By Dr. Noel Hacegaba
-Acting deputy executive director and chief operating officer Port of Long Beach-
The average size of container vessels calling U.S. ports has grown considerably over the past five years, and the trend towards even larger vessels is expected to continue in the years to come. According to industry analysts, almost half of current ship orders are for vessels exceeding 12,000 TEUs [twenty-foot-equivalent units].
Larger vessels provide many advantages to liners, shippers and beneficial cargo owners, not the least of which is the reduction in the per-container cost to transport cargo.
However, it is thought that few or no advantages trickle down to the port authorities, which are pressured to deliver water (dredging) and landside (capital, infrastructure and productivity) improvements to accommodate the bigger ships, whose advantages may be diminished without such improvements.
According the American Association of Port Authorities, U.S. ports are expected to spend $46 billion in port improvements by 2017. The Port of Long Beach alone is investing $4.5 billion on a 10-year capital improvement program. But, while many port authorities have committed to spending billions of dollars to prepare for the bigger vessels (10,000-plus TEUs), there is no guarantee that the mega ships will call their port. On top of the excess capacity seen at ports across the nation, liners are forming new shipping alliances to maximize the economies of scale made possible by the mega vessels. The combination of the growing vessel capacity and the formation of new alliances is creating a new and daunting challenge for U.S. port authorities, which have to make important decisions with significant long-term ramifications.
The rapid pace at which container vessels are growing is affecting the entire supply chain. While beneficial cargo owners have the ability to quickly adjust their business models to accommodate the mega vessels (10,000-plus TEUs), ports— fixed assets with limited resources— are not as nimble. The deployment of these mega ships presents physical, financial and operational challenges that must be met by port authorities across the country.
Even for ports that will not see the mega vessels calling at their ports any time soon, the arrival of the larger ships is creating a cascading effect in which the ships being replaced by the mega vessels on the major trade lanes are being deployed in the smaller trade routes. Thus, the strain of larger vessels has the potential to affect all ports, big and small.
Shipping lines are investing in mega vessels to create economies of scale. Larger vessels allow the lines to reduce the slot cost, or the cost per container. However, these economies of scale can only be maximized when the vessels are at full capacity. This need to fill the extra capacity generated by the bigger ships has led carriers to enter into vessel sharing agreements with other carriers to improve the chances of filling the larger ships. While vessel sharing agreements are not new, the size, reach and market concentration of recent alliances are.
The combination of bigger ships and vessel sharing agreements presents new challenge for port authorities. The concentration of the alliances is providing them with leverage and options that ports do not have. On top of this, ports across the country have excess capacity. Recognizing this, carriers and their related alliances are capitalizing on the excess capacity by pitting ports against each other for favorable rates and other financial incentives.
In addition to financial incentives, carriers are requesting that ports make capital improvements that require significant financial investments and time. According to the American Association of Port Authorities (AAPA), U.S. ports plan to spend $46 billion by 2017. Ports across the country are racing to obtain adequate water draft, berth size, crane height, terminal space and rail connections. Few ports across the country can meet all of these requirements today. And, even those that can cannot be guaranteed that the bigger ships will call their port.
At the same time, the new alliances are creating financial uncertainty for port authorities. Carriers that currently call at a particular port may shift their cargo to neighboring ports in accordance with the vessel deployment strategy agreed upon by the alliance partners. Although this scenario may play out in only those regions where alliance partners call at neighboring ports, the potential consequences for those ports could be considerable.
All of these changes in the industry are leaving ports in a vulnerable position. As a result, the role of the port authority is more important today. Port authorities must be able to evaluate how the changes in the industry could impact their port and identify ways in which some of these challenges can be mitigated.
Hacegaba oversees the daily business activities of the Port, which includes four bureaus, 17 divisions and 550 employees. The above commentary is an excerpt from a white paper Hacegaba wrote examining the effects of the mega vessels and related alliances on U.S. ports authorities. The paper also discusses the role of the port authority in navigating these changes. The Signal Tribune will publish more of Hacegaba’s paper in next week’s issue.
