Why Container Shipping is a Lot Like Farming

Transporting massive amounts of containers across the high seas has much in common with the business of rearing dairy cows or growing wheat – and alternative thinking about agriculture holds lessons for the maritime industry.

By Olaf Merk

Remorkers carrying containers to ships in Hong Kong harbour,

I have not always worked on maritime transport. One of my first assignments at the OECD was to conduct a Rural Policy Review of the Netherlands. This is how I met Jan Douwe van der Ploeg, professor at the agricultural university of Wageningen. I mention this because I think that his insights on agriculture are very relevant for container shipping. I will summarise them here briefly.

Van der Ploeg’s analysis of business models in agriculture goes against the received wisdom that economies of scale are always desirable. Over the past decades, farms have grown bigger through consolidation of land, driven by a race for market shares via cost reduction. This has required big investments in expensive equipment and huge loans to finance these.

In the process, agriculture and the local environment have become decoupled. The farmer’s main inputs (machines, seeds) are bought abroad. Most of the work has become automated. Agricultural land has turned into a space exclusively dedicated to production – it is no longer a multi-functional area where work and leisure, production and consumption can be combined.

Van der Ploeg’s merit lies in his detailed calculations showing that smaller but more diversified firms are more productive and profitable. They are less indebted, less dependent on intermediaries and less affected by price volatility, because they have developed economies of scope. And they provide more added value, jobs and biodiversity for the local community.

A container terminal seen from above

Striking similarities

Container shipping has followed a course strikingly similar to agriculture. The dominant idea: more economies of scale. The way to achieve it: cost reductions, ever larger ships and industry consolidation. The result: the large majority of the goods we consume are now moved by a handful of very large global shipping companies that source their workforce from developing countries and register their ships in tax havens. These companies have accumulated as much debt as a mid-size country they emit as much CO2 as a big country and have difficulties to be profitable except in the most bullish of times.

Container ports follow the same pattern. Completely sealed off from their surrounding communities, highly specialised, continuously trying to catch up with ever-larger ships, today’s container terminals leave no room for the intermingling that once gave port cities their charm.

In both agriculture and container shipping, policies – notably those of the European Union – are designed to pursue economies of scale. In agriculture the tool was subsidies; container shipping’s equivalent is the tonnage tax. Both sectors have special regimes that make them hybrids: market-driven sectors in name, but dependent on public support in practice.

In both, creating local synergies is an afterthought that goes by the name of rural development policies in one case and maritime cluster development in the other. In both sectoral policies, building large firms is more important than guaranteeing competition. In both cases, policy reform has become very difficult considering sunk investments, path dependency and regulatory capture by corporate lobbyists.

Cargo ship entering Singapore harbour, one of the busiest ports in the world.

Where the parallel ends

There are of course differences. Probably the most important is the extent of what economists would call the symmetry between buyers and sellers. Farmers buy from very large companies (seeds, pesticides) and sell to very large companies (food industry and retailers). In this constellation, company size could be a countervailing force to the monopoly power of buyers and sellers: larger farms – or cooperatives of farms – might better able to negotiate with the large multi-national companies in seed production, the food industry and supermarket chains.

In container shipping, liner companies buy from fragmented suppliers (shipyards, ports and port service providers) and sell to fragmented buyers (the companies that import and export), so it is the shipping company itself that is the major source of monopoly power. 

There is of course another major difference: agriculture is vital, in the true sense of the word. Container shipping is essential to the extent that global trade is. With many world leaders pleading for more regional sourcing, long-range containerised transport might be less inevitable than thought – which opens the perspective for possible fundamental change.

A policy choice

Professor Van der Ploeg proposes an alternative to the large-scale industrialised agriculture: smaller, more localised, quickly adapting to demands of clients. It is time to imagine similar alternative perspectives for container shipping, if only because that will make shipping more resilient.

The first step in sketching potential new futures would be to realise that there is nothing self-evident or inevitable about the strategy of economies of scale. It has been stimulated by public policies – and these policies can change.


Olaf Merk is ports and shipping expert at the International Transport Forum. He is the (co-) author of The Impact of Alliances in Container Shipping (2018) andContainer Shipping in Europe: Data for the Evaluation of the EU Consortia Block Exemption Regulation (I2019). Views are are his own.

Global pandemics and transport systems in an age of disruptions

The Coronavirus is the most recent in a list of global pandemics – and it is the most impactful. The human and economic costs of Covid-19  go far beyond those of Sars, the Swine flu or Ebola. Its immediate impact on transport activity has been nothing short of dramatic. Will it also change human mobility and freight transport in the long run?

By Francisco Furtado

Arriving passengers are tested for Coronavirus symptoms at Bologna airport in Italy | Source: Shutterstock

It is still early in the cycle of this global pandemic and care needs to be taken not to draw rash conclusions. But some of the striking effects of the Coronavirus on transport and related sectors are evident.

Air travel demand decreased for the first time in a decade from mid-February, according to estimates by IATA, the global association of airlines. In the Asia-Pacific region, air travel is forecast to fall by 8.2% in 2020 compared to 2019. Worldwide, the sector will shrink by 0.6%.

