Is bigger always better – Economies of scale and gigantism in shipping

The winds of change within the context of containerized shipping have been sweeping to say the least. In the pursuit of environmental sustainability, digitalization, operational and commercial efficiency, and collaborative practices the containerized fleet and the industries commercial practices have been radically modified over a significantly short period of time.

Most symbolic of the industry’s radical transformation in recent years however remains the drastic increase in fully cellular containerships. Since the day that they first took to the open oceans back in the 1960’s container vessels have grown steadily.

The pace of growth has been notorious to say the least. A few years ago, if I were to suggest constructing and sailing a containerized vessel with a carrying capacity of 24,000 TEU, I would not take offense to the assumption by others that I may have been exposed to something other than a strong sea wind.

With gigantism being the most popular trend currently pursued by the world’s major carriers a new global context has concurrently begun to rear its head.

Shipping lines have embarked on actively expanding their business towards vertical integration, encompassing services expanding beyond traditional lines, the specialized port terminals, and inland distribution.


The emergence of colossal vessels along primary routes has led to the resultant cascade of maritime traffic along secondary and tertiary routes. To cater for and retain such services ports are consequently forced to adapt their means of practice through investing in equipment and infrastructure.

Thus, whilst the argument for economies of scale relative to container vessel sizes makes for a seemingly sensible commercial case, such developments have the potential to seriously impact ports and the entirety of logistics chain, including production.

This begs the question is bigger always better and what alternatives exist?

 

Onwards & Upwards – The trend of gigantism relative to vessels within the container industry

Between the period of 1968 to 2017 the containerized shipping industry witnessed a 1500% increase in vessel sizes.

economies of scale and gigantism in shipping - shipping and freight resourceThe trend of Gigantism remains strongly in force and has demonstrated few signs in slowing down. Elucidation to practical illustrations exhibit how rapid this increase has been over a considerably short time frame.

From 2006 to 2013 the prediction of larger vessels was subject to several constraining factors including: subdued trade tendencies, an increase in ship orders, implications at ports and transport infrastructure (i.e. the Panama Canal).

On the flip side of the coin, from 2013 onwards, reductions in vessel construction costs, economies of scale, adaptions to layout infrastructure at hub ports (such as Le Havre and Rotterdam) and an inclination towards constructing environmentally sustainable vessels significantly encouraged the trend of growth in large container vessels.

Economies of scale epitomizes one of the main lines of arguments advanced by proponents of the vessel enlargement process.

When one considers individual vessel sizes, larger vessels are commercially sensible, in the sense that although the overall cost of the vessel is higher, the cost per unit is in fact lower.

In view of transformed markets and corporate strategies an examination of the argument of the simple principle of economies of scale must however be had to determine its current relevancy or redundancy for that matter.

The evolution of vessel sizes indicates that the pursuit of economies of scale constitutes a central aim within the context of broader strategic objectives in shipping jointly with mergers & acquisitions and commercial and operative agreements.

Economies of scale brings several issues into view. Shipping lines, in pursuing economies of scale have sought to establish larger companies by means of mergers and strategic alliances.

However, the implementation of oligopolistic and monopolistic practices at such a rapid rate consequently results in the conception of high barriers to market entry, the need for huge capital investment and places huge pressure on freight rates given the large number of role players involved in the same industry.

 

A Shifty Scale?

Large vessels pose an immense challenge to existing port and logistic infrastructure. Few ports presently have the infrastructure capabilities or land side superstructures required in accommodating container vessels of immense proportions.

Thus, given the current incompetence of hinterland and harbour infrastructure of the majority of the world’s ports, there have been numerous calls by terminal operators and those responsible for the payment of harbour infrastructure to impose limitations upon container vessels.

In fact, the United States of America has itself imposed a limitation on vessels of a certain size, restricting port access to container vessels with a carrying capacity of 18,000 TEU. Several ports throughout Europe have called for a similar limitation to be implemented upon container vessels.

Constructed for the purpose of enabling vessels to traverse the world’s oceans within a reduced time frame, the Suez Canal, as the direct link between Europe and Asia, in fact operates as a limiting factor.

