Mega containerships and inventory costs: who pays the pipe(r)?

Each export container is nowadays handled about four times at ports and inland terminals until it arrives to its final destination; and transshipment costs money. It is common knowledge that cargo owners dislike mega-containerships and transshipment, preferring instead a multi-porting system, with cargo unloaded closer to its final destination. Research on the optimum size of containerships has rarely taken into account diseconomies of scale at ports and in hinterland distribution, let alone road congestion and the environmental impacts of long distance overland transport. More importantly, the negative relationship between ship size and shippers’ inventory (holding) costs has never been seriously addressed. Recent research, soon to appear in Maritime Economics and Logistics, demonstrates that, were one to jointly optimize system costs of door-to-door transport, i.e. taking into account inland distribution and shippers’ inventory costs, the optimum ship size in the North Atlantic trades should not exceed that of 9000 TEUs. Obviously, the questionable, nowadays, economies of scale in shipping cause a NIMBY effect on system costs that needs to be earnestly addressed in the planning and financing of new infrastructure. HH 

Is infrastructure the solution to global peace?

It is often said that the development of vested interests and the economic interdependence among nations is the safest way towards regional and global peace. Cross-border investments in infrastructure (motorways; rail; pipelines; energy) are key in achieving this goal. The infrastructure financing needs of Central Asia alone amount to some 8 trillion USD. Cash-rich international donors, bilaterally or multilaterally, compete fiercely for a share in this market, but this engenders the risk of overlaps and of creating “cathedrals in desert”. After all, the success of any infrastructure project is in its ability to create growth and employment. On the side of recipient countries, the requirements are becoming increasingly stringent: co-financing through public-private-partnerships (PPP), budgeted state guarantees to attract private investors (something like the Juncker Plan in the EU) and, in general, sweeping economic reforms. HH 

China vs. USA: when titans thud their feet on the war path

The Chinese response to TPP is called the maritime silk road or the  one belt one road project. This formidable infrastructure idea transverses the resource-rich  countries of Central Asia (e.g. Kazakhstan), comes up to Rotterdam, down to Venice, and then through the Med and Suez back to Asia. Countries involved are more or less known but ports, railways and pipelines are not. China dangles the carrot in front of investment-hungry countries, looking for the best concession terms possible (e.g. the sale of the port of Piraeus in Greece). I have little doubt that the silk road would eventually expand eastwards from China to the West Coast of the Americas, to connect to the Nicaraguan Canal that the Chinese are also planning. With a slowly growing middle class, saturated infrastructure and declining exports, China still has 4 trillion US$ of foreign currency reserves to spend. And it will do so. After all, investments need security protection and this, in its turn, requires a geopolitical defense presence. The role of the global policeman, so far played, thankfully I must admit, by the US, won’t be enough in the future, although, one might argue, when money comes in from the door, fundamentalism goes out from the window… In my eyes, the US-China arm-wrestling doesn’t have an obvious winner yet; or does it? HH 

In Chinese, “logistics” means “Rotterdam"

On contract with DHL, the Chinese giant Huawei has established its European Distribution Center (EDC) for ICT products at the small Dutch city of Eindhoven, just 100 km down the road from the port of Rotterdam. In spite of the Chinese economic slowdown, container flows to Rotterdam continue to show a healthy growth throughout 2015. Due to its strategic location; stable business environment; extensive network of infrastructure; and a well-educated labor force, Rotterdam is Europe’s distribution center par excellence, matched only by that of Singapore. No wonder therefore that half of Europe’s Asian and North American distribution centers are located in the port’s wider industrial cluster. If one drives around on European motorways he couldn’t miss noticing that one in three trucks, from Spain to Poland and from Finland to Greece, are Dutch. Half of Rotterdam’s inhabitants are holders of a foreign passport, and the hundreds of multinationals like Huawei, setting up shop in Rotterdam, have transformed the city into a modern metropolis in less than 20 years. From open fields and cows in the 1990s, to the “Manhattan” of the Netherlands in 2015, this is not a bad score by any count. HH 

COSCO-China Shipping: Concentration in container shipping continues unabated

The proposed merger of COSCO and China Shipping will create a maritime giant which will dwarf by far Maersk line; the current market leader. In the face of a declining global demand, carriers try to reduce costs through such consolidations, as well as achieve market shares which, in the long run, should hopefully maximize shareholder value. However, such costs are created by the carriers themselves, by building ships of such sizes that they are unable to fill by themselves. Mergers and alliances are thus the obvious outcome. I am curious to see the reaction of the Chinese competition authority, when last year it gave the thumbs down to the P3 alliance (Maersk, MSC, CMA-CGM), assessing it not as an alliance but as a merger. Certainly, DG-COMP in Brussels are not going to be easy, after the tough stance they took against their own companies, when Maersk bought P&O Nedlloyd 10 years back. Assuming the merger will go through though, CKYHE –the COSCO Alliance- will not be allowed to continue under its current membership composition (COSCO; K-Line; Yang Ming; Hanjin; Evergreen). We see... HH 

Happiness, quality infrastructure, and tax evasion

I have always sustained that the quality of a country’s infrastructure is an indicator of its economic and social development. Moreover, spending on infrastructure is anticyclical and as long as it is financed from monies set aside for a rainy day (and not through borrowing or higher taxes), infrastructure spending withers the rollercoaster effects of the economic cycle.

