Container Shipping Industry

Outline the evolution of the structure in the container shipping industry and discuss the extent to which the structural changes are explained by increasing size of ships entering

Introduction

In the past especially in the last twenty years international container shipping industry and the related trade has been increasing at a tremendous rate. The period between 1980 and 2004 shows that international maritime trade grew at 2.4% compared to this the containerised cargo has increased at 8.6% with an increase of 600% over that period compared to 70% of the maritime trade. This phenomenal growth can be attributed to the many things including the growing importance of transhipment activities. As more shippers understood the advantages of container shipping ports increasingly made changes to the infrastructure and adapted to handling of cargo using containers. This growth of world container traffic has also led to an increase in the size of ships resulting in challenges and opportunities for the container shipping industry. And there is no instance of such a spectacular growth in the transportation industry. This paper outlines the evolution of the container shipping industry highlighting the main reasons behind the growth and development of the industry, moreover it also discusses the increasing size of the ships and its relationship with the container shipping industry. (Ircha, 2006. Volk)

The Factors Behind the Growth of Container Shipping Industry

Volk has studied the container shipping industry and point out four factors which have helped the container shipping industry in achieving its tremendous growth. Following are the four factors: (Volk)

Significant Increase in Productivity

The origins of containerisation can be found in the fall out from the 1956 Suez Crisis when the when the blocking of the Suez canal leading to an increase in demand for transportation this led to an investment of the shipping industry into ships, but the end of the crisis meant that there was an over supply of ships and eventually led to a prolonged recession in the shipping industry. In addition to this shippers are always seeking to minimise cost as the freight level generally doesn’t cover the costs, this cost cutting potential led to the introduction of container ships and the LASH ships, but the container ships were much more successful.

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The introduction of the 20 feet and the 40 ft container led to far-reaching changes to the transportation industry, the productivity of the container shipping is 4 to 8 times to that of the traditional shipping. This enormous productivity led to the shippers being profitable even when the freight rates were low and thus remained competitive. However to really gain from the containerisation concept a lot of investment was needed in the transportation channels. Countries have gradually adapted to this change and have done it at their own pace. This is the reason that the structural changes have been taking place even today in many of the Asian, African, Baltic and Latin American Countries. The Containerisation of shipping is still in the process of penetrating many national markets this is the reason for its greater development compared too the general transportation market.

Structural Changes in Shipping Due of Containerisation

The structural chages in Cargo shipping industry led to the success of the container shipping industry. first many of the ports which were important were unable to make appropriate changes like creation of quays, installation of careanes etc. Due to this many important ports like Liverpool, and San Francisco were left behind. Because of concentration od cargo on a few ports led to the development of hinterland connections, for example Rotterdam and Antwerp have effective inland shipping and. Not all of the shipping industry was able to adapt to the change brought about by containerisation, because in addition to shipping the shippers had to invest in containers too. This limited the number of shippers whoi were able to containerise their business.

Major difference is that has occurred because of containerisation is the increase in the efficiency of shipping. In the past ships used to spend weeks standing at ports, the trips between Northern Europe used to take eight weeks, however with the introduction of containers the trip’s time has halved to four weeks. With significant increase in the capital investment and fewer number of ports, and increase in the speed of ships and efficiency. Shippers now realise that the ships cannot be profitable sitting at ports as a result the idea of offering of multiple loops has emerged.

Because the larger ships with containers could not reach all ports and since many poiorts did not have the capacity or the finances to support containerisation, ship rotation and feeder shipping, a network of shipping feeders has evolved. These ships function both inter-regionally and intra-regionally.

There has been an evolution of the trading routes along with the evolution of containerisation. In the past the routes between different regions of the world were quite clearly defined, however with the intention of creating more efficiency, for this new concepts like the pendulum concept and the round-the-world concept evolved.

The decrease in the transportation was and is passed on to the customer with increased cost reduction, the volume of cargo being transported from far-flung areas has become extremely cheap as the large ships with containers are able to achieve economies of scale.

Increase in Trade Volume and its Relationship with Economies of Scale

The increase in containerised trade has induced the shippers to use larger and larger ships and the large size of ships has led to economies of scale. The strategies adopted by the shippers to deal with this interdependency is to understand the limitations of investment in ships, generally ships last for about 25 year on average, therefore to cope with the steady increase in demand many shippers order ships which have extra capacity to deal with the future increase. Some shippers try to increase their market share so they can invest in more ships. The increase in capacity is not insignificant as it determines the volumes whish can be transported.

Bigger ships also mean more containers, this is the reason that there is extremely stiff competition because the container ship markets have newer ships all the time increasing the competition as the customers benefit because of increased size of ships. Low transportation costs have simulated global trade as products and goods become more and more competitive on a global platform. This is the reason that containers are used for general cargo but also for break bulk cargo like transportation of salt from Australia to Europe. In addition to price container shipping is not only reliable, timely and has more geographical outreach, that industries and producers produce goods which can be containerised.

In addition since the size of ships is increasing even today the transportation costs will continue to decrease as the growth of containers is more than proportionate.

Deregulation and Liberalisation

Deregulation and trade liberalisation occurred in the 90s particularly the Asian and the Latin American countries. China’s entrance in world trade has also been a major part of this liberalisation. Because of this container industry has experienced an added impetus to growth.

