Have you ever seen mega ships up close? The OOCL Hongkong is the largest vessel ever built with a capacity of 21,413 TEU – watch the video below to see how impressive it is! The term “Mega-ship” itself came up in around 2013, with the Triple E series of ships of Maersk capable of moving 18,340 TEUs. They are the product of high fuel costs and low interest rates to achieve maximum economies of scales. But is bigger always better?
Mega-ships have led to cost savings for shipping lines, reduced sea transport costs and facilitated global trade in the past. However, larger vessels require adjustments to port infrastructure, equipment and cause massive peaks in container traffic in ports. But do the benefits of mega-ships still outweigh costs for the whole supply chain? We try to answer this question with this article looking at fuel, expenses and port infrastructure.
Cost savings of mega-ships
Doubling the maximum ship size over the last decade has reduced total vessel costs per transported container by roughly a third. However, these cost savings are decreasing with size, savings of the newest generation of mega-ships are four to six times smaller than the savings from previous rounds, according to the International Transport Forum.
The new generation of mega-ships is the lagged product of high oil prices, and low-interest rates between 2004 and 2014 and they have been optimized to save fuel by voyaging much more slowly. Additionally, mega-ships operate more efficient with annual savings of approx. — $ 50 per slot. Compared to a 16,000 TEU vessel, a mega-ship with 19,000 TEU would save close to 1 million USD. But according to the OECD, the real savings are on fuel bills because mega-ships consume less fuel on a voyage then 16,000 TEU vessels. This is because the new generation of ships was specially designed to operate most efficiently at a slower speed to take advantage of slow steaming. That makes sense because fuel consumption is related to the cube of pace – a vessel that travels twice as fast will consume eight times as much fuel!
“But costs savings are decreasing as ships become bigger”, the OECD concluded. “A large share of the cost savings achieved by ship upsizing to 5,000 TEU, which more than halved the unit costs per TEU, but the cost savings beyond that capacity are much smaller.” However, it gets more complicated for shipping lines to achieve a certain level of utilization! Mega-ships needs to have utilization of at least 91% to achieve cost savings, which is very difficult to make even for high volume trade routes. To fill their mega-ships, carriers came up with two strategies: low freight rates that decrease profit per slot and hub-and-spoke systems that they copied from airlines. That means shipping schedules have consolidated into fewer sailings per week from only the main ports in Asia and Europe. Containers for other destinations must be transshipped either on a feeder vessel or by another transport mode.
Supply Chain risks of mega-ships are rising at the same time. There are concerns about the insurability of mega-ships and the costs of potential salvage in case of accidents. Mega-ships also lead to service and cargo concentration, reduced choice and more limited supply chain resilience, especially since bigger ships have coincided with increased cooperation of the leading shipping lines in four alliances. Insurers are worried about the costs if a mega-ship sinks or develops mechanical problems. Insurer Allianz has warned the industry must prepare for losses of more than $1 billion, or even up to $2 billion in the event of a collision between two vessels.
Impact of mega-ships on ports
Mega-ships put stress on ports! The OECD estimates that “annualized transport costs related to mega-ships could amount to US$ 0.4 billion, roughly a third of the additional costs might be related to equipment, a third to dredging and another third to port infrastructure and port hinterland costs.” In addition to huge investments, mega-ships cause more congestion and increases competition amongst ports by a lot!
As a consequence, ports need to adjust their infrastructure to accommodate mega-ships. Port of Panama is an excellent example of that! They rebuilt the port between 2015 and 2017 but can’t host the OOCL Hong Kong and COSCO Universe with a capacity of more than 21,000 TEUs. If it is already hard for big ports to compete, how bad is the situation for smaller ports? They will probably be left behind by the competition or need to find new business models to generate profits.
A higher container density of fewer vessels but with more significant numbers of containers is creating peak times and puts much pressure on ports! Ports need more cranes, more highly skilled staff to operate them fast, more space in the yard, and the ability to handle more trucks, railcars and barges to move the containers inland. Parties involved in terminal operations will have to work more closely together to avoid long turnaround times, congestions and high demurrage & detention bills.
Is bigger always better?
Shipping lines struggle to accomplish a reasonable utilization rate, ports are under heavy pressure, and the savings generated through mega-ships are getting less and less. We can’t look into the future, but it seems like we reached a peak in terms of capacity per vessel for now! We’re especially concerned by the congestion and high density in terminals that already increase demurrage charges according to the FIATA. Of course, it always depends on the individual situation – but with SOC Containers you don’t have to worry about charges due to congestion and handling difficulties. You find them globally in more than 2500 locations with Container xChange, most of the time free of charge. Shoot us a message, we interested in hearing your opinion on mega-ships!