Drewry Warns Mega Ships Could Diminish Economies of Scale

Drewry says the increasing number of vessels of more than 18,000 TEU may be diminishing economies of scale.

Drewry Shipping Consultants Limited (Drewry) says a simulation study conducted by the company on the impact of the increasing number of vessels of more than 18,000 TEU on lines, terminal operators, ports, and other supply chain stakeholders has indicated that economies of scale may be diminishing.

"Without collaboration between stakeholders in the ocean freight supply chain, container megaship new-build arms race will not deliver hoped-for cost benefits," said Drewry.

The consultancy explains that container shipping lines' new-build vessel size "arms race" will continue among efforts to reduce unit costs and improve profitability, with another 53 mega ships set to enter service during the 2016 year.

"While bigger ships help carriers reduce voyage costs, these savings are increasingly offset by higher port and landside costs meaning that total system cost savings are small and declining," explains Drewry, noting that cost savings peak at 5 percent of total network costs, with economies of scale diminishing once vessel sizes increase past 18,000 TEU.

The company explains that larger vessels create increased demands on ports, which are required to upgrade equipment, yard facilities, and manning levels in order to cater to larger vessels and accommodate increased peak cargo volumes. 

Drewry says channels will need to be deepened and terminal yard areas will need to be increased by up to one third to handle the larger vessel sizes and avoid congestion, even if there is no growth in container volume.

"Drewry expects that even with no further increase in maximum vessel size, 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," said Drewry.

Further, Drewry notes that scale economies from megaships function for the total supply chain only if terminals can increase productivity alongside vessel size increases.

Commenting on the findings of the report, Tim Power, Drewry's managing director, said that lines and ports must improve coordinated efforts to improve productivity in the face of the increasing number of mega-sized vessels.

"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," added Power.

In September, Ship & Bunker reported that data from Drewry indicated that, while larger box ships continue to enjoy a cost advantage, tumbling bunker prices had halved the slot cost benefit for mega-ships.