The bulk of this reduction is associated with the domestic Chinese aviation market, which is set to contract by USD 12.8 billion in 2020. Foreign airlines reduced capacity for flights to and from China by 80%, and Chinese airlines by 40%, according to ICAO, the UN aviation body.

More container ship tonnage is idle now than during the global financial crisis. Port operators in China say that volumes for container shipping were 20 to 40% less than last year. On the land side, warehouses and factories are unable to receive or send goods as imposed quarantine exacerbates the existing shortage of truck drivers.

Cancelled and postponed

Supply chain disruptions have led to factory closures and the shutting down of assembly lines – from Hyundai in South Korea to JCB in the United Kingdom – mainly because of the cessation of activity in China and the lack of components sourced from there.

Tourism is another highly visible victim of the Coronavirus. Up to 90% of tourism-related bookings for March are cancelled in some parts of Italy. Preliminary estimates for France point to a 30 to 40% drop in the number of tourists compared to what would be expected for this time of the year. The practically complete absence of Chinese tourists in Europe since the outbreak of Covid-19 points to lost revenue in the order of EUR 1 billion per month.

Rail passengers wearing face masks in Bangkok, Thailand | Source: Shutterstock

The cancellation and postponement of events worldwide has hit big-ticket meetings from the Mobile World Congress in Barcelona, the Paris and Milan Fashion Weeks, or the US-ASEAN summit in Las Vegas. The cancellation of the Berlin Tourism Fair ITB, scheduled for early March, meant 160 000 expected visitors did not travel, use their hotel rooms, or visit the German capital’ s restaurants. Where organisers maintain events, attendance drops dramatically as big employers like Amazon take steps to limit staff travel.

Will things get worse?

Much of this activity should pick up towards the end of the year. To what extent that probable resurgence can make up for the first-quarter plunge is an open question. Some of the above figures, for instance for the aviation sector, were published before the virus reached Europe and other regions outside China. So while they take into account the impact on China, the effects of the global spread of Covid-19 are not yet included. Worse may be to come.

The economic impact was most vividly reflected on the stock markets. The week of 24-28 February was the worst week for stocks since the 2008 crisis. Covid-19 could shave 0.5 percentage points to 1.5% of GDP growth in 2020 compared to previous estimates according to the OECD’s Interim Economic Outlook published on 2 March. In a more severe “downside scenario” global economic growth would halve.

Unlike 2019, NO2 levels in Wuhan did not rise after Chinese New Year | Source: NASA

Nasa images show the dramatic extent to which transport activity and industrial production came to a grinding halt across China – not just in Wuhan province – as drastic anti-virus measures were put in place. The levels of nitrogen dioxide (NO2) in the air were 10 to 30% lower in January and February 2020 than the average of the same period for 2005-19. Such a dramatic drop across such a vast area has never been registered before – an indication to how much drastically reducing transport and industrial activity can impact emissions.

Figure 2. Pollutants in early January 2020 across eastern and central China compared to mid-February

Pollutants across eastern and central China in early January and mid-February 2020 | Source: NASA

Are telework and virtual meetings the new normal?

The contraction of transport activity is twofold: Right now, restrictions on travel and voluntary cancellations of trips compound the impact of reduced economic activity that is beginning to be seen. Later, when transport activity resumes towards the second half of 2020 – which is not a given – the bounce back to compensate for the earlier stoppage might lead to congestion on certain nodes of the transport networks, with increased costs and travel times as a result.

Most likely, Covid-19 will also have more long-term effects on transport systems and the demand for their services. Widespread cancellations of business trips and global events could drive the wider adoption of remote meetings and virtual conferences. Rather than an exception, virtual attendance might become a standard practice or even the norm. Improved digital connectivity and changing corporate cultures could work in the same direction.

The same is true for teleworking. The cost to organisations of having staff members in quarantine to contain the spread of Covid-19, is being considerably softened where those concerned can telework. The likely effect is that this form of work will become more widely accepted, reinforcing an already existent trend.

Will virtual meetings become the new normal?

A boost for re-shoring and resilience?

The tendency for nations to trade relatively more with countries of the same region than with the rest of the world is another trend this health crisis could reinforce. The disruption caused to supply chains by events on the other side of the world highlights security, safety and strategic concerns associated with off-shoring industrial production. The 2008 crisis triggered a rise in protectionism and the regionalisation of trade. In recent years, shutdowns of factories resulted in shortages of components “Made in China”, resulting in a push for the diversification of supply sources, including re-shoring.

A third relevant issue for which the pandemic could become a turbo-charger is resilience. The interest in strengthening transport networks’ ability to absorb shocks, deal with slumps and peaks, or to adapt to shifting trade flows was originally stimulated by extreme climate events, such as the 2004 Indian Ocean earthquake and tsunami. The rise of global trade disputes in recent years further nourished it.

Resilient transport networks feature different transport modes that can be used alternatively, they offer multiple route options to circumvent stoppages, and possess built-in flexibility –  for instance to easily mobilise resources to deal with activity peaks and repurpose them for other needs during slumps. More resilience reduces the costs of shocks to the system and increase safety and security of supply – but it also comes with a price tag.

