September 2017: EXPO Special
Megavessels Trigger Sweeping Intermodal Supply Changes
The transformational parade of “megavessels” calling at U.S. ports has created a blend of opportunity and uncertainty about the ever-larger ships’ overall impact on the intermodal supply chain. It has also generated intense attention on the resulting landside complexity as well as the challenges to service and port, terminal, rail and truck capacity.
According to the World Shipping Council, maximum vessel size has nearly doubled in just 12 years. The economic justification for launching and operating ships that now top 20,000 TEUs is apparent: lower costs at a time when ocean carriers as a group are struggling with profitability. The International Transport Forum identified typical savings of about $70 per TEU for 18,000-plus TEU vessels compared with their 14,000 TEU cousins.
The megavessel trend will continue. Drewry Shipping Consultants reported in July that 57 ships topping 18,000 TEUs are to be delivered. Most are due to arrive next year, anticipating further demand growth in more buoyant global markets amid a continued drive in the liner industry to lower costs through individual actions, mergers or alliances.
August’s second quarter earnings report from the owner of the largest ocean carrier, whose biggest vessels total 20,600 TEUs, succinctly explained their appeal. “Maersk Line has a continued focus on managing capacity and the new vessels will replace older and less efficient vessels,” the report said.
From the rail perspective, UP spokeswoman Raquel Espinoza said, “Union Pacific is working closely with ocean carriers in new carrier alliances to ensure larger-vessel cargo transitions from dock to rail in a seamless and efficient manner. We also work with the carriers’ equipment providers to stage resources, such as chassis, at the right time.
“Union Pacific has ample capacity to handle smaller volumesto various destinations at our International Container Transfer Facility, located about four miles from the San Pedro ports, benefitting newly-aligned ocean carriers working to increase freight density to and from the various interior rail points,” she added.
Ken Kellaway, CEO of RoadOne IntermodaLogistics, outlined the challenges drayage carriers face.
“Megavessels have created a certain amount of bunching at the terminals,” he told Intermodal Insights. “That makes it more difficult for us, with a shorter window to pick up more volume. We want our customers to understand that our capacity is finite. We don’t have the ability to ramp up significantly for a day, a week or a year.”
Kellaway explained that capacity, an industry-wide concern, is closely tied to the ongoing challenge of finding qualified drivers. “That’s becoming more and more difficult,” he said.
The situation is compounded by continued reductions in free time to pick up containers that arrive in ever-larger numbers. There also are concerns about chassis supply and matching up equipment as larger ships haul multiple carriers’ freight through alliance arrangements.
“Clearly, the megavessels have helped drive down slot costs, as they have also fueled the industry’s endemic overcapacity,” said Alan Murphy, CEO of SeaIntel Maritime Analysis. “When some carriers got megavessels, they all needed megavessels, which ended up hurting everybody. The end result has been that any savings have been passed right on to shippers and forwarders.”
He said megavessels are “a clear and real challenge for terminal operators.”
“You need extra-shift crews, more re-stows, more complex stowage planning and more short-term storage” when one megaship replaces two smaller ones. As a result, gates come under pressure, chassis run short, roadways are congested and effects stretch into the hinterlands.
“Terminals have invested many billions in the past decade to be ready to handle these behemoths, and they need to see a return on that investment,” he added.
Tioga Group principal Dan Smith elaborated. “Once you have the capacity at the berth, the marine terminals can load and unload those vessels just fine. The tough part comes in the container yard.”
Smith said challenges arise as the terminal operator often has to begin loading exports at the same time imports are being unloaded in order to keep the yard fluid. That issue is acute at load center ports, particularly on the West Coast, where the largest ships take more time to unload, and have more imports than exports. In addition to sheer quantity, complexity is added by alliances, each of which needs to have its own containers readied for later truck movements.
“The terminal operators are working as smart as they can,” Smith said. “The reality is that the longshore labor has to touch the boxes more often and work harder in order to get the boxes to the right place.”
