Niko Wijnolst | LLOYD’S LIST
MAKING ships bigger often results in a reduction of the unit-transport cost, thus creating a competitive advantage through economies of scale for the shipowner. The tanker sector was the first to embrace the “big is beautiful” principle. That really took off after the Second World War, when the 17,000 dwt T2 tanker was step-by-step overtaken by the 100,000 dwt tanker in 1958 and the first 206,000 dwt very large crude carrier in 1966.
The introduction of the first VLCC had an impact on the competitive position of not just shipowners but of ports as well. For example, the market share of the port of Rotterdam in the Le Havre- Hamburg range increased to more than 60%, while crude oil imports grew phenomenally from 110m tonnes in 1970 to 160m tonnes in 1973.
The importance of the 21 m draught VLCC for Rotterdam was such that the port authority decided to dredge a new access channel in the North Sea, the Eurogeul. This also permitted the then new category of capesize bulk carriers to be handled, which resulted in an increase of the market share in dry bulk (in particular, iron ore) from Rotterdam in the range of 40%-50%. It additionally stimulated the construction of the largest capesize bulk carrier in the world, the 365,000 dwt Berge Stahl, which shuttled iron ore cargoes between Brazil and Rotterdam for many years. Size mattered.
The sky seemed the limit when Daniel Ludwig, the father of the supertanker, launched the first 327,000 dwt ultra large crude carrier in 1976, followed swiftly by the 553,000 dwt Batilus built in France for Shell. Designs for the 1m dwt oil tanker were on the drawing board, but the oil crises of 1973 and 1979 changed all that optimism about economies of scale. Batilus went straight into cold lay-up and was later scrapped.
The size of crude oil tankers has since stabilised at around 300,000 dwt. For many years the VLCC seemed to be the most competitive tanker size, but data from Lloyd’s List Intelligence showed recently that the share of aframax tankers (115,000 dwt) in seaborne crude trades has surpassed that of VLCCs. One reason for this is the shorthaul nature of many trades, which changes the sea/port time ratio and thereby makes bigger ships less attractive.
Are economies of scale as a trigger for competitive advantage in shipping on its way out? Not if one looks at the dry bulk sector, where there is a marked increase in the number of very large ore carriers for the long-haul transport of ore from Brazil to China. The size of these VLOCs is necessary for the Brazilian exporters to compensate for their freight differential of around $40 per tonne with Australian exporters. However, if the Chinese appetite for iron ore slows down in the coming years, the massive new fleet of VLOCs under construction and on the orderbooks may have difficulty in finding alternative employment as the size and draught of these ships limit their access to too many dry bulk ports in the world. We might then witness a similar dramatic decline in ship size, as the tanker sector has already witnessed.
Are there other shipping sectors where this economies of scale paradox is, or will be, at work?
The containership sector has only recently experienced a dramatic increase in size, which started when APL ordered the first post-panamax vessel in 1985. The stealthy introduction of the super-post-panamax Emma Maersk in 2006 triggered an unprecedented order spree as the economies of scale (in particular resulting in low capital and fuel slot costs) had to be matched by the other major container lines. This category of super-post-panamax ships is growing very fast, and is also stimulated by the coming enlargement of the Panama Canal locks. The current panamax vessel of 4,500 teu may jump to the new-panamax size of 14,000 teu.
These landslide changes in shipping will also impact on the pecking order of ports, as current multi-porting call patterns will gradually change into hub-feeder networks, whereby only ports with sufficient draught may retain leadership. The coming years will show whether the drive for economies of scale, resulting in mega-ships and mega-ports, will be successful, in particular in the Europe-Far East trade and the Far East (Pacific)-east coast North America trades. The US east coast ports expect to profit from the new Panama Canal capacity whereby super-post-panamax vessels will make direct calls instead of using the landbridge from the west coast.
For many years the largest gas carriers had a capacity of 135,000 cu m, until the series of 210,000 cu m-250,000 cu m Q-Max vessels came on to the market. The giant leap in size and economies of scale have not yet really paid off for the shipowner because of the overall disappointing gas market caused by the economic crisis and the over-optimistic ordering of newbuildings. It is still too early to assess whether the increase in size will be a structural change, or a blip like the 500,000 dwt ULCCs of the 1970s.
Another news item — on the ordering of two 75,000 dwt chemical tankers by Odfjell and its partner NCC — has surprised the industry. It represents a 50% increase in size over existing chemical tankers. The vessels can also be used as medium range product tankers, which gives the owners the flexibility to combine chemical cargoes with standard clean petroleum products. I believe that this flexibility when designing large vessels is a very good move.
The oil tanker sector has shown over the past decades that the creation of a lasting competitive advantage through economies of scale in shipping is not as simple as it looks on paper. Economic theory cannot that easily be applied to the unpredictable and volatile shipping sectors, as the bulk carrier, container and gas sectors will demonstrate in due time as well. That is why shipowners should handle the economies of scale paradox with care.
Niko Wijnolst is chairman of the European Network of Maritime Clusters and Professor of Euromed Management, Marseilles