There is still a great degree of uncertainty about this pandemic’s long-term legacy with regard to the mobility of people and the transport of goods. What emerges more and more as the situation evolves is that it could be significant and long-lasting.


Francisco Furtado is an Analyst and Modeller at the International Transport Forum. He is currently working on a project on Decarbonising Transport in Emerging Economies.


Read more about disruptions to the transport system in the ITF Transport Outlook 2019

No Big Bang on the High Seas

Maritime transport is dominated by shipping line consortia and alliances that are exempt from European competition rules. The EU wants to keep it that way, but its case does not look too strong.

By Olaf Merk

On 20 November, the European Commission released its proposal on the “Consortia Block Exemption Regulation” for shipping lines. What sounds like some obscure bureaucratic rule of little interest managed to upset almost everyone in the maritime logistics chain – from shippers to freight forwarders and the towage sector to port terminal operators. The latter qualified the proposal as “alarming and bewildering” and even threatened court action.

What is the fuss about?

Liner shipping has traditionally been organised in so-called “shipping conferences”, de-facto cartels. Within the European Union, conferences are no longer allowed. But shipping companies can co-operate in the form of consortia, or in bundles of consortia called alliances.

The difference between a cartel and a consortium is that cartel participants collude to improve their profits and dominate the market. Consortia, on the other hand, are tools for co-operation in practical matter, for instance for sharing ship capacity.

The EU’s Consortia Block Exemption Regulation (BER) for liner shipping sets the rules for such co-operation. It exists since 1995 and was revised in 2010. Since then, it has been renewed, without modifications, every five years. The Commission’s proposal that created such a storm is to once more renew the BER without modifications.

Cartels in disguise?

So what caused the backlash now, when in the past the extension of the BER was a mere formality?  At the heart of the controversy is the fear that a cartel-like constellation might be re-emerging under the guise of the current regime. For consortia could, in practice, act like cartels if they effectively co-ordinated not just schedules and other practicalities of operation between competitors, but also the price or the available capacity.

And indeed the cost calculation models in the three global shipping alliances allow carriers of the respective alliance “to develop a fine sense of the costs of other carriers”, according to a recent ITF study on liner shipping alliances. And the European Commission raised concerns that carriers might have engaged in price signalling via their announcements of general rate increases.

Joint capacity planning for “adjustments in response to fluctuations in supply and demand” is allowed by the BER. But there is evidence that carriers might have co-ordinated orders for new mega-ships as well as the timing of ship dismantling within alliances.

Also, most of the so-called blank sailings – the cancellation of a scheduled weekly service – are done simultaneously by different consortia and alliances, as shown in Figure 1. While some interpret this as joint “capacity adjustments in response to fluctuations in supply and demand”, others might suspect concerted action to influence freight rates. Because the different shipping consortia and alliances are heavily intertwined (Figure 2) even detailed co-ordination between them is not particularly difficult.

Figure 1: Blank sailings per month per alliance (2012-2019)

Figure 2: Overlapping consortia links between carriers (for trades to/from Europe)

Will there really be legal certainty?

For many observers, renewing the BER without modifications in this context raises three major questions. The first relates to legal certainty, which the BER is said provide for carriers. Without the BER, consortia would need to carry out self-assessments to ensure they meet the EU’s general competition regulation.

Yet an unmodified BER may not provide this legal certainty, because it is unclear which consortia are still covered by it: it applies only to consortia with a market share below 30%, which is difficult to monitor in practice. The reason is that the Commission uses the “combined market share”, which takes the cross-linkages between consortia into account (illustrated in Figure 2).

That is the right benchmark to look at in principle, but also creates uncertainty as to which consortia fall below and above the ceiling (Figure 3). The Commission recognises that it does not have the data. Collecting it would help to provide legal certainty, but that does not seem to be on the cards.  

Other updates would also provide added legal certainty. It is not quite clear whether alliances are still covered by the BER, for instance. And the definition of “relevant markets” no longer reflects the reality of today’s port competition.

Figure 3: Ranges of uncertainty on combined market shares on consortia covering Europe

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A matter of market share

The second question is about economic concentration. Consortia were invented as tools to allow smaller shipping lines to achieve scale and compete. Since then, consolidation in the shipping sector has surpassed any previous expectations. The market share of Danish shipping giant Maersk alone was 19% in 2018, larger than the share any alliance had until 2012. So consortia have not been the alternative for market consolidation, they have in fact come on top of consolidation and provided an additional tool for an increasingly consolidated sector to benefit from scale.

The result is that a few alliances have huge buying power and can play off their service providers, such as ports, against each other. For the alliances’ customers the result is reduced choice to transport their goods, because the ocean transport offers are mostly similar.

These aspects are mostly absent from the considerations by the European Commission, which concludes that service quality has remained stable. But the number of direct port-to-port connections has fallen, as have weekly service frequencies. The Commission paper also finds no indications for market power of carriers vis-à-vis ports, yet several examples are documented, including the ports of Malaga, Taranto, Gioia Tauro, Zeebrugge or Genoa.

