The Ceiling on Economies of Scale in Container Vessels
Shipping lines are continuing to order larger vessels in order to take advantage of the economies of scale. With no end in sight to this growth in the size of ships, the question must be asked: is there a limit on how big future container vessels can grow?
Thursday, 29 March 2018
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January 2018 was a record month for new vessel deliveries, with shipping lines seemingly intent on continuing to order new, bigger ships. As a result, the active total fleet deployed has increased by some 10.8% in the last year, and to date it is now just under 21 million TEU. New, larger tonnage is expected to be introduced on the main arterial trade lanes of Asia-Europe and Asia-North America, with existing tonnage cascading onto secondary trade lanes. This will increase the average size of vessels deployed across all the main trade routes.
Increase of Existing Vessel Sizes
“Jumboisation” is back on the agenda. Some lines looking to increase the capacity of their 13,800-14,000TEU vessels by lengthening them to achieve a capacity of 17,000TEU, making them more suitable for the main trade lanes. There are twenty-one ships currently in the process of being converted. This additional capacity and slot cost savings will come at the expense of a slightly slower (-2 knots) speed.
Hyundai Merchant Marine (HMM), a member of the 2M Alliance, has also decided to launch its own stand-alone Asia-Europe service as of April 2018. The existing 2M Alliance expires in April 2020 and HMM has also suggested that they would consider ordering 20,000 to 23,000TEU vessels in the future. This suggests that they are on the lookout for a new alliance position, deploying these Ultra Large Container Ships (ULCS) that would be bigger than any other vessels yet sailing.
Shipping Lines are Investing in Size
The appetite of shipping lines for more and larger tonnage has continued unabated, despite their struggles to maintain consistent operating profits over the course of 2017. Additional tonnage means more space to fill as well as further, future pressure on sea freights and operating profits. Nevertheless, all of the main shipping lines have increased their fleet capacity.
Although some of these increases were the result of acquisitions - Hapag-Lloyd acquired UASC and COSCO acquired OOCL - there is nevertheless a general trend towards new, additional, and much larger vessels. CMA-CGM’s new flagship, the CMA-CGM Antoine de Saint Exupery, is now CMA’s largest container vessel in active service, with a capacity of 20,776 TEU, an LOA of 400m, and a width of 23 rows (59m). This vessel can carry up to twelve tiers of containers in its holds, one tier greater than other recent ULCS, giving it the extra capacity compared with other recent newbuilds.
Comparison of Fleet Capacity For Top Five Lines (2017 and 2018)
LNG Fuel is Better for the Environment, but Requires More Space
CMA-CGM is also the first of the large container shipping lines to order liquefied natural gas (LNG) ready vessels. Nine of the 22,000TEU newbuilds that are due for delivery in 2020 will be designed with engines that can use LNG. This fuel provides significant environmental benefits when compared to heavy fuel oil (HFO), including 25% less CO2 emissions, 99% less fine particles and sulphur emissions, and 85% less nitrogen oxides emissions. The design of the newbuilds has required additional space for the LNG fuel storage, however, which requires more space for conventional bunkering.
If CMA-CGM wants to increase future capacity beyond 22,000TEU while maintain LNG capabilities, there will be a challenge in finding the room for both the additional capacity and the additional fuel storage.
How Big Can Container Vessels Become?
Is there a limit on how big container vessels can be? A great deal of sabre rattling by the three largest shipping lines would suggest that there are only limited physical restrictions on the maximum container vessel size, but is this really true?
While lines could physically build longer, wider, and deeper vessels, doing so would exacerbate the challenges they already face of getting their ULCSs operated efficiently at container facilities at either end of their main trade lanes. There also remains size restrictions on vessel at the Kiel, Suez, and Panama Canals. These could be regarded as short-term challenges that can be resolved with time, but it would certainly create some serious mid-term challenges if vessels are to increase their capacity substantially.