As demonstrated by the infamous Ever Given debacle, the Suez Canal is in fact a structural bottleneck in the overall path. Vessels that extend beyond 50 metres in width are only allowed a draft of 12 metres thus vessels with a carrying capacity of 24, 000 are already running the gauntlet in terms of this limit.

Ever Given - Shipping and Freight Resource - Suez Canal

 

Potential re-positioning of the focus of developments in Improving Efficiency

Shipping remains one of the largest and antiquated contributory economies. Numerous actors co-use infrastructure, resources, and the natural environment.

Visiting and planning different operations as well optimizing infrastructure along the maritime supply chain therefore remains essential in streamlining operations that align with sustainability as well as current commercial and environmental objectives.

As opposed to being determined by the design and construction capabilities of shipyards, recognition has been given to the fact that future ship designs should be premised on the optimization and streamlining of vessel and land-based logistics.

Ultimately, a shift in thinking should be advocated in the sense that container vessels should be seen within the context of larger ecosystem that includes ports rather than merely perceiving them as isolated units to the exclusion of the latter.

In seeking to give effect to United Nations 2030 Agenda for Sustainable Development and its SDG 13, as well as the International Maritime Organization initial strategy in reducing vessel Greenhouse Gas Emissions by almost 50% by 2050, achieving energy efficiencies and environmental sustainability have been the main drivers in the ongoing ordering of larger vessels.

The reasoning advanced in justification of such engineering feats is that the larger the vessel the less the amount of energy that is required to transport the container, therefore a reduced output of CO2 emissions and in turn more energy efficiency lower costs. Ultimately, these vessels are constructed on the aim of “Improving profitability and reducing the supply chains impact upon the environment‘’.

Regarding increasing vessel sizes, should the focus of development not rather be based on the potential usage of cleaner alternative fuels rather than that of size? Technological developments afford us with more than adequate means of exploring sustainable ways in which a vessels environmental footprint may be improved without having to compromise efficiency.

 

Conclusion

The purpose of this article was to examine the principle of economies of scale within the context of gigantism. Whilst bigger may seem to be better, at this present moment of time the consideration of various factors seems to suggest that this may only be superficial in nature.

The deficiencies and incapability’s of landside infrastructure of most ports in being able to handle these vessels evidently means that such vessels can only call into a select few ports.

As this trend of gigantism becomes more rapid the further the gap will consequently become. Apart from effecting the North-South trades the trend of gigantism has significant implications in port planning, services, and related activities.

Our focus needs to shift on perceiving container vessels as part of a larger ecosystem that includes ports rather than perceiving them as isolated units. Such a shift in focus must remain cognisant of present commitments to improving efficiency, environmental concerns and sustainability.

The question as to whether we have reached the point at which container vessels have become too large has become a subject for conversation that is more relevant than ever.


About the author : Matthew Van Maasdyk is a Bachelor of Law (Cum Laude) and Bachelor of Law’s (LLB) from the University of Pretoria and currently completing his Masters in Maritime Law (LLM-MR).

The full paper “IS BIGGER ALWAYS BETTER? – VISITING THE PRINCIPLE OF ECONOMIES OF SCALE & GIGANTISM WITHIN THE CONTAINER INDUSTRY.” can be downloaded here..

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2 thoughts on “Is bigger always better – Economies of scale and gigantism in shipping”

  1. An interesting article but there was one, I believe, very important point missing. That is the effect of high wind on the ever-growing sides of these ultra-large container vessels. The surface area of not only the side of the hull but eleven layers of on-deck containers is quite massive. I believe this has been a contributing cause not only to the Ever Given debacle but several recent losses in the North Pacific Ocean. I can see a time when insurance companies are going to restrict their cargo cover on these vessels as there is almost an inevitability of loss with them.

    Reply
    • good point

      onesided approach to gigantizme shows that even shiowners
      should look twice before deciding about future size of new orders.

      Copetitionsz theoretically end in oligopols and oligopsons when not monopolies.

      Market logic is partial logics and leaves out( important points which when not taken into considerstion cause social and economic costs

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