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The "big ship/rate volatility" conundrum

By William DiBenedetto, CBN Feature Editor

It doesn’t seem to add up to a viable, profit-making business plan: buy huge containerships and then go about trying to raise rates on the most important trade routes.

Apparently making that equation work involves withholding space on some trade routes to bolster rates, but it all adds up to extreme rate volatility.

According to Olaf Merk, ports and shipping administrator of the International Transport Forum (ITF), the time is quickly approaching when it won’t make much sense to build mega-ships. Merk said the shipping industry is close to reaching the point of optimal ship size. Carriers are already having difficulty filling their existing huge vessels; they have a capacity oversupply of about 20-30 percent, he noted. Increasing ship capacity from 19,000 TEUs to 24,000 TEUs would only cut costs by five percent, which he said was relatively marginal. He was quoted in a Singapore Business Times report.

ITF is a unit of the Organization for Economic Cooperation and Development. Its much-discussed report, which was a focus of a recent OECD ministerial meeting in Leipzig, contends that mega ships generate minimal savings, while putting huge pressures on ports to keep up with infrastructure and equipment upgrades to avoid congestion.

Not so, says Maersk Line, which continues to order mega-containerships at a startling pace—most recently a $1.8 billion order with Daewoo Shipbuilding & Marine Engineering for 11 19,630-TEU vessels with an option for six more. Maersk Line Vice President Amdi Krogh, along with the World Shipping Council, counter that the OECD estimates are off.

In a Shipping Watch interview, Krogh asserted, "When we look at our own numbers and calculations of the savings, we have numbers that are somewhat bigger than the results from OECD. The difference in savings on a twenty-foot container on a new mega-vessel and an older 14,000-TEU container ship can reach up to $500 in our calculations, which is somewhat higher than at OECD. So here, there is no doubt that the large ships provide real savings and are more cost efficient than the older generations of vessels." Maersk is following the growth in volumes, he said.

The World Shipping Council agreed. "Given the competitive nature of the business and constant pressure on rates, carriers will continue to use the most efficient ships available for a given trade lane,

meaning that vessels will continue to get larger," the WSC said. Fuel prices and increasing environmental regulations have imposed higher costs on the industry that can only be addressed through the efficiencies brought about by using larger vessels, the council added.

But Drewry Maritime Research, after looking at looking at shrinking box demand, says mega-vessels have failed to produce improved economies for owners as promised. "Ordering ships that take years to build is always a gamble but, as things stand, the roulette wheel has landed on red when all put their chips on black," Drewry noted. While the rush to build the biggest containerships might eventually pay off, so far the gamble "has backfired and carriers are faced with overcapacity in Asia-Europe, making it very difficult to see how rates will become sustainable," Drewry said.

The large number of containerships due to be deployed on the Asia-Europe routes in the short to medium term exacerbates the problem and is "posing a huge risk to carriers in a slowing market," Drewry concluded.

Speaking of rates, spot rates on the Asia-Europe trade recently fell to incredible lows, levels so low that carriers cannot even cover their fuel costs, according to the Shanghai Containerized Freight Index. Trans-Pacific rates have also slumped to their lowest levels in years.

General rate increases recently announced by carriers have as little chance of sticking as previous ones, Drewry director of container research Neil Dekker told Containerization International.

There’s another part of the mega-ship/rate equation, according to Drewry: "The introduction of ever larger ships into a market that is already over-supplied has had the effect of increasing rate volatility. The reason is that not only does the upscaling of vessels increase the capacity deployed but also there is the individual carrier behavior, especially with this first wave of record ships, where shipping lines don’t want to have the ship sail half empty on its maiden voyage."