THE SHIPPING SURVIVAL GUIDE Juggling efficiency with bigger container ships
As the prices paid to move cargo over long distances have plummeted, shippers have turned to ever-larger ships in search of volume-driven savings. But that strategy is putting a massive financial burden on the ports needed to service them, creating friction between shipping interests that depend on one another to survive. Both sides are looking to information technology improvements for relief.
Shippers of containerized cargo know exactly how to lower their costs: move more cargo per ship. As a result, the industry is scheduled to welcome its first 20,000 TEU (twenty-foot equivalent unit) ship in 2018 – a leviathan so big that few ports in the world will be able to service it.
For shippers, the motivation for bigger ships is a simple question of economics. “The cost of moving a box from Hong Kong to New York in 1973 was about US$5,800 per box; today it is about US$2,500 per box,” said Richard Larrabee, former director of port commerce for The Port Authority of New York and New Jersey, a decline made possible by rapidly escalating volumes of cargo moving on larger and larger ships.
Growth in demand for containerized shipping is historically strong, projected to increase by 6% to 7% this year, according to RS Platou Economic Research, a division of the Oslo, Norway-based RS Platou Group, a leading international broker and investment bank serving the offshore and shipping markets. Meanwhile, Tokyo-based International Association of Ports and Harbors (IAPH), a nonprofit organization, reports that global cargo levels in 2013 reached more than 651 million TEUs. While the growth rate in demand for space is respectable, ship capacity grows in tandem, with an estimated 1.6 million to 1.9 million TEU of new shipping capacity scheduled to hit the water in 2015, a net fleet expansion of nearly 7%.
“PROFITABILITY IS, TO A HIGH DEGREE, DEPENDENT ON THE INDUSTRY’S ABILITY TO LOWER COSTS AND INCREASE EFFICIENCY. THE MAIN LEVER IS ECONOMIES OF SCALE, ILLUSTRATED BY THE INCREASE IN VESSEL SIZE.”VICE PRESIDENT, OPERATIONS EXECUTION, MAERSK LINE
But “container shipping is a low-margin industry,” said Keith Svendsen, vice president, Operations Execution, Maersk Line, the global container division of the A.P. Møller-Mærsk Gruppen, a Danish conglomerate. “In 2014, only Maersk Line and three other lines reported significant positive earnings before interest and tax margin. The industry’s margin as a whole averaged 3.1%. Profitability is, to a high degree, dependent on the industry’s ability to lower costs and increase efficiency. The main lever is economies of scale, illustrated by the increase in vessel size.”
As ships grow bigger the channels, ports, facilities and associated logistics services must grow as well, a reality that is creating friction between shippers and the facilities that serve them.
“I believe the defining trend is the owners’ pursuit of optimum ship size, which appears to be toward bigger carrying capacities and lower unit costs,” said Shashi Kumar, professor of International Business and Logistics and academic dean at the United States Merchant Marine Academy (USMMA).* “Everything else is driven by this: the widening of the Panama Canal and improvements to the Suez Canal; new investments in ports and terminals; dredging deeper channels; and even the motivation (for carriers) to form alliances.”
Port facilities and terminal operators complain that ship owners have forced them to bear the brunt of the burden to invest, without a sufficient increase in volume to offset the cost.
“These ultra large container vessels put us, as a port operator, under pressure,” said Mohammed Al Muallem, senior vice president and managing director, UAE Region, DP World, a global container handling specialist with more than 65 marine terminals in Dubai, one of the seven United Arab Emirates. “On the one hand, they help shipping lines to reduce unit costs. But they also require the port industry to invest in longer berths, deeper drafts and bigger cranes to translate on-water economies of scale to land.” DP World has invested more than US$6 billion over the past five years, Al Muallem said, adding capacity and upgrading infrastructure of its terminals, including its flagship Jebel Ali facility in Dubai.
“DP WORLD HAS INVESTED MORE THAN US$6 BILLION OVER THE LAST FIVE YEARS ADDING CAPACITY AND UPGRADING INFRASTRUCTURE OF ITS TERMINALS, INCLUDING JEBEL ALI PORT IN DUBAI.”SENIOR VICE PRESIDENT AND MANAGING DIRECTOR, UAE REGION, DP WORLD
The story is the same in New York, which has invested approximately US$5 billion over the past decade on dredging channels from 40-foot depths to depths of 50 feet, along with other port and facility improvements. Such investments must be made on faith, the Port Authority’s Larrabee said. “Digging a deeper channel, raising the Bayonne Bridge … it doesn’t necessarily mean that more cargo is going to come.”
Naturally, shipowners see the equation somewhat differently. “High-quality infrastructure is an important determinant for economic growth,” Svendsen said. “While shipping lines invest to make global trade more efficient, governments and ports are not following the same path. More collaboration between shipping lines and terminals is key to improving efficiency going forward.”
