Biggest Container Ships … chasing big dreams of economies of scale!

In December 2015, the quarter-mile-long Benjamin Franklin created history and became the largest cargo ship ever to berth at an American port. Five more mega-vessels were supposed to follow. Owing to lesser than expected demand, the Benjamin Franklin made its last port visit to USA a few weeks ago.

This should not have been a surprise as the shipping industry is struggling through its worst recession in half a century, and that icon of globalization - the mega-container ship is a major part of the problem. With global growth and trade still sluggish, and the benefits of sailing and docking big ships are diminishing with each new generation. Ship owners are now realizing that bigger is not better.

In 1975, the size of a container ship was 1530 TEUs and by 2012 – the size of a container ship was 16000 TEUs. The logic behind building such giants was the unstoppable globalization and to exploit economies of scale.

Increase in Container ship capacity!

But by 2008, that logic had begun to falter. Even as global trade volumes collapsed after the financial crisis, with disastrous effects on the cargo business, ship owners were still commissioning more and bigger ships which had disastrous consequences: This year, 18 percent of the world's container ships are anchored and idle (adding up to more capacity than was idled in 2009). In just the last quarter, global shipping capacity increased by 7 percent while demand grew by only 1 percent. As a result, the price of shipping a container fell by nearly half.

And the solution is …

A study last year by the OECD found that economies of scale from today's mega-ships are four to six times smaller than those in previous periods of upsizing. 

The OECD report looked into the impacts of ships with a capacity in excess of 18,000 twenty-foot equivalent units (TEUs) and found cost savings from bigger container ships are decreasing. Increasing ship size from 8'500 to 15'000 TEU saved approximately $80 per container, while increasing from 15'000 to 19'000 saves $40. Of these savings, over half is attributable to the optimized engines, engine technology improvements rather than capacity of the latest mega-ships.

In other words: Building smaller ships with better engines would offer more savings than going bigger.

Risks, disadvantages & threats of big ships

A Mega ship is a Floating risk: Today's largest container vessels can cost $200 million and carry many thousands of containers creating $1 billion in concentrated, floating risk that can only berth at a handful of the world's biggest ports. Such mega ships make prime targets for cyberattacks and terrorism, suffer from a dearth of qualified personnel to operate them, and are subject to huge insurance premiums.

The biggest ships also bring the biggest landside costs: The biggest costs associated with these floating giants are on land especially at the ports that are scrambling to accommodate them. New cranes, taller bridges, environmentally perilous dredging, and even wholesale reconfiguration of container yards are just some of the costly disruptions that might be needed to receive a Benjamin Franklin and service it efficiently. Even when taxpayers foot the bill for such upgrades, the costs can be passed on to vessel operators in the form of higher port fees.

Traffic jams at sea and at port: In recent years, mega-vessels have caused traffic jams in the water and on-shore as overwhelmed ports struggle to offload thousands of containers. The expense in worker overtime and cargo delays can be significant. Making matters worse, the bigger ships make fewer port visits, leaving operators wondering if they should invest in costly renovations for what would amount to infrequent stopovers.

Economies and Diseconomies of Scale in Container Shipping

Like many forms of transportation, container shipping benefits from economies of scale in maritime shipping, transshipment and inland transportation. The rationale of maritime container shipping companies to have larger ships becomes obvious when the benefits, in terms of lower costs per TEU, increase with the capacity of ships. There is thus a powerful trend to increase the size of ships, but this may lead to diseconomies to other components of container shipping.

For port terminals the growth in ship capacity comes with increasing problems to cope with large amounts of containers to be transshipped over short periods of time as shipping companies want to reduce their port time as much as possible (improved ship asset utilization and keeping up with schedule integrity). Larger cranes and larger quantities of land for container operations, namely temporary warehousing on container yards, may become prohibitive, triggering diseconomies of scale to be assumed by port authorities and terminal operators.

For inland transportation, congestion growing capacity, such as more trucks converging towards terminal gates, leads to diseconomies. Because of technical innovations and functional changes in inland transportation, such as using rail instead of trucking to move containers from or to terminals, it is unclear what is the effective capacity beyond which diseconomies of scale are achieved. The fundamental point is that diseconomies are a challenge that impacts several segments of the transport chain.

The Future of Mega ships

The upfront costs for mega ships look daunting, however the long-term trends in global trade are what should really worry big ship owners. 

The Organization for Economic Cooperation and Development estimates that world trade will continue expanding in the next few decades, but at a much slower pace than it did during the golden age of globalization. A big reason why is that emerging economies, such as China, are hoping to rely more on domestic consumption and less on export-led growth.

However, global capacity will increase by 4.5 percent this year, and by another 5.6 percent in 2017 -- almost entirely due to new mega-vessels. 

Mergers and consolidation, which certain shipping companies are pursuing, might offer a chance to keep those big ships steaming. But sooner or later, even the biggest operators will have to accept that the era of super-sized shipping is almost coming to an end.

Video on MSC ZOE - Largest container ship in the world