There are some potential steps to address the situation, Smith said. They include creating a separate location so that trucks can shuttle back and forth between on and off dock facilities and do the sorting away from the waterside. Another choice is to create specific container stacks on the docks for large customers or motor carriers with high volume.
Rails are buffered a bit due to portside handling, but still face freight sorting issues to match dozens of customers and destinations. Rail freight loaded at on-dock facilities needs an additional sort.
One potential solution Smith and Kellaway both cited was to do more effective planning at the originating port to smooth out the process on the arrival end. Kellaway noted that could help shippers improve predictability as well.
“The burden is falling on the truckers to sort this out. Draymen are doing a lot of extra work,” Smith said, with split moves of chassis and containers, which means more trips to different places.
Veteran intermodal executive Larry Gross, president of Gross Transportation Consulting, makes no secret of his view of megavessels.
“The ocean carriers let this thing loose,” he told Insights. “What you are seeing is what happens when one side of the supply chain tries to optimize their leg. All of the other pieces of the supply chain puzzle have been sub-optimized to optimize the ocean carrier’s line haul.”
‘Twice as Big’
“If you are a terminal,” Gross said, “your volume isn’t growing much, but the chunks of freight are twice as big as they used to be. That means not only giant cranes and more parking area as all of your terminal costs are increased. But your revenue is not.”
“There is a corresponding surge of outbound and inbound volume for draymen. What do you do with all that capacity when the ship isn’t there?” Gross added.
He believes that if the non-ocean costs of the conversion to make the total supply chain adjust to megavessels had been considered at the outset that the shift never would have happened, noting that ever-larger ships haven’t translated into ocean carrier profits.
The shift to megavessels occurred, he said, because most of the costs are being borne by people who didn’t get the benefits. In fact, ocean carriers have had their own financial troubles with the megavessels coming into 2017 as overcapacity and low rates ravaged their earnings before pricing improved this year as trade rebounded.
Gross pointed out that he wasn’t saying the challenges can’t be overcome, since it is obvious the freight is still moving steadily. He also cited a complication arising from the broad exit of ocean carriers from supplying chassis.
“Ocean carriers can’t afford to say no to any customer when markets are weak,” Gross said. “They need all the volume they can get. But they haven’t exited chassis supply agreements with BCOs. So the shippers will say ‘keep giving me a chassis or we will go to someone who will.’”
‘Orderly and Successful’
Economist Walter Kemmsies, a managing director at Jones, Lang, LaSalle’s infrastructure group, made the case for megavessels, particularly when other players are prepared.
“The adjustment to megavessels has been a lot more orderly and successful than some would have you believe,” he said. “The ports and terminal operators were experienced. They knew they had to scale up.”
“On the land side, it hasn’t always worked very well,” Kemmsies said, creating the largest barrier to efficient growth. “It’s all about creating the networks. Everyone has to be equally responsive. Otherwise, they become the bottleneck.”
He praised railroads’ multi-billion-dollar infrastructure investments.
“Railroads can only take so much freight. Roadways haven’t kept up. We need that highway piece to work better because it is impacting all the others,” he believes.
States and planning organizations that set policy based on highway congestion need to do more.
Kemmsies cited Georgia’s success in matching infrastructure adjustment to larger vessel size. In a specific case, a planning agency that prioritized projects altered its cost-benefit analysis to reflect greater value for grade crossing investments to help the supply chain and lowered the need for a bike path.
The JLL official underscored another key point. “These ships do not make money if they are sitting on the docks,” said Kemmsies, explaining that if a port doesn’t work right, ocean carriers can choose to go elsewhere, hurting truckers that rely on that business, and to a lesser extent affecting railroads that typically serve more ports.
“Most of the cargo that is being dropped off at a port is discretionary,” Kemmsies said, meaning it can be switched between ports, based on the most efficient box dropoff point outside the immediate arrival area. “If you have trouble with congestion, you move to another port in those cases.” He also noted that places such as Southern California and the New York area have so much regional cargo volume that it affects port choice.