports by standardized cargohandling equipment (cranes, straddle carriers, reach stackers, etc.), and stacked uniformly one on top of the other, both in ships and at terminals. 

The container, or the maritime container, as it is often called, is a fairly robust and sturdy structure, manufactured at very high standards, intended to withstand the harshest of conditions, such as those often prevailing on the high seas. Containers are waterproof, vandal-proof, and adequately ventilated, to avoid possible accumulation of condensation, and, if treated well, they could give their owner many years of problem-free service (the average economic life of a container is 15 years). There are many types of containers (high cube, flat rack, open side, open top, tank, reefer [refrigerated], etc.), depending on the intended use (cf. figure).[1]

Containerization is often described as a revolution in transport. General cargo goods are now increasingly carried in steel boxes (containers) of standardized dimensions; most common is the 8 × 8 × 20 foot container known as TEU—Twenty-foot Equivalent Unit—although containers of double this size (40 feet) are increasing in importance.[2] Perhaps one of the most important effects of containerization is that, now, containers can be packed (stuffed) and unpacked (stripped) away from the busy waterfront, either at the premises of the exporter (consignor) and/or the importer (consignee), or at Inland Container Depots (ICD), warehouses, and distribution centers (dry ports).

Expensive and often unreasonably strongly unionized port labor is thus bypassed; pressure on port space relieved; and ship time in port minimized. These developments have increased ship and port productivity and system reliability immensely, thus allowing ships to become even bigger, achieving significant economies of scale and, consequently, lower unit transport costs and thus international competitiveness. Actually, as I have discussed many times in the past, the economic incentive behind the construction of ever larger ships is modern day port efficiency and productivity, rather than technological advances in ship design, or economies of scale at sea (which are lost if the ship has to wait in port). Nowadays, containers are increasingly carried by specialized cellular containerships many of which able to carry more than 20,000 TEUs, while designs for 25,000 TEU ships—or bigger—are already on the drawing boards of naval architects.
  
In parallel, by-passing the waterfront in the stuffing and stripping of containers, and thus having them ready in port to be handled by automated equipment, has increased immensely the punctuality, predictability and reliability of cargo movements and transport systems, enabling manufacturers and traders to reduce high inventory costs through the adoption of flexible Just-in-Time and Make-to-Order production technologies. Inter alia, such technologies have helped manufacturers to cope with the vagaries and unpredictability of the business cycle and plan business development in a more cost effective way. Indisputably, containerization has been the kindle wood under global logistics and supply chain management. Furthermore. The concept of logistics does not regard only cargo systems, but it permeates every aspect of our everyday life. For instance, in a reliable transport system, I know precisely what time I need to leave home to make it to the airport. But if taxis are frequently on strike; rail under continuous maintenance; or security controls at airport a mess, I need to leave home an hour earlier. This hour is “my” inventory cost.

Around the world, the port industry has invested a lot, in order to cope with the technological demands of containerization. Modern container terminals and commensurate cargohandling equipment have been built and new, more efficient, organizational forms (including privatization) have been adopted in an effort to speed up port operations. Operational practices have been streamlined, the element of uncertainty in cargo flows largely eliminated, forward planning has been facilitated, port labor regularized, and customs procedures simplified. These developments took place in the firm understanding of governments and local authorities that ports, now, constitute the most important link (node) in the overall door-to-door supply chain and thus inefficiencies (bottlenecks) in the port sector can easily wither all benefits derived from economies of scale and scope in transportation and logistics. Since 2000, the measurement of port efficiency has thus become a key research area in maritime economics, pioneered by the Maritime Economics & Logistics (MEL) Journal. 

HE Haralambides



[1] For more on containers, their production, use, leasing market, etc., see my 2016 report for Davenport Laroche “Liner Shipping, Containerization and the Container Leasing Market”, freely downloadable from my ResearchGate and Academia profiles.

[2] Although, for reasons of simplicity or easy reference, the standard maritime containers (TEU or FEU) are often referred to as 20x8x8 or 40x8x8, their height is actually 8 ft 6 in. Moreover, the hi-cube 40-footer, with a height of 9 ft 6 in, is assuming increasing importance, representing, according to certain estimates, the majority of maritime containers in service in recent times.

