Zero Hedge
0
All posts from Zero Hedge
Zero Hedge in Zero Hedge,

Too Big To Sail? Container Ship Cost-Cutting Creates Potential Of "Nightmare" Catastrophe

We remarked on the first notable casualty of the collapse of global trade and with it the cost of shipping freight last week when the first of the bulk shipping bankruptcies occurred, but as The South China Morning Post reports, over the past 10 years, shipping lines have endlessly invested in newer, larger vessels - flooding the market with additional capacity - yet the industry's profitability and return on capital have remained pitiful. This supply-demand imbalance has lowered the cost of ocean shipping, but has raised concerns among vessel operators, insurers and regulators about the potential for catastrophic accidents, as "cost cutting measures such as reducing crew numbers, overworking and lack of training” have exacerbated the risks.

 

The MSC Oscar can carry 19,224 containers, making it the world's largest container ship...

 

As The Wall Street Journal reports,

The big container ships that ply the world’s trade routes are growing ever larger...

 

 

...holding down the cost of ocean shipping, but also raising concerns among vessel operators, insurers and regulators about the potential for catastrophic accidents.

 

 

Since the economic downturn, shipping lines have sought to stay competitive by running larger, more fuel-efficient container ships in major shipping lanes, reducing their cost per container, according to Noel Hacegaba, acting deputy director of the Port of Long Beach, Calif.

But bigger is not better... (as The South China Morning Post reports)

Trade growth no longer justifies such massive capital expenditure. Data from British maritime consultancy Drewry shows the gap between fleet growth and trade growth has widened since 2006.

 

Carriers now face a dilemma: without using the newest and largest ships to lower operational costs, they risk losing business; but by investing in a state-of-the-art fleet, they exacerbate a supply glut and poor freight earnings and may eventually struggle to stay afloat.

 

"Flooding the market with additional capacity is counterintuitive, and I believe all shipping lines know that," Lane said. "It has, however, become a case of 'you are damned if you don't, you are damned if you do'."

But, as The Wall Street Journal notes, their increasing size already is straining the unloading resources at some port facilities and—along with labor troubles—has contributed to major traffic snarls at the nation’s West Coast ports.

The larger ships will further test the capacity of ports and canals and the skill of their captains and crews. “There is a world-wide shortage of qualified seamen to command these vessels,” said Andrew Kinsey, senior marine risk consultant at insurer Allianz SE’s Allianz Global Corporate & Specialty unit and a retired ship’s captain. Capt. Kinsey added that human error is a factor in most shipping accidents.

 

...

 

“Cost cutting measures such as reducing crew numbers, overworking and lack of training” have exacerbated the risks, and could contribute to a shipping accident, said Jonathan Moss, partner and head of transport at law firm DWF in London.

 

A major contributor to the recent losses was the $2 billion wreck and subsequent efforts to salvage the cruise ship Costa Concordia, which ran aground in Italian waters in 2012.

 

The prospect of a similar incident involving a container vessel, which might carry 18,000 containers, “is one of our nightmares at the moment,” said Capt. Rahul Khanna, another Allianz marine-risk consultant.

With bigger ships, the risks are magnified. “The bigger the ship, the bigger the challenge,” said Nick Brown, marine communications manager at Lloyds Register.

A collision of two ships delayed traffic through the Suez Canal last September. Though the blockage was rapidly cleared and didn’t have much impact on costs, it illustrated what could happen. With much bigger ships, which offer less margin for error, the impact could have been much worse.

 

“I would compare it to driving a giant SUV like a Ford Explorer or Suburban, versus driving a midsize car. It is probably OK on the highway, but on a small, local road, with two cars passing, size becomes a challenge. There are fewer areas you can go with the vessels, and they are more susceptible to effects of wind and wave,” said Munich Re’s Mr. Dalton.

 

Also, not all ports can accommodate big ships, so the risk is concentrated among the few major ports that can. Insurers expect that risk to trickle down as bigger ships displace smaller ones at these ports and smaller ships are redeployed to replace vessels with even less capacity.

*  *  *

Oh the unintended consequences of centrally-planned, artifically-signalled mal-investment booms...