Shipping's Mega Wave

While attending the TOC Americas 2011 Conference in Panama last month, I heard four ocean carrier executives say very similar things about the future of vessels and services. What they said won’t please those who emphasize service, for a period of time at least.

The bad news is that frequency, direct services and transit times will suffer, while transshipments will increase. The good news, if good news is to be found, is the carriers will use their larger vessels to reduce costs, which they hope will help return them to profitability. Shippers, of course, hope that translates to lower rates. I’m not sure the latter will happen, but some will want to see even lower rates.

The carriers, with one possible exception, seemingly recognize the significant cost benefits of larger ships. Depending on the expert, the differences on a cost-per-slot basis for an 8,000-TEU ship and a 14,000-TEU ship is north of 20 percent. As one who pays attention to something called margins, that’s a huge number, especially when you consider that in 2010, a particularly good year for carriers, the average margin per TEU for the industry was less than $100.

With the recognized cost advantages, larger ships are replacing relatively smaller ships, and one might think, “So what?” That gets me back to what I heard in Panama from the four carrier executives. They each said, in essence, that with what amounts to 15 percent overcapacity globally, carriers would insert the larger vessels for relatively smaller vessels, and do so in a way that doesn’t exacerbate the overcapacity in a specific trade. So it won’t be a one-for-one vessel swap, and the service patterns will change.

Change to what? They all said the same thing in slightly different ways, but it boils down to going to a hub-and-spoke service pattern using mega-ships to call at relatively few large ports and transshipping to relatively smaller ports. Logically, this would reduce frequency, say from three strings a week to two.

It won’t be that simple. This is a logistical challenge focused on protecting prized markets and, although Maersk Line, Evergreen or Mediterranean Shipping may not have too many issues in making their decisions, those in alliances will, because each carrier has its own criteria on which markets are the most prized. The simple reality is that until global trade grows into the more efficient vessels, the hub-and-spoke services will become the norm in major trades.

That brings us to another reality: fuel costs. Some shippers still ask, “When will slow steaming and super slow steaming go away?” The four carriers addressed the issue head-on, saying with bunker fuel approaching $700 per ton and with no realistic chance of the price declining in the long run, operating conditions won’t change. So, get used to it; it’s a fact of ocean transportation life.

The issue of transshipments is interesting because it’s compelled by several factors, first and foremost, which facilities — ports and terminals — can handle the mega-ships? Even if the water is deep enough and the terminal facilities are modern, with dual lift cranes and other efficient equipment, do the processes and labor rules allow for efficient handling of these mega-ships? Although it’s nice to save significant dollars in the ships’ operation while at sea, what if it takes extended days to unload and reload them because of poor processes or labor work rules?

The four carriers in Panama talked about transshipment port alternatives — either side of the Panama Canal, Jamaica, Miami or other U.S. ports — but their focus with this audience, of course, was on the Americas. When was the last time you heard a shipper asking for a transshipment service that didn’t relate to the most isolated of destinations where there was no other choice?

Again, those who emphasize service and are hoping for improved services may be bitterly disappointed. The hub-and-spoke vessel operations won’t be the answer to better overall services. I think the opposite will be true, in fact; services to non-direct ports will generally deteriorate initially unless you believe reliability will increase if they can make it work.

But the whole point of this is that if slow steaming extended transit times and increased inventory levels, the changes noted here will make it worse and possibly more complex. Just miss a feeder connection or two and see what happens to your supply chain strategies.

Gary Ferrulli, a veteran of nearly 40 years in the shipping industry, is director of export carrier relations for non-vessel-operating common carrier Ocean World Lines, a subsidiary of Pacer International. Contact him at mrgtf4811@mindspring.com. The views expressed here are his own and do not necessarily reflect those of OWL.

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