Is the Drive for Ever Bigger Containerships Irresistible?

Is the Drive for Ever Bigger Containerships Irresistible? CI Shipping Forecasting Conference 25th April 22 Martin Stopford Clarkson Research Martin Stopford 1

The Big Ship controversy The driving force is the creation of a competitive advantage through economies of scale. The Malaccamax design has an overall lower cost level of approximately 16% over the current largest container ships of 8 TEU. In a world of cut-throat competition, 16% can make a decisive difference" The Malacca Max Study No it s not Big is best Topics For Discussion One of the world s most important industries 1) The challenge of sustaining growth 2) Economies of scale in shipping 3) Trends in containership size 4) Economics of containership size 5) Implications of size for the transport system Martin Stopford 2

Part 1: The challenge of growth l l Graph shows sea trade outlook 2-225 Crises, wars, extra terrestrial invasions excluded Total sea trade is likely to grow at about 2-3% pa growth on average Million tons sea trade 8 7 6 5 4 3 2 1 Actual Forecast 1963 1968 1973 1978 1983 1988 1993 1998 23 28 213 218 Fig 2 Growth of container trade Container trade has been expanding rapidly Average growth rate 8% compared with 2% pa for the bulk trades Future growth assumed to be 6% pa Billion tons bulk trade 3.5 3. 2.5 2. 1.5 1..5. 1973 1978 Bulk Trade Container Trade 1983 1988 1993 1998 18 16 14 12 1 8 6 4 2 Million container lifts Martin Stopford 3

Fig 3 1. Market Widening The chart shows ship types in the liner fleet - it still includes non cellular vessels Containerships are now about half the fleet Note growth rate of the total fleet is only growing at 2% pa The process of market widening will end soon Million dwt fleet 14 12 1 8 6 4 2 1985 1988 Cellular Reefer PCC 1991 1994 1997 2 MPP Liner Ro-Ro Fig 3 2. Price Reduction The second contribution to growth was price reduction Transport cost for 15,5 bottles of whiskey from UK to Japan fell from $1,56 in 1991 to $675 in 21 Cost of transporting container 18 16 14 12 1 8 6 4 2 $1,56 1991 $675 21 57% Down Martin Stopford 4

Fig 4 3. New Trades The International Transport System Raw materials Component Component Wholesaler Retailer Consumer Raw materials Assembler Retailer Consumer Raw materials Component Component Agent Consumer Component Arrow indicates a transport operation BULK LINER TRANSPORT Source: Martin Stopford Fig 5 Container Trade Challenge This graph reflects the widely held view that container traffic will grow at around 6% per annum over the next twenty years This is not a forecast, it is a challenge! Million TEU container lifts 7 6 5 4 3 2 1 Great forecast, but the liner industry has to make it happen 1978 1983 1988 1993 1998 23 28 213 218 223 Double Martin Stopford 5

Part 2: Economies of scale in shipping Average size of 35 merchant ships 3 can change 25 Tankers, bulk carriers and gas 2 tankers all 15 followed different 1 size trends 5 It is all a matter of economics Index of average ship size 197 19731976 Tanker size Peaks 1975 1979 19821985 Crude Tanker Gas Tanker 1988 19911994 Bulk Carrier Container Container fleet size Increase similar to Bulk carriers 1997 2 Fig 8 Economies of Scale - Draft Chart shows draft distribution of tanker, bulk & container fleets The average is Tankers 1.6 m. Bulk 11.6 m. Container 9.7 m, Number of ships in draft group 1,4 1,2 1, 8 6 4 2 Tankers Containerships Bulk Carriers No really big container Ships so far 3 6 9 12 15 18 21 24 Draft (metres) Big ore carriers ULCCs (tankers) Martin Stopford 6

Segment Upsizing Model Most upsizing today takes the form of upgrading ships within a segment Tankers, bulk, gas all have self contained market segments And so does the container fleet shipping fleet by ship size 6, 5, 4, 3, 2, 1, 198 1983 1986 1989 1992 1995 1998 21 New Bigger Bigger Fig 9 Container segments growing Although the Post- Panamax fleet is growing fastest, all segments are growing That includes 5-999; 1-2; 1 and 2-2 3 teu teu container fleet 1,6 1,4 1,2 1, 8 6 4 2 198 1983 1986 1-499 5-999 1-2 2-3 3+ Post Panamax 1989 1992 1995 1998 21 Martin Stopford 7

Part 3: Trends in containership size 3,5 This looks like An overshoot 3, Average size in teu 2,5 2, 1,5 1, 5 Forecast? Red line shows average ship size delivered in each year & white line shows trend 1962 1967 1972 1977 1982 1987 1992 1997 22 27 212 Part 4 Containership size economics Door to door transport costs depend on the cost of The ship The containers Terminals Inland transport Economies of scale apply differently in each case Inland 25% Other 13% Termi nal 21% Ship 23% Contai ners 18% Martin Stopford 8