Structural Change due to Increase in Ship Size

Gradually over the years, specialised container ships have steadily increased in capacity and dimension shippers try to find the economies of scale in an ever competive market. In 2004 half of the ships ordered were big enough to have a capacity of 5500 TEUs at the minimum, in addition the 36 percent of the all container ships planned for building have a capacity of 7400 TEUs. These huge ships are now becoming more common in the key trading paths which serve Asia. New orders for China Shipping Container Lines range between 8500 and 9600 TEUS. It is estimated that the new ships will be 334 metres long and 42.8 metres wide and have anticipated drafts of 15 metres or more. Even bigger ships depend on better engine technology for the vessels’ propulsion system. (Notteboom2004)

It is believed that the next increase in ship size will be 12,000 TEUs or even more, as the limitation in the engines mean that it will take two engines for the ships larger then 10,00 TEUs. It is estimated that the maximum size of ships would be approximately 18,000 TEUs. This is based on the fact that Malaccan Straight between Indonesia and Malaysia has the relevant depth limits (Gilman 1999).

Bigger container ships need:

• Approach channels and berths which are deeper

• Channels and turning basins which are wider

• larger container terminals which have more storage capacity and warehouses on land so that they can satisfactorily handle higher volumes of export and import containers.

• Outreach which is both higher and longer

• mechanized ship-to-shore support cranes,

• An extremely proficient and well-organised work force working round the clock to guarantee swift ship turnaround

Cullinane et al (1999) have found that economies of scale exist in the case of Europe-Far East and trans-Pacific routes in ships with 8,000 TEU even if the limitations of ports are taken into consideration. As for trans-Atlantic route the range of 5,00 to 6,00 TEUs is ideal. However today there is less knowledge about the economies of scale related to super-big container ships. Some believe in the case of 18,000 TEUs the cost saving are negligible as they would lack flexibility. Adding post-panamax capacity can give a short-term competitive edge to the early mover, putting pressure on the followers in the market to upgrade their container fleet and to avert a serious unit cost disadvantage, i.e. the ‘me too’ syndrome as indicated by. A boomerang effect eventually also hurts the carrier who started the price war.  While others like Waals and Wijnolst,( 2001)insist that there would be cost saving based on hub-feeder arrangement.

It is clear that the increase in scale of vessels has decreased the slot costs in container industry, however it is also significant that larger carriers have not been able to achieve cost saving from economies of scale (Lim, 1998). Moreover inefficient slot utilisation and the tendency to buy more cargo at lower rates can lead to lowered revenues.

Graham states that the techniques like cost cutting by post-panamax building will not be helpful and instead will prevent the shipping industry from achieving stability. To him the danger of a brutal cycle of increase in ship scale, continuous building and decreasing margin is detrimental to the industry. he goes on to say that this increase leads to short term reduction in cost which pushes competitors into investing in still larger vessels this is confirmed by Helmick et al (1996) who thinks that it is a boomerang effect hurting the shipper who started it in the first place.

Conclusion

Containerisation has been revolutionary in terms of changes brought about in the transportation industry, and especially in the case of container shipping industry the change has not only led to its tremendous growth but also lowered prices.

From the above discussion it becomes obvious that containerisation and subsequent steady increase in ship sizes has led to many changes however some people argue that the exercise to find achieve economies of scale is unending and this will lead to an increase in vessel size, which may go beyond 12,000 TEUs in the next few years. This is because shippers have tried to achieve savings in terms of fuel economy and economies of scale in larger ships, this is to have a larger market share and be successful in the sector. Larger ships do have lower costs per TEU than smaller ships.

From the perspective of the ports, the larger vessels will be favoured in the longer rroutes, like Trans-Pacific, trans-Atlantic and Far East- Europe routes, with vessels larger than 8,000 TEUs. Ports have been gearing themselves up for bigger vessels trying to provide facilities to accommodate the huge sizes, this entails huge costs and structural adjustments, and however the incentive is to become hub ports, other ports have to make appropriate changes to remain competitive.

References

Cullinane, K., Khanna, M. and Song, D.-W. (1999) “How Big is Beautiful: Economies of Scale and the Optimal Size of Containership, Liner Shipping: What’s Next?” Proceedings of the 1999 IAME conference, Halifax, 108-140.

Gilman, S., 1999, The size economies and network efficiency of large containerships, International Journal of Maritime Economics, 1(1)

Graham, M.G. (1998). Stability and competition in intermodal container shipping: finding a balance, Maritime Policy and Management, 25(2), 129-147

Helmick, J.S., Wakeman, T.H., Stewart, R.D. (1996). Technology, intermodal transportation and port productivity: throughput maximization and environmental sustainability, The Journal of Urban Technology, 3, 11-38.

Ircha, M C. (2006). Characteristics Of Tomorrow’s Successful Port in Crowley, Brian Lee (Ed.) The AIMS Atlantica Papers #4

http://www.aims.ca/library/Ircha.pdf.

Lim, S.-M. (1998) “Economies of Scale in Container Shipping,” Maritime Policy and Management, 25: 361-373

Notteboom T E. (2004). Container Shipping And Ports: An Overview. Review of Network Economics Vol.3, Issue 2, 86-106

http://www.rnejournal.com/articles/notteboom-RNE_june_04.pdf

Volk B. Growth Factors in Container Shipping. Elsfleth, Department of Marine Studies

http://www.amc.edu.au/mlm/papers/AMC3_GRO.pdf

Waals, F., Wijnolst, N.(2001). Malacca-max: container shipping network economy, Proceedings of the IAME 2001 conference, Hong Kong, 191-207