The politics of liner shipping

The third question being asked is about the transparency of the process leading to the decision to extend the BER. The Commission’s stakeholder consultation ended in December 2018 but the document was not released until almost a year later, in November 2019. This was only days before a new Commission took office. Some might think the continuation of the BER will protect European liner shipping companies. But in fact the BER has arguably done the opposite, by helping the emergence of Chinese liners. Asian liner companies have ordered large numbers of mega-ships recently (see Figure 4) and to fill that capacity they will need the alliances and consortia more than the Europeans. Interestingly, the Chinese liner company COSCO submitted a document to the European Commission arguing for extending the BER.

Figure 4: Mega-ship deliveries for Asian and European carriers (2013-2022)

The BER might benefit global liner shipping companies, a few of which are headquartered in Europe. It will do less for European shipping companies operating exclusively in Europe, such as feeder companies and tonnage providers (i.e. ship owners who charter out their vessels to liner companies).

Evolution or Big Bang?

The agenda of the new European Commission that took office in December 2019 emphasises industrial policy, geopolitics and a European Green Deal. How the extension of the current BER aligns with these priorities is not so clear. But if it is deemed essential to keep a shipping-specific exemption from EU competition rules, maybe this is the time to re-imagine its conditions.

One could think of a block exemption that only applies to liner companies that pre-dominantly operate in EU waters, or only for consortia on intra-EU routes, or for types of ships (“Europe class” vessels) that meet certain criteria, for instance with regard to energy efficiency, shares of EU seafarers and use of EU-approved ship recycling facilities. Not exactly a Big Bang, but at least some steps that could help implement the agenda of the new Commission, as exemplified by the Green Deal, and give the blanket exemption a new legitimacy that is currently in some doubt.

Olaf Merk is ports and shipping expert at the International Transport Forum. He is the author of Container Shipping in Europe: Data for the Evaluation of the EU Consortia Block Exemption Regulation (ITF, 2019). This article draws on research for this report. It does not necessarily represent the views of ITF members

Getting Maritime Subsidies Right

by Olaf Merk, ports and shipping expert at the International Transport Forum

Many countries support their shipping industry via maritime subsidies. The value of well-functioning maritime transport for trade is undisputed. But is this, in itself, a justification for passing taxpayers’ money on to operators? Clearly, the private sector can provide shipping services. Subsidies would only make sense if they serve a clearly defined public interest that cannot be achieved otherwise. They would also need to be designed in ways that will not distort shipping and logistics markets.

In practice, this appears to be challenging. To begin with, nobody really knows how much governments spend on maritime subsidies. Support often comes in the form of favourable tax treatment, which is largely invisible in most government budgets. Even countries that make an effort to monitor maritime subsidies, notably in Northern Europe, have difficulties in establishing the actual numbers. Many countries seem to be little fussed, perhaps even happy, that the monetary value of their maritime subsidies remains unknown.

More worryingly, maritime subsidies often do not have a clearly defined public interest purpose. The usual justification is that they support the competitiveness of the shipping industry. The standard threat evoked is the relocation of a shipping registry or of ship management activities to low-tax jurisdictions. The problem with that is that hosting these is no guarantee for good maritime connectivity or for a maritime cluster that adds significant value to the economy.

Many subsidy schemes assume specific outcomes, but do not actually make direct or indirect financial support conditional on achieving them – be it on ships flying a domestic flag, operators hiring domestic seafarers or vessels reducing emissions. Unsurprisingly then, only a few subsidies seem to actually achieve their stated goals. Despite an impressive range of subsidies, only 16% of the world fleet sailed under the national flags of OECD countries in 2019, down from 54% in 1980. The share of domestic seafarers has continuously declined in maritime countries like Germany, France and the UK.

A vicious circle is also at work. Maritime subsidies by one country provoke subsidies by others. This happened already in the 19th century, and it continues to be the case. This perverse dynamic has been fuelled by “flagging out” of vessels to countries with low taxes and little regulation. This development has led to the emergence of the tonnage tax in the European Union: a very favourable tax the shipping sector pays in lieu of corporate income tax. In some cases, regulations have been put in place to avoid a race to the bottom. The proliferation of tonnage tax schemes within the EU has prompted the European Commission to formulate maritime state aid guidelines to avoid tax competition between EU member states. Yet the tendency over time has been to allow more generous schemes that opened the door for other countries to apply similar generosity.

Finally, there is evidence that maritime subsidies distort wider logistics markets. A new study by the International Transport Forum at the OECD found that many tonnage tax schemes for shipping companies can also be applied to their cargo-handling operations in ports. The European Commission has approved this practice in its decisions when it reviewed the tonnage tax schemes of individual EU countries. This creates a competitive advantage for shipping companies that are vertically integrated with terminal operators, by allowing theses to profit from a lower tax burden compared to corporate income tax. This distorts the market for cargo handling, as independent terminal operators do not have these fiscal advantages.

How can these challenges be solved? Governments should be more transparent about the money they spend on maritime subsidies, as well as the impacts generated. And subsidies could be better justified if more conditions were set regarding those impacts, tying support closely to specific outcomes governments want to see. Distorted markets should not be among those, and subsidy schemes ought to be carefully crafted to this. Finally, governments should understand that it is in their own best interest to avoid a maritime subsidies race.

