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