But it is much more than that: as infrastructure development is a question of public choice, its quality represents the value citizens ascribe to the quality of life in general and their content with taxation and the performance of the public administration. Such perceptions lower citizen’s propensity to tax evasion. Simply put, the taxpayer feels he gets back value for his money. HH

Container shipping: the bigger you are the harder you fall

Years back, I developed this simple formula in an attempt to formalize the relationship between ship size, fuel costs (p) and other variables, like cost of capital (z) and operating costs (w). As the latter costs remain grosso modo the same, while bunkers become cheaper, the optimum ship size on a certain route becomes smaller too. With the prevailing overcapacity in east-west trades and the need of carriers to reduce services, it is not at all unlikely –alliances notwithstanding- that the bigger vessels would be among the first to withdraw from service. HH

Reforming the financial sector

With a probable new global financial meltdown looming in the air as a result of excessive corporate over- borrowing, Hillary Clinton’s sweeping financial reform proposals are commendable. This will not be easy, as Obama himself has learnt the hard way. But then again, the global economy cannot afford another “2008” in less than 10 years. Particular credit deserve her ideas on empowering regulators (and ‘whistle-blowers’); holding banking executives responsible for reckless, and sometimes criminal,  behavior cushioned by taxpayer money; amending the Glass-Steagall Act (separating commercial and investment banking); and taxing the undoubtedly market destabilizing high frequency trading. As said, such steps won’t be easy. In front of her she will meet a brick wall of bankers and republicans. But the filly is well worth a flutter. HH

Is a New Global Financial Crisis Looming?

Developing countries are over-leveraged with a corporate debt in access of 3 trillion dollars, as a result of low interest rates and lax monetary policies of the immediate past. The situation needs to be managed carefully and collectively, allowing for de-leveraging measures (including bankruptcies), particularly in China which already feels the credit crunch. Else, the situation could quickly get out of hand, with increasing sovereign debt spreads, bond firesales, and collapsing stock markets. HH

The World Economy 2015-2016

According to the IMF, 2016 may see some encouraging news for the industrialized world, but the news are not at all promising for developing countries, including BRICS (with the exception of India). Falling commodity prices are taking their toll on global economic growth, coupled with a flee of capital away from China. The developing world needs to speed up economic and administrative reform and industrialization. Lengthy over-reliance on the primary sector of the economy (commodities) has never been, and it will never be, the way ahead towards economic and social development.  HH

Diseconomies of Scale of Mega Containerships

Mega containerships increasingly defeat their very raison d'être: To be filled, they call at more Asian ports than before, picking up containers at random. To unload, stack them in yard, and clear them through the gate, is a port’s greatest headache today. The ensuing mess could cost a large terminal up to 3 million dollars a week and regulatory authorities are looking into this situation. The fact that 95% of international trade is handled by four shipping alliances does not help matters much either. HH

Do General Rate Increases (GRI) in Liner Shipping Constitute Illegal Price-signaling?

Case Law is scarce, but it seems that the European Commission, following two cases (Netherlands and UK), is taking the correct approach, in spite of earlier rulings of the European Court of Justice (ECJ). To start with, and in the face of rate volatility following the abolition of conferences from EU trades, the advance notification of price changes is important to shippers, so that they can plan meaningfully their future  transportation costs. However, frequent price-signaling (carriers do this a few times a year) of non-finalized pricing decisions, which are followed by those of competitors (in concentrated industries like liner shipping), could well be seen as a coordinating strategy aiming at reducing business uncertainty. If it is indeed so, such practices are definitely illegal under EU competition law. HH

Mega Containerships and Schedule Unreliability

As we have explained many times, gigantism in shipping does not only cause diseconomies of scale in ports but, increasingly, schedule unreliability too. Unreliable transport systems defy the very essence of logistics, by increasing inventory and holding costs. It should be remembered that ‘logistics’ is not simply an optimized transport system but, more importantly today, a way of life. HH

PS: Graph source: Olaf Merk (OECD)

Container Shipping and Terminals

Containership size records are broken by the day. Here is the MSC Maya (19,200 TEU) on her maiden voyage to Antwerp, the company’s main European hub, where she will be christened by Mr. Aponte’s four year old granddaughter of the same name. Intelligently as always, Gianluigi Aponte is showing a great interest in the north Adriatic port of Trieste, in order to capitalize both on the TEN-T network and the Chinese “maritime silk road” which has already chosen this Italian port. HH