News / Who pays for the 'disadvantages of scale' from mega-vessels and mega-alliances?

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The quantum leap in container vessel sizes over the last decade has left the logistics industry searching for answers about who really wins with the introduction of mega-vessels, mega-alliances and their much-lauded economies of scale.

As the supply chain is being re-shaped to accommodate 18,000teu vessels and the world’s largest shipping lines stretch, the paradigm of what is considered “normal” on every trade lane, port operators and shippers are set to feel the pressure and pick up the cheque for a new set of “disadvantages of scale” being faced throughout the supply chain, delegates heard at the recent TOC Americas conference in Cartagena.

Shippers, port operators and industry observers were perplexed by moves by the world’s largest shipping lines to pull up the drawbridge to new entrants to one of the world’s most confounding and consistently unprofitable industries.

“Economies of scale are beneficial for some actors but it creates a whole array of other problems for others,” said Dr Jean-Paul Rodrigues, head of global studies and geography at Hofstra University. “Economies of scale work well for the shipping companies but the bigger the ships the less flexibility you have in terms of port calls, so that is an issue and this has put pressure on the ports,” he says.

Ports in particular are feeling the pressure to embark on expansion plans that will only benefit a select handful on trades dominated by the new mega-vessels.

“The Panama Canal rationale has been a kind of ‘clear and present danger’ scenario for ports on the US east coast – ‘if we don’t invest we are screwed’ – but what is going to break the economies of scale is supply chains,” said Dr Rodrigues.

Liner economies of scale were also likely to lead to increased friction with shippers looking for lower costs and more direct services, which are being driven out of the system with the arrival of bigger ships and bigger alliances, he said.

“Supply chain managers are going to be more and more annoyed, as you will have two issues: less frequency and more volume. And more cargo on big ships raises insurance issues,” he added.

Shippers were concerned that the rise of mega-alliances seeking to drive costs down through network rationalisation would have a negative impact on their efforts to get products to market swiftly. Large perishable exporters were particularly concerned that transit times would become an issue of getting produce to market.

“The concern is that you need to add in transhipment, and if cargo is going from one vessel to another it takes time, there is no way to eliminate that. That is going to increase transit times, which, with slow-steaming, are already a concern,” said Allison Nowlin, in charge of international logistics at JBS USA, the North American arm of the world’s largest frozen meat shipper.

Other shippers – only now becoming accustomed to longer transit times as a result of slow-steaming – would only accept delays, and the added inventory required, in return for greater transparency and real-time information on the whereabouts of shipments. The issue of increased transhipment has accentuated the issue of tracking goods in transit.

“Customers are becoming far more demanding. Predictability and reliability are major concerns,” said Richard Jordan, regional head of logistics in the Americas for Panalpina.

“If we use hubs, it’s not so much a matter of ‘how much it is going to cost?’; it is more a matter of ‘where are my goods?; when will they be there?; when can I get my hands on them?’” he added.

The emergence of mega-alliances as a response to the continuing decline in rates was placing carriers on a path to conflict with their customers if service levels also decline, according to one of Chile’s most important shippers.

Any reduction in direct transit options and an increase in transhipment could prove counter-productive to the region’s trades, according to Mario Aguilera, logistics manager for CPMC, the largest forest products exporter in Chile.

“If the mega-alliances are not a move towards improvement, then it will go very quickly from a mega-alliance to a mega-disaster,” he said.

Less frequency, fewer direct services and more transhipment in the region were what shipping lines had to careful of, according to Poul Hestbaek, Hamburg Sud’s senior vice-president for Latin America West Coast & Caribbean.

“As you increase the size, then suddenly you are seeing half the frequencies. Fruit exporters will tell you that they need the frequency; they need to be re-loading every day, so it’s going to be very interesting to see how we will increase the utilisation rates,” he said.

He forecast that, despite the obvious attractions of implementing hub and spoke systems to increase utilisation rates on the largest ships, shipping lines would probably be forced to listen to shippers’ clamouring for direct calls, and create parallel services that connect key markets with direct services.

However, lines were growing concerned about the diminishing returns on their investments in regional ports.

“We need to look at crane density and less wasted time. On average, there is six hours of wasted time per port call: waiting for the pilot; 20 minutes of gangway; inefficiencies that we can’t afford any longer,” Mr Hestbaek said.

The strain is already being seen in Brazil, where the introduction of 8,200teu vessels, coupled with the doubling of berth capacity in Santos, the region’s largest port, had so far not had the desired effect in terms of reducing vessel waiting times.

Emerson Buarque, Gulftainer’s managing director in Brazil, said waiting times had increased by 31% in 2014, with container vessels now waiting on average up to 15 hours to berth in Brazilian ports.

And the widening of the Panama Canal – set to introduce vessels of up to 12,500teu – is only set to exacerbate the problem in the region’s under-equipped ports.