Fig 11 The Container Transport Model Door to door transport 1% costs depend on the 9% cost of 8% The ship 7% 6% The containers 5% Terminals 4% Inland transport 3% Economies of scale 2% apply differently in 1% each case % Other 13% Inland 25% Port 21% Boxes 18% Ship 23% Admin Cargo Claims Inland transport Refrigeratioon Terminal cost Port costs Repositioning Containers Bunkers Capital costs Operating costs The Economies of Scale Curve Scale economies of big ships depend on savings in per teu costs on:- Capital Operating expenses Port & terminal costs Bunker costs Cost/TEU Atlantic trip 75 7 65 6 55 5 45 How much do you Save by building Bigger ships? Bigger 1,2 2,6 4, 6,5 8, 9,5 11, 12,5 14, 15,5 17, 18,5 Size of containership used (teu) Martin Stopford 9

Fig 12 Economies of Scale Capital Cost The line shows the price of container ships ranging from 75 teu to 6,2 teu The bars show the cost per teu One 18, teu ship costs same as 3 6,2 teu ships!! $ million new pri Av. Cost / teu for each ship size. (Right axis) 7 6 5 4 3 2 1 18 725 1, 1,7 2, 2,75 16 Ship Cost (Left axis) 12 14 12 1 11 1 4,6 6,2 Ship size (teu) 18, 2 18 16 14 12 1 8 6 4 2 $ million per t Not much scale Economies here Fig 13 Economies of scale - OPEX There are quite strong 14, economies of scale in 12, manning, stores & 1, admin they hardly 8, increase with size. 6, Insurance and 4, maintenance go up in 2, proportion to the value of the ship Not much scale Economies here Admin Stores Manning Maintenance Insurance 1, 2,5 4, 6,5 8, 9,5 11, 12,5 14, 15,5 17, 18,5 Martin Stopford 1

Fig 14 Economies of Scale : Bunkers 3 Bunker conumption (Y) 25 2 15 1 5 y =.318x + 4.3984 R 2 =.8295 2 4 6 8 Ship capacity teu (X) 31.8 tons per day per teu Fig 15 Economies of Scale To 2 teu 2% saving 75 Cost/TEU Atlantic trip 7 65 6 55 5 45 2-4, teu 7% savings 2, 4, 6, 8, 1, 12, 14, 16, 18, Not Much saving 4-6 teu 4% saving 6-18, 4% saving Size of containership used (teu) Martin Stopford 11

Fig 16 Other Studies reach same result! Cost/teu Singapore to Rotterda 24 23 22 21 2 19 18 17 2, 4, 6, 8, 1, Size of containership used (teu) Only $4/teu improvement over 8-12, teu 12, 14, Source: Planco Report quoting Malacca Max Report Fig 17 Containership size economics Going from 4, TEU to 6,5 teu only saves about $5/slot Transatlantic Distribution costs are increased by extra lifts These economics do not make sense Cost per teu 8 7 6 5 4 3 2 1 1, 4, 8, Main leg Feeder cost? 11, 14, 17, Size of containership Martin Stopford 12

Diseconomies of Scale? The total transport model splits into five parts Only one part benefits from economies of scale on the ship In the port & feeder segment there are possible diseconomies Item Ship Containers Port/Terminal Inland Transport Other Costs Share 23% 18% 21% 25% 13% Economies of Scale Yes but diminishing Congestion?? Dredging, Feeder? None Some on admin Part 5 Is Big what the future transport system will need? Over the centuries technical development in liner shipping has not been so much a continuous process as an occasional leap forward precipitated by a compelling call for change R.O.C. Swain Chairman OCL,1973 Martin Stopford 13

Fig 18 NW Europe 6.3 Growth area in East European states & Russia Growth area in China and Caspian states WCA 15.2 ECA 1.2 Japan 1.5 Med 7.7 Hong Kong 17.8 Singa pore 17. Other Asia 39.1 ATLANTIC Growth 15m TEU PACIFIC Growth 3m TEU Growth rates 1994-2 Numbers show container lifts in million TEU per annum Liner Service 22 The logistics revolution? The compelling change will be web based logistics Arterial services continue, but sea transport is commodityised Frequency and flexibility are the key issues S.America America China Logistics Network Europe Asia India Super carriers Specialist carriers Cargo management system Segmented liner system 2-225? Martin Stopford 14

6. Conclusions Mega ships do not save much in costs Diseconomies due to dredging, congestion & feeders Broadening trade matrix will favour mid size ships Potential economies through upsizing smaller trades Logistics operators like flexibility So Martin Stopford 15