Economies of scale in container shipping may have peaked

Signal of change / Economies of scale in container shipping may have peaked

By Benjamin Irvine / 26 Jan 2016

According to a report from the OECD's International Transport Forum, efficiency gains from larger ships have been steadily declining – and further increases in maximum container ship size could increase the overall cost of transporting goods.

Containerisation was a key enabler of the expansion of world trade and economic globalisation in the 20th century. Subsequent increases in the size and capacity of container ships drove down transportation costs yet further, while high oil prices placed emphasis on fuel efficiencies. 

However, with the latest 'mega-ships', economies of scale may have reached their peak. Bigger ships deliver economies of scale at sea, but they also involve greater costs associated with cargo handling, additional investment in ports (dredging channels, strengthening quays, larger cranes), and greater concentration of risk – with implications for insurance.

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 optimised engines, rather than capacity, of the latest mega-ships.

The report suggests 'cascading effects' of mega-ship adoption could in fact result in dis-economies: mega-ships deployed on shorter routes – such as the Transatlantic trade line, which is one-third the distance of the Far East North Europe trade line, would require reducing time in port by a third in order to realise projected savings – which may be unrealistic. It suggests these dis-economies may significantly erode the benefits of up-sizing.

The latest generation of mega-ships may compound what has been an overcapacity problem for the shipping industry since 2007-8. Supply of container capacity currently exceeds demand by 20%, a situation that some analysts predict will persist until 2019 creating profitability problems for the industry.

So what?

The average size of container ships will continue to grow in the coming years, based on the size of ships currently under construction. In April 2015 there were 52 ships on order with capacity of over 18,000 TEU, to come online in 2017. But is there enough demand? World trade recorded its biggest contraction since the financial crisis in the first half of 2015. Chinese manufacturers are producing components that they used to import, and automation may diminish the relative cost effectiveness of offshoring producion, says a recent Bank of America Merrill Lynch report.

As for emissions reductions, while megaships are fuel efficient, it may be more important to ensure all ships are incentivized to travel more slowly.

Targets or regulations for reducing emissions from shipping were unfortunately left out of the final text of the Paris agreement along with aviation. If the world were successful in limiting emissions consistent with 2 degrees of warming by 2050, these two sectors could make up 40% of all emissions based on current trajectories.

The challenge for an industry so used to growing in size could be becoming at ease with the idea of slowing down and focusing on the potential of lightweight value creation, while maximizing efficiencies through smart planning for load and routes. 

 Image credit: Andrew Albertson / Flickr

Sources

OECD International Transport Forum (May 2015) The Impact of Mega-ships

Maritime Executive (September 22, 2015) 'Megaships economics nearing its limit'

Shipping Watch (June 1, 2015) 'Maersk Line does not recognize criticism of mega-vessels'

What might the implications of this be? What related signals of change have you seen?

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