Study Warns of Diminishing Economies of Scale From New Megaships - Global Trade Magazine
  April 12th, 2016 | Written by

Study Warns of Diminishing Economies of Scale From New Megaships

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  • Total system cost savings from megaships are small and declining, according to a Drewry study.
  • Larger vessels place demands on ports, where channels have to be deepened and terminals need to upgrade equipment.
  • Efficiency gains from upsizing of vessels are eroded as vessels size increases beyond 18,000 TEU.

Fifty-three megaships expected to enter service in the ocean shipping fleet worldwide in 2016. While bigger ships help carriers reduce voyage costs, these savings are increasingly offset by higher port and landside costs.

That means that total system cost savings are small and declining, according to a study from global shipping consultancy, Drewry.

Since 2009, leading container shipping lines have engaged in a new-build race with vessel sizes increasing at breakneck pace to drive down unit costs and improve profitability.

Drewry carried out a simulation study of the operational and financial impacts on lines, terminal operators, ports and other supply-chain stakeholders as vessel size increases up to and beyond 18,000 TEU. The study results suggest that the economies of scale, that have been a key feature of the liner industry, may be running out.

Larger vessels place greater demands on ports, where channels have to cater for deeper draughts

and on terminals, which need to upgrade equipment, yard facilities and manning levels to

effectively handle increased peak cargo volumes. On a total system-cost basis the study found

that the upsizing of vessels provides only modest savings for the overall supply chain with

efficiency gains being further eroded as vessels size increases beyond 18,000 TEU.

Drewry expects that the sheer number of mega vessels expected to be delivered in 2016 will strain terminal resources, as the average size of ships increase the amount of cargo that has to be handled at times of peak container activity.

Combined shipping line and port total system cost savings peak at only five percent of total network costs and economies of scale diminish as vessel sizes rise beyond 18,000 TEU. Terminals will incur significant capital expenditure to handle larger vessel sizes and terminal yard areas will need to increase by one third to avoid congestion, even with no growth in volume. Scale economies from megaships only work for the total supply chain if terminals can increase productivity in line with increases in vessel size.

Continued vessel upsizing risks, leading to no significant cost benefit, include lower service frequency and/or less choice for shippers; higher supply chain risks as volumes are concentrated in fewer vessels; environmental effects arising from dredging deeper channels and expanding yard area.

“As more megaships enter service the industry is rapidly approaching a critical stage,” said Tim Power, managing director of Drewry. “To ensure the economics of vessel upsizing continue to benefit the entire supply chain, lines and ports need to work in a more coordinated manner if further productivity improvements from the transport system are to be realized. Addressing the operational and cost effects at port facilities caused by the challenging load and discharge patterns of these larger ships requires a cross-industry effort. All stakeholders in the supply chain must recognize the need for dialogue and collaboration if the maritime transport system as a whole is to benefit. If these benefits cannot be delivered and economies of scale in this industry really are running out, the implications are profound.”

There is a wider possible implication of these findings for the industry: if economies of scale in liner

shipping have finally run their course, future vessel ordering will no longer be driven by the need to

secure economies of scale but will instead be based on lines’ assessment of future demand


“When this happens, the tendency to structural overcapacity that has plagued the industry will be

much reduced,” added Power. “If this were combined with a process of continuing industry

consolidation, liner shipping might at last be in a position to generate sustainable profitability.”

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