Download the report for free at this link

How shipping got its own Paris Agreement – and what that means

by Olaf Merk

pexels-photo-262353.jpeg

 

Maritime shipping now also has its “Paris Agreement”. On Friday, 13 April, the International Maritime Organization (IMO) and its member states agreed on an “Initial GHG Strategy” for shipping. This strategy sets out an absolute target to reduce shipping emission by “at least” 50% by 2050. It also commits the sector to pursue efforts to phase out CO2 emissions in line with the objective of Paris Climate Agreement.

Is this compromise (for that’s what it is) a historic achievement or a collection of weasel words? How did we get here? And what still needs to be done? In my view, the deal struck at IMO is a huge step – for at least three reasons.

First, the IMO’s Initial GHG Strategy is the first big response of shipping to the climate change challenge since the introduction of an energy efficiency measure for ships, the Energy Efficiency Design Index (EEDI), in 2012. The EEDI, developed in the wake of the 1997 Kyoto Protocol, the predecessor of the Paris Agreement, is a binding global regulation. But it has at best a moderate positive impact on shipping’s greenhouse gas emissions,which will materialise only over the long term (given that the EEDI only applies to new ships, while the average life time of ships is more than 25 years).

Looking good

Second, the new agreement makes shipping – seen as a laggard by some – suddenly look better than the aviation industry, the other transport sector that was exempt from the Paris Agreement because its emissions defy national boundaries. The International Civil Aviation Organisation (ICAO), IMO’s sister body that regulates global aviation, was much faster than the IMO to respond to the Paris Agreement. However, its solution now seems less robust than what the maritime sector is now undertaking. For the moment, aviation has adopted a voluntary offset scheme but avoided to set an absolute emission reduction target as the one just agreed at IMO.

Third, shipping and IMO delegates have come a long way in their approach to combatting climate change. An absolute emission target for shipping was unthinkable a few years ago, and even two weeks ago far from certain.

 

In short, this commitment goes further than anything in the past or in similar sectors. And it surpasses what seemed possible only since very recently. So yes, this was probably the best possible outcome for all those who wanted shipping to align with the Paris temperature goals. Even if the Initial GHG Strategy does not quite achieve that (a 50% cut will not suffice to get shipping on a pathway to the famous 1.5-degree scenario),  it sends a clear signal that the sector needs to decarbonise. This will not be without impact on how ship owners act. It will also drive technological innovation for cleaner shipping. Not least, the IMO agreement is a boost for multilateral solutions; all too rare these days.

So, the agreement on the IMO Initial GHG Strategy provides a good reason to uncork some champagne – for those who need a reason for that.

 

Olaf video image
ITF port and shippping expert Olaf Merk talks about hoe maritime transport can decarbonise

 

 

Litmus test of statesmanship

How did this little miracle happen? A combination of things was at work: A technical debate became politicised. A powerful actor threatened unilateral action. Laggards were effectively shamed. Evidence made an impact.

Politicisation took the form of the Tony de Brum declaration. This text, supported by more than 45 countries, demanded that shipping align itself with the goals of the Paris Agreement. Pushed by French President Emmanuel Macron and Hilda Heine, President of the Marshall Islands, during the One Planet Summit in November 2017 the declaration was a political masterstroke: It made shipping emissions a strategic political priority and a litmus test of statesmanship, rather than the arcane topic for shipping technocrats and corporate lobbyists it had been for so long. Intense cooperation among officials of the most ambitious countries, sailing under the flag of the “High Ambition Coalition”, provided important backup.

Another success factor was the threat of unilateral action by the EU. Lack of progress at IMO, the Europeans made clear, could lead (and can still lead) to inclusion of shipping in the emission-trading scheme of the EU-ETS. This was a rather big stick to wield: The prospect of scattered regional rather than global regulation horrifies the shipping sector. EU parliamentarians attended  IMO meetings and added pressure by lending support to the European Commission’s Plan B.

A new degree of transparency

Added Into this mix was a new degree of transparency. Journalists are not allowed to report on what countries say during IMO meetings. Yet social media and leaks to media made it possible for the public to follow the positions of individual countries. Public blaming and shaming by environmental NGOs and activist Twitter accounts like @imoclimate as well as extensive coverage of country’s respective positions in the press seem to have had an effect – most of the countries less eager to commit to strong ambitions backed down in the end.

Report Cover
ITF report “Decarbonising Maritime Transport: Pathways to zero-carbon shipping by 2035”

Finally, there were the facts. Over the past years, ample evidence has been collected which shows that zero-carbon shipping is possible and will create new opportunities. Innovative ship-owners demonstrated what is possible in practice, for example in Sweden. A range of studies, emanating from the research community (like or the University Marine Advisory Services, ship classification societies (like Lloyd’s Register) and policy think tanks like the International Transport Forum.

