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Economics, Banking, Finance, and Supply Chains

How did gigantic ships break our global supply chains?

global supply chains: Image of the cargo ship MSC Gulsun

How did the arrival of gigantic mega-ships break our global supply chains?

This topic is covered in depth in the Odd Lots podcast episode: How Gigantic Ships Are Creating Global Supply Chain Havoc.

This blog post is a summary of that podcast episode.

Odd Lots, in my mind, is an EXCELLENT podcast dealing with logistics and supply chain issues.

While there are a lot of podcasts about logistics and supply chain issues, it’s my experience many are thinly veiled long-form ads for the products and services being discussed.

Odd Lots is a series of discussions with people in the industry who don’t seem to be promoting a specific perspective or agenda per se, but rather have deep expertise and engage in substantive discussions about what’s happening, with thoughtful analysis of why it’s happening.

The guest, Marc Levinson, knows about global shipping

Marc Levinson, the podcast guest, is an economist, historian, and author.

He literally wrote the book on modern global shipping: The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger.

The podcast episode below is from the 31st of Mar 2021 (29 weeks ago). You can listen to it below, but, if you want to get the gist of what is discussed in less time, you can read this summary.

Odd Lots podcast 31 Mar 2021: How Gigantic Ships Are Creating Global Supply Chain Havoc

This is a summary, not a word for word transcript

The episode starts with a discussion of the Ever Given cargo ship that had, at the time they recorded this episode, just been unstuck from within the Suez canal.

I bring that up to segue into this summary of the episode, whose focus is on how modern mega-ships broke our global supply chains.

One interesting thing about the Ever Given being stuck, and the subsequent global internal maritime shipping traffic jams, is more and more people are becoming aware of how the stuff we buy gets here.

The bad news of course is the reason so many are becoming aware is because the system is broken.

It turns out, one major factor contributing to this brokenness is the giant mega-ships the ship lines built thinking they would help.

And getting stuck in canals is just one of many issues with giant mega-ships.

These mega-ships are REALLY big

Cargo ships are measured in TEUs. TEU stands for Twenty-foot Equivalent Unit.

Typically, the trailer being towed by a truck is forty feet long, or two TEUs. So the number of 18 wheel truckloads one of these cargo ships can carry is the number of TEUs divided by two.

The Ever Given capacity is 20,124 TEUs or 10,062 forty-foot trailers, such as we see on our highways.

And, there are dozens of ships with greater capacity than the Ever Given.

The world’s largest cargo ships have a capacity of 23,992 TEUs.

The economic decisions that led to these mega-ships

The standardized shipping container was invented in 1956, and the first ship built to carry them carried 58 containers.

Because economies of scale bring down per-unit costs, the cargo ships got bigger.

The next generation of cargo ships added a few hundred containers.

Each generation of ships got larger, but moderately so.

The first mega-ships were commissioned in 2003, by Mersck, the Danish shipping firm, who feared they were going to lose out if demand for shipping outgrew their capacity.

They decided to leapfrog their competition by building a much bigger ship.

They commissioned the building of seven ships that were 60% larger than any cargo ships currently moving freight across the oceans or being built by any of their competitors.

The first of these ships came online in 2006 and had a capacity of about 15,000 TEUs.

When it was full, it moved cargo much more cheaply than any other ship in service at that time.

Their competitors saw this and realized that unless they too built bigger ships, their shipping costs were going to be higher than Mersck’s.

Around 2010, ships with 17 thousand and 18 thousand TEUs came online.

This led us to where we are today.

How these mega-ships hurt global shipping

These larger ships did bring down unit costs for ocean freight when these mega-ships were full, but because so many ship lines increased their capacity so much so quickly, they not only weren’t always full, many ships sailed around half empty.

This was financially disastrous for the maritime shipping industry. This led to some ship lines going bankrupt, and it forced others to merge to avoid going bankrupt.

And how Covid then saved global shipping – Seriously

And bizarrely, the global Covid shutdown saved the maritime shipping industry.

Most Americans and Europeans stopped spending money on services. They stopped going to restaurants, theaters, concerts, vacations, etc.

They then started spending more money on stuff.

And very quickly the factories in Asia ramped up production, and the global fleet of meta-ships filled up for the first time.

The conditions that made mega-ships seem like a good bet

From 1980 to 2008, international trade grew twice as fast as the global economy.

There was no expectation this would end.

While it was clear the mega-ships would have unused capacity for some time, there was an expectation that international trade would continue to grow and that the excess capacity would be needed later.

That trade did not pick up after the global financial crisis was not expected by anyone in the industry.

If world trade had continued to grow, transport issues would be less

Two things would be different:

More competition and less oligopoly

There would have been fewer ship line bankruptcies and mergers, so there would be a lot more competition in the industry today.

