Hello from Frankfurt, where we’re keeping a close eye on the after-effects of the blockage of the Suez Canal by one of the world’s megaships. With supply chains already under pressure from the pandemic, we’re curious to see what fresh hell a load of cargoes clogged up for almost a week at one of the arteries of world trade will cause.
With the Ever Given finally unstuck, we ask whether the incident in the Suez Canal is likely to derail the trend of container ships getting bigger and bigger.
Have megaships become too big to sail?
When the modern Suez Canal officially opened on November 17 1869, time was called on the sailing ship’s dominance. A Splendid Exchange, William Bernstein’s history of world trade, charts how, by cutting the distance between London and what is now Mumbai pretty much in two to 6,200 miles, the canal wiped out sail’s economic advantage in traversing longer distances against its then up-and-coming steam-powered competitor overnight. More than 150 years later, the unplanned berth of the Ever Given in the canal is raising questions about whether ships have become too big to sail.
In his brilliant take on the hydrodynamics behind the incident, FT Alphaville’s part-time boat correspondent Brendan Greeley writes that what we’ve seen play out at Suez over the past week, was an accident waiting to happen, with the Ever Given’s width and height when fully loaded exposing it to gusts. “Wind definitely played a role, but there was probably something else happening, too,” Brendan concludes. “The ships keep getting bigger. But everything on Earth stays the same size.”
The era of the megaship as we now know it only really took off in the noughties when — after decades of rampant growth in trade over the second half of the 20th century, in large part driven by containerisation — the major shipping lines calculated that world trade volumes would continue to soar and that they could take advantage of economies of scale by building bigger ships.
The trend also capitalised on cheap financing — a side effect of central banks’ ultra-low interest rates — and an overcapacity in the shipbuilding industry. The biggest megaships travel on the route between east Asia and northern Europe (even under the new Panamax rules, the Ever Given would have been too big to make it through that canal).
While the craze is a nightmare for those operating the global shipping infrastructure, the public love a big ship. We, the media, have been all too eager to feed the frenzy, telling the eager audience how long each vessel is in terms of Empire State Buildings or football pitches. (The Ever Given is just under four times the length of our hallowed Anfield turf, in case you’re wondering. We’ll stop short of telling you how many times each of its containers stacked atop of one another would reach the moon and back.)
Container ships may have peaked in terms of length, but they are still getting wider and taller — more twenty-foot container equivalents, or TEUs, have to stack in there somewhere. The result is that the average container ship is now three times the size it was in 1996, according to data from the International Transport Forum (ITF) at the OECD and Clarksons.
Yet, those in the know have long voiced concern. The ITF warned of the dangers six years ago. “We’re now seeing the logical consequences of what we observed in 2015,” says Olaf Merk, who leads the work on ports and shipping at the ITF. “A lot of people now realise how difficult it is to deal with these ships if there’s an accident. The situation will not change overnight — these ships are here now. But there is a question to be asked about how this affects the next generation of vessels.”
Insurers share that assessment, saying loss prevention has not kept pace with upscaling. “Such ships generate economies of scale for shipowners but also a disproportionately greater cost when things go wrong. Dealing with incidents involving large ships, such as fires, groundings and collisions, are becoming more complex and expensive,” says Captain Rahul Khanna, global head of marine risk consulting at Allianz Global Corporate & Specialty. “With 24,000 TEU vessels on the horizon, we are now seeing the implications of what might happen more regularly in the future.”
Though the gains of ever-larger vessels lie with private shipping companies, the cost of upgrading the infrastructure through dredging and reinforcing quay walls is often borne by publicly owned bodies. (Though some might argue that, by creating more work and better infrastructure for the local community too, these projects have high multiplier effects.) There are also environmental costs associated with dredging — the practice used to ensure waterways have sufficient depth to accommodate ships — with ports such as Hamburg coming under pressure from environmental groups that claim it damages the local ecosystem.
Meanwhile, the ITF argues that the economies of scale, while substantial, diminish after 5,000 TEU, with some of the cost savings coming from the use of more efficient engines (the Ever Given can take more than 20,000 TEU).
The shipping industry has been quick to defend the use of megaships. John Butler, president and chief executive of the World Shipping Council, has extolled environmental benefits, telling Trade Secrets that the use of larger vessels helps limit the amount of CO2 per unit kilometre of goods.
From a political perspective, the Suez incident could not have come at a worse time. Regulators were already keeping a close eye on the rapid rise in prices on several major trading routes — including from east Asia to Europe, where the cost of transporting a 40ft container has more than quadrupled since the summer of 2020.
Those costs reflected pandemic-related logjams that were not entirely of the industry’s own making. Nevertheless, the incident places the spotlight on the business practices of the shipping liners at a time when they are already vulnerable to attack. Liners may see this as an opportunity to price gouge — and with some justification: in the run-up to the incident, the supply chain was operating at close to full capacity. That does not sound wise to us.
The Suez incident has focused attention on the risks associated with huge vessels. But so too did the ITF’s 2015 report, before eventually being largely ignored by officials. Unless lawmakers decide that this time is different and clamp down on the liners, the megaship will not go the same way as sail — the economies of scale, even if diminishing, are too significant.
It’s worth noting too that, in the years up until the pandemic, this was an industry that faced lean times. It’s no accident that ships have become bigger as industry consolidation has intensified — both trends are down to cost pressures. The lines may not be able to afford to reverse either. “Historically, with declining rates, shipping costs per container for the liners have to get cheaper and cheaper because the margins have been so small,” says Patrik Berglund, chief executive of Xeneta. “Unless Covid brings a systemic change to that, we’ll have carriers chasing economies of scale with bigger vessels in a more normalised market.”
Still, we’d bet that the triumphalism surrounding these ever-bigger vessels dims a little post-Suez. When the next megaship sets sail on its maiden voyage, we wouldn’t expect quite as many camera crews.
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Source: Economy - ft.com
