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The Large Vessel Conundrum

Going into 2018 the container shipping industry faces a fundamental problem: too many large vessels. The carriers have invested heavily in “megaships” to reduce slot costs and emissions, and continue to take delivery of ever-larger examples. The oversupply of vessels overall and large vessels in specific creates a double-edged problem:

-Oversupply has depressed rates and profitability in an era of slow trade growth, despite partial recoveries by some carriers in some trades.

-Efficient handling of large vessels requires capital investment by ports and terminal operators at the very time when depressed carrier profits limit port and terminal revenue.

All the revenue in the shipping industry eventually comes from shippers and flows through the carriers. Those shippers are enjoying bargain basement rates due to overcapacity, and so carriers cannot raise payments to terminals. Both independent terminal operators and ocean carrier terminal subsidiaries are being asked to invest hundreds of millions for cranes and systems to handle the same cargo volumes, at the same rates, as they did before the recession, only now in larger ships.

Public port authorities are getting the same requests, with the same revenue limits. Every port wants to be “big ship ready” and maximize cargo volumes on behalf of its city or state. Yet the cost of being “big ship ready” is soaring while revenue has plateaued. Rather than accommodating rapid growth, ports are paying heavily to compete with one another.

The carriers are the only ones who can solve the problem. Asking shippers to pay rates above the competitive floor is an empty gesture. The carriers need to raise the floor by getting capacity in line with demand. Carrier consolidation can help fill the larger vessels, but will not reduce the overall capacity or downward rate pressure unless accompanied by accelerated scrapping or order cancellation. While there has been some movement in that direction it has hardly been a stampede.

It remains to be seen whether 2018 is the year when carriers will finally choose long-term profitability over short-term bragging rights to having the biggest boat.

Dan Smith is a Principal with The Tioga Group:

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