That said, much remains to be done. Finding agreement on short-term measures to reduce emissions will be a tough job. One of the guiding principles in the IMO Initial GHG Strategy is the concept of “common but differentiated responsibilities” (“CBDR” in climate-change speak), meaning while there is a shared obligation to address climate change, not everyone can be held responsible at the same level.  The introduction of this approach (adopted from the UN Framework Convention on Climate Change, UNFCCC) to the context of shipping (where all ships are treated equally,  irrespective of whether they fly the flag of a developing or developed country) is likely to make discussions on the concrete measures to cut CO2 complex and heated.

But that will come tomorrow. For now, let us just enjoy a historic moment.


Olaf Merk is a port and shipping expert at the International Transport Forum.

Rough waters for container shipping. Why Hanjin, the world’s seventh largest container line, went under

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End of the line

Olaf Merk, Ports and Shipping Project Manager, International Transport Forum. We are co-publishing with the OECD Insights blog.

Sad news. After months – even years – of pain and suffering, the South Korean container shipping company Hanjin finally sank and passed away. Not just any casualty, but the largest shipping bankruptcy in history: Hanjin was the world’s seventh biggest container line with a fleet of 90 ships. Was this an accident, an isolated case of bad luck, or is something more structural going on?

Like with any bereavement, there are the immediate arrangements to make. Terminal operators and maritime service providers were not paid for their services and need their money, so they have seized Hanjin ships in ports to have some sort of guarantee. Hanjin’s clients are eager to know that their goods will be delivered and not be stuck on ships. Competitors are circling around the deceased to pick up some of the ships that Hanjin leaves behind.

At the same time, people start to wonder how all this could have happened. Forensic analysts talk about the sluggish demand for container transport, hit by declining trade from China, the overcapacity in container shipping and the resulting low ocean freight rates that have made it very difficult to make profits in container shipping. All this sounds very logical, but also pretty abstract, and – more fundamentally – it obscures an uncomfortable truth: This was not an accident, but market forces at play – and it will happen again.

The story starts – in a way – in a corporate boardroom in Copenhagen in 2010. Then, the world’s largest container shipping company, Maersk Line, decided to order a set of new container ships that were larger than the world had ever seen, able to carry 18 000 standard containers. Putting more containers on a more fuel-efficient ship would save costs and thus give it a better position in a very competitive market.

For a weekly container service between Asia and Europe – the route on which the largest ships are deployed – ten to eleven ships are needed; a lot of capital that smaller companies would not be able to collect. As the order for the new mega-ships was placed while the global economic crisis was still unfolding, banks were unwilling to lend much to a risky business like shipping, especially the smaller ones with high risk profiles. Timing was excellent, with ship prices low due to overcapacity in shipbuilding yards. The new mega-ships were smartly marketed as “Triple E” ships, providing economies of scale, energy efficiency and environmental performance. They also provided a life-time opportunity for the market consolidation that big players hoped for.

Yet things worked out differently: Other firms reacted by ordering similar mega-ships and by organising themselves in alliances. They agreed to share slots on each other’s vessels, which means they can offer networks and connections that they would not be able to offer if they would go it alone. Alliances had existed before, but the Triple E-strategy involuntarily resulted in stronger alliances in which more carriers were involved. These consortia were also used to share newly acquired mega-ships, so individual carriers would only need to buy a few of these, instead of having to shoulder a whole set of ten ships. Consequently, many carriers were able to rapidly catch up and also order mega-ships, many more than expected. The alliances became such powerful mechanisms that even the largest companies found themselves forced to find alliance partners.

This gave a different twist to the play, but with a similar outcome. The combined mega-ship orders in a period of sluggish demand created a sensational amount of overcapacity: way more ships than were needed. This overcapacity resulted in lower freight rates, lower revenues and several years of losses, of which we have not started to see the end. Who has the longest breath and biggest pockets will survive; the others won’t and will suffer death by overcapacity, like Hanjin.

There will very likely be more Hanjins. Hardly any container shipping line is making profit nowadays and the perspectives are bleak. Sputtering trade growth and gigantic ship overcapacity will continue to depress ocean freight rates. Banks, creditors and governments might well get impatient with some of the liners and cut life lines again.

Economic theory champions the notion of “creative destruction”, in which inefficient firms are replaced by more efficient ones. So, even if it is hardly any comfort for employees that lose their jobs in the process, one could consider it a natural thing that weaker shipping firms disappear.

There is just one problem. If this process continues, it will soon lead to a very small group of powerful carriers dominating an already concentrated market, enabling them to put a lot of pressure on clients and ports. We are starting to see what the results of this are: less choice, less service and less connections for shippers, the clients of shipping lines. The ports that accepted the offer they could not refuse and invested in becoming mega ship-ready may find out that they placed their fate in the hands of a few big players who frequently change loyalties at fast as the wind.

Hanjin is gone; the problem is still very much there.

Useful links

The impact of mega-ships Olaf Merk on OECD Insights

The Hanjin case is a practical illustration of the complexity of sectors such as international shipping. The OECD is organising a Workshop on Complexity and Policy, 29-30 September, OECD HQ, Paris, along with the European Commission and INET. Watch the webcast: 29/09 morning29/09 afternoon30/09 morning

Carbon emissions all at sea: why was shipping left out of the Paris Climate Agreement?