Saturday, March 2, 2019

Before containerization…(or, 'a beautiful day we shall see')


Cargo carried by liner shipping has come to be known as general cargo. Up to the beginning of the 1960s, i.e. before containerization, such cargo was transported in various forms of unitization (packaging), such as pallets, slings, boxes, barrels and crates, by relatively small ships, known as general cargo shipscargo freightersmultipurpose shipstwin-deckers or multi-deckers. These were ships with holds (cargo compartments) in a shelf-like arrangement, where goods were stowed in small pre-packaged consignments (parcels) according to destination (see Figure).

This was a very labor-intensive process[1] and ships were known to spend most of their time in port, waiting to berth, load or discharge. Seafaring was fun[2] in those days, but congestion was a chronic problem in most ports, raising the cost of transport and hindering the growth of trade. Equally importantly, such delays in ports made trade movements erratic and unpredictable, obliging manufacturers, wholesalers and retailers to keep large stock. As a result, warehousing and carrying (capital) costs were adding up to the cost of transport, making final goods more expensive and, again, hindering international trade and economic development. Cases have also been known where inefficient ports were welcomed, if not deliberately pursued, by governments, as an effective tariff and barrier to foreign imports. (see: Gigantism in container shipping here). 

HE Haralambides




[1] Labor productivity in those days was roughly 1 ton per man-hour; with containerization, this went up hundredfold. In the first case, a docker would climb up the gangway 10 times an hour, with a sack of rice on his shoulder. In the second, a crane-driver would load 20 containers of rice onboard the containership, comfortably seated and handling a “joystick” from the warm cubicle of a ship-to-shore gantry-crane, or from the terminal office, or even from his home! The first docker would be paid peanuts (if he was lucky) while the second has a salary every worker in the world would envy today.

[2] Listen here the insuperable Maria Callas singing 'un bel di vedremo' (a beautiful day we will see...): The song of Cio-Cio-San (Madama Butterfly), waiting to see the smoke in the horizon that would bring the white ship of her beloved B.F. Pinkerton into the port.



Friday, February 22, 2019

Tramp and Bulk Shipping, Forecasting, and a Chilled Viognier on a Thames Terrace


My gigantism in container shipping  ‘little book’[1] gave me the opportunity to do something I have always wanted to do since the days of my good friend and colleague, the late Basil Metaxas and his infamous monograph The Economics of Tramp Shipping (Athlone Press, 1971). This was my perceived need for a clarification in the concepts of tramp; tramping; or tramp shipping on the one hand, and bulk shipping or even bulk-carrier on the other.

Often in the literature, the two concepts, tramp and bulk, have been confused or used interchangeably. Even worse, a “tramp ship” has often been used synonymously to a “bulk ship”, or bulk-carrier, and vice versa. However, “tramping” simply means operating a ship in the spot (voyage) market -i.e. as a taxi of the seas, whereby the contractual relationship between ‘passenger’ and ‘taxi-driver’ (‘cargo owner’ and ‘shipowner’ in our case) ends upon the completion of the voyage and the driver (shipowner) is again on the lookout for new custom (cargo) that will take him to the four corners of the earth, without any scheduling or fixed itinerary (thus the name tramp). Other than the ship itself, the provision of a tramp service requires minimal carrier infrastructure;[2] the market is highly competitive, with prices (freight rates) fluctuating wildly even in the course of one day.

Certainly, however, tramping does not assume any particular type of ship, such as a tanker or a bulk-carrier. To put it differently, a bulk-carrier or a tanker on a long-term time-charter is not tramping, nor is one engaged in a contract of affreightment. In short, the mere fact that a bulk ship is not offering regular or scheduled services, like a liner ship, does not make her a tramp. In the opposite, and this is the first time you hear this, a small container feeder-ship which out of, say, the hub of Piraeus distributes containers all over the Mediterranean, working as a common carrier, indiscriminately serving many principals (main-haul majors such as Maersk, MSc, CMA CGM, Cosco, etc.) would most definitely fall under my definition of tramping.

HE Haralambides



[1] Freely downloadable from: Gigantism in Container Shipping.
[2] Things nowadays may be somewhat different, but I remember a Greek shipowner friend, years back, telling me that, to do tramping, the only things you needed were a telephone, a shared office and a part-time secretary! He was also very good in forecasting… I remember him once, while sipping a glorious chilled Viognier on his terrace, overlooking the Thames, attentively and silently looking down on the street. “what are you doing”, I asked. “When the queue of the taxis below is long”, he replied, “business is not good, and people take the bus… shipping will not be doing well either”, he said philosophically with half a smile, refilling at the same time our glasses.

