Are the giant megaships increasing supply chain costs for everyone but the ocean carriers themselves?

That's the unfortunate situation, according to Chris Welsh, secretary-general of the European-based Global Shippers Forum, an industry lobby, who spoke at an industry conference last week.

The growing size and number of container megaships is causing high costs and delays throughout the supply chain - costs paid for by ports, shippers, terminals and others parties, not the container lines, Welsh said.

He noted for example that there are giant traffic jams of drayage trucks at the port of Hamburg, Europe's third busiest port, the result of the average number of container moves per vessel increasing from 2,000 to 2,500 a few years ago to between 6,000 and 7,000 today. That increase in container moves per terminal stop also causes long unloading times in addition to the traffic woes and delays.

Welsh also noted that while container lines can get a new megaship in about 18 months, it can take 10 years to complete a port expansion (it was more like 20 years for the port of Oakand).

The deployment of megaships "has led to the bunching of vessels, peaks and troughs in cargo handling, terminal congestion and void sailings, piling up costs across the supply chain," Welsh said.

Welsh is hardly the first to make this general observation on the cost impact of the megaships.

Last year, for example, the Organization for Economic Cooperation and Development (OECD), a group of economically developed countries, completed an analysis of the impact of megaships.

That report noted that "Although economies of scale allow vessel costs per volume transported to decrease with bigger ships, the on-land costs of handling those volumes increase. Together, these two costs determine the total costs for the transport chain. At a certain point increasing ship size becomes sub-optimal as cost savings become marginal. While a doubling of container ship size reduces costs by a third (vessel costs per TEU), making sea transport cheaper, the savings decrease with increased size."

That basic principle is illustrated in the graphic below, which shows at some point, megaships will continue to reduce costs for container lines but drive total costs per container up.

OECD looked at what the impact would have been if instead of ordering the latest 19,000-TEU ships, ocean carriers had instead ordered 14,000 TEU ships to attain the same total fleet capacity.

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In that scenario, land-side costs would have been approximately $50 lower per transported container. While that might not seem like much, "it is actually substantial when compared to freight rates for transporting a container from Shanghai to Rotterdam - now at less than $400 [at the time in mid-2015] and the thousands of containers ships can carry. Hence, as ship sizes continue to increase we find ourselves heading towards overall increasing costs," the report noted.

What's more, the OECD found that the latest generation megaships do not really drive down cost due to the scale (more containers handled per number of crewmen, etc.). Instead, the preponderance of the savings for the container lines come not from operational scale but from improved bunker fuel efficiencies from the latest generation of engines - savings that would be realized say on 14,000-TEU ship as well as those with 18,000 and above TEU capacity.

Additional costs that are driven by the megaships include size-related fixes to existing infrastructure, such as bridge height, river width/depth, quay wall strengthening, berth deepening, canals/locks and port equipment (crane height, outreach). Megaships also require expansion of infrastructure to cater to the higher peaks related to megaships; as a result, more physical yard and berth capacity is needed.

These annualized transport costs related to megaships could amount to $400 million according OECD's rough cut estimate. About one third of the additional costs might be related to equipment, a third to dredging and another third to port infrastructure and port hinterland costs.

OECD also observers that "A substantial share of the dredging, infrastructure and hinterland connection costs are costs to the public sector in many countries."

What to do about all this? Hard to say, other than ramping up port and terminal fees for the container lines, but then those costs will just fall back onto shippers in the end.

Do you believe that this is a big issue - container shippers benefitting from megaships, but cost cost rising elsewhere in the supply chain? What should be done? Let us know your thoughts at the Feedback section below.

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