At present, ports are already struggling to handle 18,000 to 20,000TEU vessels and some are not even trying, further reducing the number of alternative terminals open to the shipping lines that have deep enough water, long enough quays, and cranes with wide enough outreach to offer the basic requirements for serving ULCSs. It is also important to consider that these physical requirements are in addition to the extra power/electricity needed to handle larger vessels. This is causing further restrictions for some terminals.
By far the main restriction, however, is increasingly the speed at which containers can be handled from the vessel and what happens to these containers once they have been discharged from the vessel into the terminal as well as the transition to/from the gate or intermodal yard.
The increase in the number of units handled per call puts increasing pressure on the required terminal area. Whether for direct onward local delivery, gateway cargo located relatively close to the terminal, or for transhipment units that need to be moved across the quay either to a stack or waiting feeder vessels, it stresses the port’s infrastructure.
Overloading the Hinterland
This is especially felt on the road, barge, and rail networks designed to move cargo to its ultimate destination. Too many containers dropped in one location will see hinterland infrastructure placed under immense pressure, resulting in serious delays in the inland haulage and final delivery times.
As there are only a finite number of container terminals that can handle the ULCSs at present, the container exchange per call is increasing each time the size of vessels increases. Unless more terminals become capable of handling the big ships, the container exchange per call will continue to increase and put more pressure on the hinterland connectivity of a port. In this eventuality, terminals will have to be faster in order to keep up with the larger vessels and larger consignment size.
There is a body of opinion that maintains that the container exchange required at each port of call for a 20,000TEU vessel on a European rotation with four direct calls is already at the limit of a port’s capabilities as far as successful hinterland connectivity is concerned. In other words, with an exchange of 9,000 to 10,000TEU per call, there are operational difficulties involved in getting some of the cargo to its final destination. Even one customer complaint is one too many.
Is Bigger Better?
Any increase in capacity of the vessels will only increase the number of problem shipments, suggesting that a capacity greater than 20,000TEU exceeds the perceived financial benefits scale that comes from using a larger vessel.
There are new generation designs for vessels of 22,000TEU and 24,000TEU, proving that larger vessels can physically be built, with additional LOA and breadth and only a marginal increase in draught requirements, but will vessels of this size require an increase in exchange that results in too many problem shipments?
Current and Potential Container Vessel Sizes
The Limits of Economies of Scale
It is also worth assessing how far the benefits of the economies of scale go. The financial benefit of increasing a vessel from 8,500TEU capacity to 10,800TEU vessels and again from 14,500TEU to 18,000TEU is clear (when vessels are fully utilised), but diminishing returns for vessels from 18,000TEU to 20,000TEU and >20,000TEU suggests that increasing the capacity of vessels beyond 24,000TEU is unlikely to provide the necessary, significant economic benefit required for lines to want to order still bigger tonnage.
While we don’t have actual newbuild prices for vessels of 22,000 or 24,000TEU capacity, some assumptions can be made based on the existing price of 18,000 and 20,000TEU vessels. It is extremely likely that the benefit of increasing a vessel from 20,000 to 22,000TEU capacity will only result in a combined “at sea” and “in port” benefit of US$0.6/TEU and a further combined “at sea and in port” diminishing returns of US$0.4/TEU for vessels of 24,000TEU capacity.
The increasing difficulty of ensuring that the vessels are full in order for lines to enjoy the benefits of scale, coupled with the physical and hinterland challenges identified above, suggests that vessels are unlikely to grow beyond 24-26,000TEU capacity in the future.
The Scale of Economies of Container Ships (US$/FEU)
Major shipping lines have already had to acquire other shipping lines and form new alliances to ensure that big vessels can be well utilised by loading combined alliance volumes, but there remains only limited further scope here. It remains likely that the “marriages of convenience” that form the structure of the current alliance groups will remain in place until such time as world container trade demand catches up with the world container capacity (supply) and the market recovers.
Once this has happened and container vessels reached their maximum theoretical capacity of 24,000 to 26,000TEU, then it seems extremely likely that major shipping lines will once again want to go their own way and enter divorce proceedings with their alliance partners once they are confident that they can fill large vessels entirely with their own cargo. This isn’t likely to happen in the next five years by which time, who knows what further advances will have been made in the container industry?