Friday, February 8, 2019

Shipping and economic development



 Shipping is a global service industry that, by general recognition, provides the lifeline of international trade. Suffice it to say that, due to the morphology of our planet, 90% of international trade takes place by sea. Technological developments in ship design and construction, and the ensuing economies of scale (EoS) of larger ships, have reduced trade- and transport costs, thus promoting trade (particularly that of developing countries) by making the transportation of goods over long distances affordable.[1] As a matter of fact, geographical distance plays a much lesser role today, as a determinant of trade between countries, and it is being replaced in trade models by the concept of economic distance, as this is proxied by ocean freight rates (cf. transport costs).


These developments have expanded the international markets for exported goods, thus allowing mass production and lower unit costs at home. This has improved the international competitiveness of exporting countries, and it has facilitated the industrialization of many of them around the world. One of the best examples of export-led industrialization is Japan: The Japanese are thrifty people. It was not therefore growth of domestic demand that enabled the country to develop, but low transport costs which allowed Japan to conquer Asian and world markets with high quality products. As a result, a huge global market for its products led to mass production, even lower costs and export prices, and greater dominance still in international markets.  

Often, international ocean transportation and Information and Communications Technologies (ICT) are referred to as the two basic ingredients of globalization [Joseph Stiglitz (2006) Making Globalization Work. W.W. Norton and Company, Inc. New York].


HE Haralambides





[1] In spite of distances, China buys more iron ore from Brazil, four times farther than Australia; it costs one dollar cent to transport one can of Heineken beer from Rotterdam to New York; and less than 10 dollars to bring an expensive TV set from Busan (Korea) to London. Actually, what matters most these days is not transport costs, but the time of the sea passage (as well as time in port) and the way these times impact the logistics and warehousing costs of traders.

Friday, December 21, 2018

20 YEARS OF MARITIME ECONOMICS & LOGISTICS (MEL)



DALIAN MARITIME UNIVERSITY
SCHOOL OF MARITIME ECONOMICS & MANAGEMENT


Following our most successful and memorable 20-year celebrations at Kuehne Logistics University of Hamburg, in November 2018, in December it was the turn of the Dalian Maritime University, School of Maritime Economics and Management. At the opening of the “Belt and Road Initiative workshop, and upon welcoming speakers and guests, the dean of the School, Professor Qingcheng Zeng remarked: […] We are deeply proud to jointly organize this great workshop with Professor Haralambides on the occasion of the 20th anniversary celebrations of MEL. MEL is the flagship journal of the maritime industry and I can only congratulate it on its outstanding contributions.
In his salutation, as member of MEL’s Editorial Board, Professor Young-Tae Chang, Inha University, Korea, said: […] MEL is published quarterly, like most scientific journals for which quality is more important than quantity… I hear that in the European Union, Australia, New Zeeland and more, MEL is classified as the best economics- oriented journal in this area; probably Asia will follow soon… MEL is using rigorous methodological analyses to resolve problems in global supply chains, which include shipping, ports and marine terminals. The journal, however, also emphasizes the importance of practical insights and it has thus won not only us academics but also the business executive and policy maker.
Dr. Grace Wang (Texas A&M University), representing the International Association of Maritime Economists (IAME),  of which MEL is an official journal, said: […] MEL is the flagship journal in maritime logistics... Researchers have the highest esteem for MEL but also policy makers who want to know what's going on, what is the current debate, and what are the challenges and obstacles in daily operations. They know MEL is a place to find solutions…I know how important and how difficult it is to maintain the quality of a good journal. Under our editor-in-chief’s continuous efforts in the past twenty years, MEL has become the top rank, leading journal in the maritime field.
Closing the introductory session and thanking Professor Zeng, keynote speakers and participants, Professor Haralambides added: […] in these 20 years we have published around 600 papers by more than 1000 authors. In doing so, we have never compromised on quality; rather, we have helped authors to publish. Once we identify a paper of good potential, our refereeing procedures are meant to assist the author develop the paper further and, through advice, constructive comments, ideas and suggestions, bring the paper up to MEL standards of publication which are very high. In this way, we have not only distributed and disseminated research findings but, more importantly, we have shaped the future agenda of maritime economics and logistics research. Naturally, our greatest support has been towards the younger generation of researchers. Through our advice and support, we have taught them that it is one thing to get good results from a computer screen and quite another to write a paper which is enjoyable, understood and appreciated by others. I wouldn’t exaggerate if I said that we have transformed many of them from competent researchers to seasoned authors, and they have all acknowledged this with gratitude. Now I look forward to our workshop and I thank you again for attending.

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.