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)


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.