Sunday 18th Nov, 2018

INDUSTRY OPINION: The hidden costs of hand-me-downs

Large Container Ship. Photo: Shutterstock
Large Container Ship. Photo: Shutterstock

OVER the course of 2018 global container lines will take delivery of some one million TEU of newbuilding ship capacity, with almost all in the form of Ultra Large Container Vessels of 18,000-22,000 TEU.

Only one trade is physically capable of accommodating these behemoths: Asia-Europe, where consequently supply is once again well exceeding demand.

In what should thus be no surprise to any regular observer, freight rates are now “substantially below” 2017, with some sources claiming offers of as low as US$350/TEU are in the market against “expectations” of US$1500/FEU.

For every new mega-containership delivered carriers have to find a use for an incumbent of the previous generation. As Alphaliner’s Tan Hua Joo told a Singapore conference last week, as ULCVs push existing ships out of major east-west routes, carriers will use the displaced tonnage to “attack” north-south trades. This may mean a degree of mutually-assured destruction, at least in terms of profitability: the quest for market share is everlasting.

Of course Australia will not see Asia-Europe scale vessels for a very long time, if ever. But if carriers get their way, bigger and bigger ships will be pushed to Oceania, whether we need them or not.

The largest boxboats in regular service to Australia are, in nominal container capacity terms, three Hyundai 7500s (now rated at 7,847 TEU) operating on MSC’s Australia Express Service to Europe. These are also the largest by deadweight, at 93,650 tonnes, and are 300 metres long and 43 metres wide.

The former UASC A8-class ships, now operated by Hapag-Lloyd as their contribution to the joint EAX/NEMO service with CMA CGM, and also to Europe, are longer, at 306 metres but narrower (40 metres) and have a correspondingly lower deadweight (85,500t) and container capacity (listed as 6921 TEU).

It’s counter-intuitive that such tonnage should be servicing the European route (through Suez) given that trade is a quantum smaller than those with East Asia and Southeast Asia. But this can be explained by the multi-sectoral structure of the services: on-board slots are re-sold several times over on successive legs of the journey from Australia to Europe; actual dedicated cargo may only occupy a relatively small percentage of the vessel capacity.

Carriers quite legitimately argue deployment of such tonnage to accommodate the necessary service structure required for profitability ensures Australian shippers have continued access to direct links.

Yet this nevertheless means the imposition of much larger vessels than the Australian trade requires. These ships already face operational limitations in local ports, not just though principally in Melbourne. This generates pressure on port owners and operators to invest in deeper channels and berths, longer quaylines, more sophisticated navigational aids – and on service providers to supply equipment commensurate with the requirements of bigger ships.

Who pays for these upgrades?

Invariably, ultimately, it is not the shipping lines.

One of the justifications offered by stevedores for their rampant infrastructure charges – against which APSA and FTA continue to campaign strongly – is the need to fund investment in new equipment to service larger ships. Surely such investments should be a normal part of service provision, with costs recovered from those utilising (and benefitting from) the infrastructure – the shipping lines.

But it is already clear stevedores have succumbed to both competitive pressures and shipping line diktat in agreeing rates for lift-on lift-off and associated services that are simply too low; cost recovery has been shifted to the land side. It is to be hoped that the growing concerns of the ACCC and state governments forces greater transparency in these matters sooner rather than later.

There is another aspect to the cascading of tonnage into lesser trades that also warrants attention.

In quiet moments shipping line executives will tell you that, ironically, Melbourne’s inability to handle larger ships is the only thing standing between sanity and another bout of destructive over-capacity in Australian container trades.

Without Melbourne constraints significantly larger box ships would pour into this market, especially on Asian routes, far in advance of demand. Global carriers are flush with ships displacing from east-west trades and need to find employment for them.

Inevitably, excessive supply drives blue water rates down and shippers may be short-term winners. Just as inevitably, though, over-capacity promotes instability: carriers look to compensate for low rates through new and higher surcharges, or by ruthlessly driving down costs (such as stevedoring rates).

Eventually, services consolidate, contract or close – and shippers are powerless to prevent the cycle repeating. No amount of regulatory intervention to ensure minimum service levels will stop shipping lines from going broke.

Bigger container ships are always touted as more cost effective, more fuel efficient, more productive and more profitable – but the on-costs are never cited. For shippers, infrastructure providers and service suppliers it’s a case of be careful for what you wish for.

* Dale Crisp is a shipping commentator and media advisor to the Australian Peak Shippers Association 

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