Shipping lines that want to find berths for their new mega-ships don’t expect ports to do all of the work on their own, Maersk’s Svendsen said. For example, Maersk helped ports prepare in advance of its world-record-setting Triple-E vessels, where “Triple-E” stands for efficiency, economy of scale and environment. “Maersk Line worked with ports in Asia and Europe to assist with the preparation for larger ships,” Svendsen said. “Such preparations included infrastructure adjustments (water draft, length/width of quays or turning basins, crane upgrades) and pilot training, for which Maersk Line provided data for simulator use.”
Movement of cargo via container ship is a delicate global dance; disruptions caused by severe weather conditions, labor disputes or political unrest can bring the machinery to a grinding halt. For example, the nine-month port strikes on the US West Coast in 2014 and early 2015 gave the industry a multibillion dollar economic wallop. Store shelves were left empty, employees were laid off, and dozens of ships sat at anchor off West Coast ports for weeks as produce rotted and orders went unfilled. The stoppage forced shippers to redraw well-established trade patterns, permanently moving some Asia-to-US cargo from the geographically closer and more cost-effective West Coast to US Gulf and East Coast ports.
Weather, labor and politics are all unknown variables. What is known is the undeniable increase in the size and complexity of ships, ports and the logistics chain, which creates equally large and difficult scenarios to optimize system efficiency. The US West Coast situation convinced many experts that bigger ports are not the sole solution to bigger ship sizes; increasing the flow of cargo into fewer, larger facilities simply created bigger ripples throughout the logistics chain.
“(Bigger ships), in terms of fuel and cargo efficiency, seem to be very effective,” said Marco Pluijm, ports and marine sector manager for Bechtel, one of the world’s largest engineering, construction and project management companies. “However, at the same time, it puts stress on the port and terminal owners and operators who have to handle these bigger ship sizes. The top three impediments (to efficiency) are port and terminal handling capabilities, hinterland connections and the availability of suitable financial means.”
For example, Pluijm said, the US East Coast, where major ports have been upgrading to prepare for the new Panama Canal (the new Panamax ships will haul as much as 12,500 TEU) coming into operation in 2016/17, now need even more investment to accommodate the 20,000 TEU vessels that began operating when the expanded Suez Canal opened in August 2015. “Not each port will be able to do so,” he said.
Some of these impediments, the USMMA’s Kumar said, can be eased with better information delivered earlier.
“Central to all of this is the speed of the information from the ship to the terminal,” he said. “Without IT support in its myriad forms there would be utter chaos, from port and shipping operations to cargo clearance to forecasting and data analytics. There can be no supply chain efficiency without real-time information, and that’s only possible because of all the advances we continue to make in IT.”
Regarding ships at sea, Maersk’s IT investment is best exemplified by, but not exclusive to, its investment in the Triple-E class, Svendsen said. “We are increasingly connecting the fleet with the shore organization to provide guidance in real time on optimal routes, port stays and speed. This has allowed Maersk Line to realize significant savings.”
Like shippers, ports are investing in IT as well. “We are constantly investing in our operations systems, procedures and software,” DP World’s Al Muallem said. “We have a strong IT team developing software tools that can help make the entire port more efficient. Getting the containers off the ship is just the first step in a multistage process from ship to evacuation from the port.”
DP World has dubbed its Jebel Ali Container Terminal 3 its “terminal of the future.” “T3” features 19 of the world’s largest and most modern quay cranes, remotely operated from a quayside control room. The cranes – along with smart mobile applications, a 100% electronic transaction facility and an advanced Gate Automation system – are all designed to contribute to a cost-effective terminal.
In New York, meanwhile, the port’s most visible IT investment is the new Terminal Information Portal System (TIPS) from Sustainable Terminal Services. TIPS provides all port users with comprehensive web-based access to centralized information on container availability, booking status as well as terminal-specific news. The power is in the consolidation of information.
While much headway has been made, more work lies ahead. Kumar, for one, believes port and terminal operators can learn how to handle the world’s largest ships by studying how airports handle the world’s largest airplanes.
“When airlines started using the (Airbus) A380s (which can carry as many as 853 passengers), the embarking and disembarking of passengers were also speeded up,” he said. “No additional time is required in airports to handle the bigger planes, unlike what is going on with the bigger container ships. We need similar paradigm changes in port operations to keep up with increasing ship sizes. There has to be increased automation and even greater use of information technology to make this happen.”
* The views expressed in this article by Shashi Kumar are his own and not those of the United States Merchant Marine Academy, the Maritime Administration, the US Department of Transportation or the US government.
While much attention is paid to the size of ships, the depths of harbors and the onshore capabilities to move containers through the system, Bechtel’s Marco Pluijm, ports and marine infrastructure sector manager, is a proponent of building man-made offshore ports to ease congestion and increase efficiency of container shipping operations.
In the Bechtel model, deep sea vessels discharge their cargo via the offshore hub. From there, it is transferred to barges, which transport the cargo to one or more nearby ports. Distributing the cargo in this way spreads the burden across a wider area, rather than pumping more cargo into already congested corridors. Offshore hubs also reduce the need for deeper dredging of existing ports, reducing the ecological impact that would come with expanding existing ports, Pluijm said.