This article, by Shayne MacLachlan of the OECD Environment Directorate, is co-published with the OECD Insights Blog.

surfNewcastle, Australia has the dubious honour of being the world’s largest port for coal exports. There’s even a coal price index named after it: The NEWC Index. Surfing Novocastrian beaches not only means “watching out” for great-white sharks, but also “being watched” by the lurking great-red coal ships out beyond the breakers, waiting to come in to port for their fill (see photo). Growing up accustomed to these ever-present leviathans, I never questioned what ships did to the environment and to our health apart from when they crash and leak oil. This all changed recently as I discovered a raft of statistics about the shipping industry that indicate we’ve been sailing too close to the rocks since the engine started replacing sails and oars in the early 1800s.

A stern warning for climate change, and our health

Shipping brings us 90% of world trade and has increased in size by 400% in the last 45 years. Cargo ships, tankers and dry-bulk tankers are an essential element of a globalised world economy, but they are thirsty titans and they won’t settle for diet drinks. There are up to 100,000 working vessels on the ocean and some travel an incredible 2/3 of the distance to the moon in one year. Some stats floating around state that the 15 largest ships emit as much as all the 780 million cars in the world in terms of particulates, soot and noxious gases. The International Maritime Organization (IMO) says sea shipping makes up around 3% of global CO2 emissions which is slightly less than Japan’s annual emissions, the world’s 5th-highest emitting country. Ships carry considerable loads so they’re reasonably efficient on a tonne-per-kilometre basis, but with shipping growing so fast, this “broad in the beam” industry is laying down a significant carbon footprint. And local pollution created by ships when they are moored and as they rev hard to get in and out of port can be severe as most use low-grade bunker oil, containing highly-polluting sulphur. Ships also produce high levels of harmful nanoparticles, but encouragingly we’ve seen IMO collaboration to raise standards on air pollution from ships.

Mal de mer with rudderless regulation

A recent estimate forecasts that CO2 emissions from ships will increase by up to 250% in the next 35 years, and could represent 14% of total global emissions by 2050. This could wreck our hopes of getting to a well-below 2°C warming scenario. Even though many, including Richard Branson, called for emission reduction targets for international aviation and shipping to be included in the COP21 Paris Climate agreement, we failed. The IMO has introduced binding energy-efficiency measures so by 2025 all new ships will have to be 30% more efficient that those built today, but in my view there are questions about stringency and seemingly they don’t go far enough.

projected-annual-co2-emissions-from-the-shipping-sector_9ecd-768x662

http://www.grida.no/graphicslib/detail/projected-annual-co2-emissions-from-the-shipping-sector_9ecd

Navigating alternative routes to <2°C

As the Arctic ice sheet melts, a route across the North Pole would be about one-fifth shorter in distance than the Northern Sea route. But this isn’t what I have in mind for reducing shipping fuel consumption and emissions. We need to develop a copper-bottomed response to the challenge by further boosting investment in innovation and research. It’s great to all these sustainable shipping initiatives in the offing:

  1. Fit wind, wave and solar power such as kite sails, fins and solar panels. There’s some research into other energy sources underway such as nuclear cargo ships, but of course that presents another element of risk if something goes wrong.
  2. Increase carrying capacity of ships and future proofing of ships for a further 10-15 years with increased fuel efficiency by retrofitting vessels with more technologically advanced equipment.
  3. Use heat recovery technology to harness waste energy from exhaust gases to create steam, then mechanical energy, then electrical energy to power elements of the ship’s systems.
  4. Construct ships with sleeker design to reduce drag and install more efficient propellers.
  5. Use Maritime Emissions Treatment Systems (METS) in the form of a barge which positions large tubes over ships’ smoke stacks and captures and treats emissions from berthed vessels.

Let’s sink fossil fuels

Innovation and efficiency is hardly a “cut and run” approach. And typically when an industry reduces fuel costs they use the savings to increase activity, meaning carbon reduction is limited. This “rebound effect” could happen in maritime shipping. Truly green shipping will require vessels that are 100% fossil-fuel free. To help drive down fossil-fuel use, a carbon charge for shipping (and aviation) has been proposed. The International Chamber of Shipping (ICS) queried the carbon price of $US25 per tonne. Indeed this is higher than the price on CO2 for onshore industries in developed countries. What’s needed is a system where emitters that aren’t linked to a country’s climate policies are accountable. At COP17 in Durban, delegates discussed a universal charge for all ships that would generate billions of dollars. The money could be channelled to developing countries’ climate policy action. Phasing out subsidies on bunker fuel used by ships is also needed to get us on the right course.

You can’t cross the sea by standing and staring at the water

Following Paris it’s time for specific shipping emissions targets. It appears we know the co-ordinates but the fuel tanks are full of the wrong stuff. Earlier this month, the Marine Environment Protection Committee (MEPC) of the IMO discussed emissions targets but only got as far as approving compulsory monitoring of ship fuel consumption. This is a key step if one day we introduce market-based mechanisms to reduce shipping emissions. What’s needed is accelerated action consistent with the Paris agreement.

In the doldrums of COP21, it seems shipping (and it’s by no means the only sector) is rather like that surfer, sitting on their board waiting for the next wave. At the same time it’s trying to avoid the lurking great white shark.