Today, there are three shipping alliances that control 85% of global shipping.

Ship lines would have been profitable

And a result would have behaved differently.

But the landside problems would be the same

The ship lines ordered these mega-ships because they thought they would be good for their bottom lines.

They didn’t consider the full transport system.

They didn’t ask what would happen when so many containers showed up at once at the container terminal.

  • Can the terminal process that many?
  • Can the railroads get enough trains in and out?
  • Will the truckers be able to handle this volume of containers?
  • Are the harbours deep enough for these ships to dock?

These questions didn’t get enough consideration.

The ship lines simply started showing up with more cargo than the terminals and land carriers could easily handle.

Wider ships take longer to load

The shipping lines didn’t seem to think that sea to land cargo handoff was their problem.

They viewed themselves as being in the shipping business. Their part is to arrive with the cargo.

The terminals are responsible for getting it off the ship.

The truckers are responsible for getting trucks in and out.

These mega-ships are not longer than their predecessors. They’re wider.

And this matters.

Ships are loaded and unloaded by cranes on the dock. One crane moves one container at a time.

You can only fit so many cranes alongside a ship. Each crane needs a certain number of linear feet and the ship is only so long.

The picture below shows a cargo ship docked next to ten cranes.

cranes at termainl to unload cargo ship

Since the ships are wider and not longer, it is not possible to add more cranes to speed up the loading and unloading.

Not only that but because the ships are wider, loading and unloading containers from the side of the ship farthest from the dock takes longer than it used to as the crane needs to travel further.

For one container this is no big deal. For 10,000 containers this adds up.

To give some perspective, if this adds 10 seconds to each container for half of the 10,000 containers on the ship, the time to unload and load the ship is extended by over 12 hours.

This has already resulted in 30 to 35 percent of ships leaving Asia later than scheduled.

And they travel slower to save fuel costs

One of the major costs of maritime shipping is fuel, and traveling slowly conserves fuel. So these mega-ships were designed to travel slower than older generation ships.

If a smaller older generation ship was running behind schedule, they could travel faster for a while to catch up.

These mega-ships can’t. When they fall behind schedule, they stay behind schedule.

Strong winds blow them around

These ships are 400 meters (a quarter-mile) long and with a full load of cargo, the containers above the deck create a wall 25 meters (85 feet) tall.

This creates a rigid wall of containers on both sides of the ship which strong winds can blow against.

If you’ve ever driven a van down a highway in a crosswind you have an idea of why such a wall of containers would be a problem in a strong wind.

This is in fact how the Ever Given got stuck in the Suez canal. A strong cross wind. Seriously.

How the mismatch between ship capacity and port throughput affects global shipping

The problems identified below all have one thing in common. Ship lines made decisions based on what is most profitable for them, without concern for the overall flow of goods around the world.

Empty containers piling up in the US

Ship lines make their money hauling cargo. Empty contains have to get back to Asia to be refilled, but the big money is in cargo traveling from Asia to the US.

There have been complaints from ports in the US that ships are not waiting to be fully loaded with empty containers as doing so takes too long.

They want their ships to return to China as quickly as possible and pick up more cargo for the next run.

US farming exports being left behind

Apparently, ships are leaving US ports and returning to Asia without having fully loaded containers of US farm exports (soybeans, meat, etc).

This is due to the US to Asia shipping volume being lower than the Asia to US shipping volume. Waiting to fully load a smaller load is less profitable than returning more quickly to pick up a larger load.

The Suez canal blockage increased transit times

Due to the six-day blockage of the Suez Canal, some Asia to Europe-bound ships decided to travel around Africa since the duration of the canal blockage could not be known.

This added two to three weeks to the transit time for that cargo.

How the current visibility of supply chain issues might affect future policy

Economists, lawmakers, business people, and laypeople talking about economics have not often taken transport (and associated) costs into account when discussing policy.

The current global supply chain issues have made “friction” within our global transport systems more visible.

To carry inventory, or not to carry inventory?

Over the past few decades shipping had been so reliable, people did not factor in what it would cost if stuff didn’t arrive on time.

That is now happening, and the savings obtained by moving production to Asia is diminished.

Companies in the US are starting to keep more inventory than they used to.

Inventory has been thought of as being a cost that could be eliminated.

Inventory is now increasingly being seen as insurance.

When economies of scale get too expensive

While building everything at a mega factory gives great economies of scale, if something disrupts the flow of stuff, be it a fire at the factory, or a supply chain breakdown, those economies of scale don’t help.

As a result, companies are now thinking in terms of redundancies and resilience.

Of making products in more than one location, and as a result, of moving materials and products via multiple routes.

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