Big ships: Container lines reach for scale


On a sunny summer afternoon, workers at the Port of Felixstowe, the busiest container port in the UK, put the finishing touches to the new berths eight and nine, designed to handle ships far bigger than even the biggest on order.

Across the water from the new berths, the port’s existing berths regularly handle ships – such as Maersk Line’s E-Class ships, that carry 15,500 twenty-foot equivalent units (TEUs) of containers – with nearly twice the capacity of the biggest vessels seven years ago.
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The scene at Felixstowe illustrates a scale revolution that continues to transform container shipping, the backbone of the globalised world’s logistics system.

The growth in size seems relentless. In February, less than five years after its E-Class ships shattered container ship size records, Maersk Line, part of Denmark’s AP Møller-Maersk, announced it was ordering the triple-E class. Its 18,000-TEU capacity adds another 16 per cent capacity to the record.

This pursuit of scale has excited a debate about how far and how fast the continued growth of ships can go on, and about how much upgrading work is needed for container shipping companies’ management systems to cope with a once-unimaginable scale of operations.

Executives hope the result will be a slicker, more professional industry.

As the industry plunges into its second serious downturn in two years, many also hope that it might lead to more consistent profits.

Ron Widdows, chief executive of Singapore’s Neptune Orient Lines, a noted sceptic about the industry’s size fixation, says the advent of the vast ships now calling at Felixstowe – and the threat that more will arrive soon – is helping to depress earnings.

“All the carriers are scrambling to try to ensure that they have enough cargo to fill these things,” Mr Widdows says.

However, even his company has felt obliged to invest in some 10,000-TEU ships for the vital Asia-Europe service, worried that without these economies of scale it might not be able to compete.

“I have not been enamoured of the big, big ships,” Mr Widdows says. “But it became evident to us, at least in the Asia-Europe trade, if you don’t get a competitive cost structure you’re dead.”

The central calculation for lines introducing the new, far bigger ships is straightforward. A ship carrying 14,000 TEUs of containers will have operating costs much lower than a 7,000-TEU vessel.

Eivind Kolding, Maersk Line’s chief executive and advocate of big ships, told the Financial Times when he was announcing the ordering of the triple-E class ships, that they would cost 26 per cent less per container to run than even the vast E-Class.

But, Mr Widdows and other critics point out, if such large vessels operate less than fully loaded, their higher overall operating costs can make them hopelessly uneconomic. Lines consequently have a tendency to panic if volumes drop and ships look like they may sail only partially full.

These worries, according to Brian Nixon, a container industry veteran and now an executive director at Morgan Stanley, a bank, can push lines to sign contracts in bad times that they either will not or cannot honour in good times, when ships are suddenly full.

The blame for the problem is shared with the shippers – container lines’ customers – he adds.

“It’s no surprise that carriers can’t manage their capacity when some shippers come to them and expect them to deliver up to 150 per cent of [the previously agreed cargo volumes] with no penalty for delivering zero,” he says.

Mr Nixon argues that both sides should make far more use of derivatives based on container shipping costs – Morgan Stanley is a significant broker in this area – to offset risks, reduce volatility and improve profitability.

The derivatives trades could also giving shipping lines a useful benchmark for their salesforce to use, instead of simply undercutting other lines. This is the tactic many use at present.

Mr Kolding, meanwhile, has argued that a key industry aim should be to ensure ships arrive on time – at present only around half do – and to make it easier to book cargo on to vessels.

In June, Mr Kolding launched a campaign to persuade the industry to start addressing the issues, arguing that it had been complacent for far too long about its success over the past 50 years.

However, the Port of Felixstowe faces more practical challenges.

Paul Davey, corporate affairs manager for Hutchison Ports UK, the arm of the world’s largest container terminal operator that owns the port, confesses to a certain relief at news of the ordering of the triple-E ships.

They will be the first to need the 16m water depth and vast cranes that have been expensively provided at berths eight and nine. The cranes can reach across 24 containers, one more than the triple-E ships’ 23 container width.

The port has an extra card up its sleeve – it has built the new facility with the potential to deepen the water to 18m, in case of the arrival of yet another new class of container ships.

The company recognises that, just as in 2002, when berths eight and nine were being planned, secretive shipping lines would never have admitted in public to thinking of 18,000-TEU ships, so another gigantic surprise may soon come steaming over the horizon.

“To a certain extent, we’ve been doing all this blind,” Mr Davey says, referring to the planning of new berths. “The shipping lines, for their own commercial reasons, don’t share their plans with terminal operators.”

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