Useful links

International Transport Forum work on maritime transport

Did shipping just fail the climate test? ITF’s Olaf Merk on Shipping Today

 

The Impact of Mega-Ships

by Olaf Merk

Ever bigger container ships inspire awe and fascination, and are one of the hottest topics in maritime transport. They are also a headache for ports and terminals – mainly because of their vast size.

mega-shipsA new publication by the International Transport Forum (ITF) at the OECD assesses the impacts of these giant container ships. First of all, let’s get a hook on how big these ships really are. They are big! Mega-big! These are true giants, bigger than houses, bigger than apartment buildings and bigger than skyscrapers. They are bigger indeed than whole urban neighbourhoods. Now at up to 400 metres long, these ships are longer than Eiffel Tower (301 metres).

This size increase has been exponential; ships doubled in volume in 20 years between 1975 and 1995, and then almost doubled again in the following decade, doubling yet again between 2005 and 2015. And it ain’t over yet! Plans are afoot to continue increase size to 21 100 TEU* by 2017. (TEU: twenty foot equivalent unit – a small transport container – is a standard volumetric transport measurement)

 

When is big too big?

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.

To find out where we are on the cost curve, we tried a thought experiment. Imagine that instead of ordering 19 000 TEU ships, shipping companies had ordered 14 000 TEU ships giving the same total fleet capacity. In that scenario, land-side costs would have been approximately $50 lower per transported container. This might seem little, but it is actually substantial when compared to freight rates for transporting a container from Shanghai to Rotterdam – now at less than $400 and the thousands of containers ships can carry. Hence, as ship sizes continue to increase we find ourselves heading towards overall increasing costs.

 

Do we really need this capacity?

Our research casts serious doubts over whether this capacity can in fact be filled. We found a disconnect between what is going on in the boardrooms of shipping lines and the real world. The growth of containerised seaborne trade is no longer in line with the growth of the world container fleet. And shipping companies have created alliances (only four in total worldwide) which dominate container shipping. So the little guys can get to the big toys, but this has also leads to overcapacity.

There are also several supply chain costs and risks related to mega-ships. There are adaptations needed to infrastructure and equipment: the ships are longer, wider and deeper which has consequences for cranes, quays, access channels and all that. Mega-ships stay on average 20% longer in ports – quite an achievement for most ports as this requires massive efforts to accommodate these longer-stay guests. The higher risks associated with mega-ships are linked to difficulties in insuring and salvaging in case of accidents. Furthermore, mega-ships mean that more cargo is concentrated on a single ship, leading to lower service frequencies and lower supply chain resilience – all your eggs in one basket.

Mega-ships have redefined the meaning of the word “peak”. Massive truck movements, train movements and yard occupancy are all related to the arrival of a mega-ship. There is a requirement to manage this huge capacity on arrival which may lead to more port congestion.

 

Where are we heading?

We looked at three scenarios: one in line with market demand growth projections, two others above these growth projections, one with 50, another with 100 ships with a 24 000 TEU capacity (and a length of 430 metres), which currently do not exist or have not been ordered – but that could be operational by 2020. The results are pretty scary. We could see 24 000 TEU ships in Europe – both in Northern Europe and the Mediterranean. All other regions would be impacted as ships what used to be the biggest ships serving Europe are reassigned to other routes. So we might see 19,000 ships in North America, 14,000 ships in South America and Africa in a few years. Whatever the scenario, mega-ships will be the new normal in Northern Europe very soon. In just a few years 19 000 TEU ships will be seen every day in major ports. One thing is sure – this will lead us to a decade of port gridlock if nothing is done.

 

What needs to be done?

Mega-ships are a fact of life, so there should be policy support to use them effectively: for innovation, for more labour flexibility, optimisation of existing infrastructure (spreading use over day and night), releasing peaks (e.g. by “dry ports” – inland transshipment centres), and upsizing of hinterland transport units (larger trains, trucks and barges).

On a more fundamental level, decision-making by ports and countries should be more balanced. Many public policies stimulate mega-ship use, but public benefits are limited whereas public costs can be high. This should change, first by aligning incentives to public interests. For example, not to have port tariffs that cross-subsidise mega-ships, to clarify state aid rules for ports, increase their financial transparency and possibly link state aid for shipping companies to commitments to share in certain costs (e.g. dredging).

Another way would be to increase collaboration at regional level, between countries, ports and regulators. This might include coordination of port development and investment, possibly port mergers and more national or supra-national planning and focus. For example, the number of core ports in EU trans-Europe transport network (TEN-T) corridor networks could be reduced.

Finally, there should be a clear discussion on what the future direction should be. A forum for liners, terminals, ports and other transport actors should be facilitated to discuss about the desirable container ship size in the future. The International Transport Forum (ITF) at the OECD is there and willing to facilitate such a discussion.

 

About the author
Olaf Merk is the ports and shipping expert of the International Transport Forum (ITF). The International Transport Forum at the OECD is an intergovernmental organisation with 57 member countries. It acts as a policy think tank and organises an Annual Summit of transport ministers. The ITF is the only global body with a mandate for all transport modes.

Useful links

ITF work on maritime transport

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