Economies of scale made steel : The economics of very big ships
Aboard one of the world’s largest container ships, moving almost imperceptibly through the seas off Vietnam, it’s easy to appreciate the economies of scale that allow a T-shirt made in China to be sent to the Netherlands for just 2.5 cents.
The Eleonora Maersk and the other seven ships in her class are among the biggest ever built: almost 400m long, or the length of four football pitches, and another half-pitch across. The ship can carry 7,500 or so 40-foot containers, each of which can hold 70,000 T-shirts. On the voyage your correspondent took, the Eleonora was carrying Europe’s New Year celebrations: 1,850 tonnes of fireworks, including 30 tonnes of gunpowder.
To move all this cargo from China to Europe in just over three weeks, the Eleonora boasts the largest internal-combustion engine ever built, as powerful as 1,000 family cars. This engine turns the longest propeller shaft (130m) ever made, at the end of which is the largest propeller, at 130 tonnes. Yet the ship is so automated that it requires a mere 13 people to crew it. Reassuringly, most captains prefer to take a few more.
Maersk Lines, the world’s biggest container-shipping company and owner of the Eleonora, is betting that, given the current economics of world trade, the only way to go is yet bigger. In February it announced an order for 20 even larger ships with a capacity of 18,000 twenty-foot-equivalent units (TEUs), the standard measure of container size. (The Eleonora can carry a mere 15,000.) The new ships will cost $200m each. And judging by this year’s order books, Maersk’s example will be followed by others. Singapore’s Neptune Orient Lines has ordered ten vessels of 14,000 TEUs; Orient Overseas Container Line has ordered ten of 13,000 TEUs. This is excellent news for South Korean shipyards (see article).
Most of these vessels will be designed for the Europe-Asia run—now the world’s busiest trade route. Given the rising price of fuel, many shippers think they need huge ships to turn a profit. Fears of a renewed slowdown in global trade accelerate the rush to find economies of scale.
Freight rates have plummeted in recent months, thanks to weakening demand and an oversupply of container ships, many of them ordered in the optimistic years before 2008. Freight rates on the Europe-Asia run are now below $700 per TEU, less than half the peak a year ago. At this price, says Janet Lewis, an analyst at Macquarie, a bank, “It’s hard for any container company to be making any cash.”
Recent financial results bear this out. On November 9th Maersk said its container business had lost $297m in the latest quarter. Neptune posted a third-quarter loss of $91m, having made a profit of $282m a year earlier. Japan’s “K” Line reported a loss of $239m on its container-shipping unit in the fiscal first half. And things could get a lot worse.
Companies are searching for new strategies to differentiate themselves from rivals, or merely to survive. Maersk has launched what it calls the “Daily Maersk” service on the China-Europe run, deploying 70 vessels to promise daily deliveries to Felixstowe, Bremerhaven and Rotterdam, the three main European container ports. The firm is hoping to deliver 95% of these containers on time, up from 80% for its own service on that route. This would be far higher than the industry average of about 65%. If a container arrives more than a day late, Maersk pledges to compensate the customer. Orient Overseas, by contrast, is focusing on the quality of its cargo-handling. It charges more, for example, to ship perishable items, such as blood plasma.
Given the stormy waters that may well be ahead, it seems likely that shippers will seek economies of scale not only from bigger ships but also from mergers. The industry is too crowded, many analysts believe. Smaller firms may soon be swallowed like containers vanishing into the hold of the Eleonora Maersk.