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

13100_teu_class_hanjin_sooho
End of the line

Olaf Merk, Ports and Shipping expert at the International Transport Forum (ITF), OECD. We are co-publishing this post with the ITF’s Transport Policy Matters 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 are starting 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 once in a lifetime 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, which we have not started to see the end of yet. Whoever 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 fewer 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

Can a shipping levy affect the growth of Passive House in Australia?

SkysailsScott Stewart, Australia-based Certified Passive House Designer

Shayne MacLachlan wrote an excellent piece Carbon emissions all at sea: why was shipping left out of the Paris Climate Agreement? Outlining the carbon emissions generated by the shipping industry, and possible solutions for encouraging technological advances (wind power, better fluid mechanics …) and behaviour change of the industry ($25/tonne carbon levy).

As a kite surfer myself I know the power a modern kite can generate, but as someone who uses shipping as a tool in Australia for also reducing emissions I thought it necessary to do some further research and consultation as to the possible unintended consequences of an industry behaviour changing carbon levy.

The issue of a carbon levy in Australia is incredibly divisive and if introduced needs to be explained through economic modelling and examples as well as environmental benefit.

It is important to consider all industries that are attempting to reducing the demand for electricity and thereby reducing emissions as we may end up pulling in opposite directions when we are trying to achieve the same outcome. A corresponding credit system could be introduced to offset a levy on sea freight movements for elements that are reducing carbon emissions. Examples for the supply and demand sides of the energy equation are explored below.

Supply – Solar Panels and Batteries

Since the 1970s and 1980s the majority of Australian houses have been designed and built less for climate and more for aesthetics (function following form).  The advent of relatively in-expensive air-conditioning and cheap electricity has allowed the housing industry to move away from houses designed for climate to houses that control climate. The trend is changing with education and rising electricity prices, cheaper solar panels have enabled more people to participate in the lower carbon economy with the supply of cheaper solar energy. The majority of the manufactured solar panels are imported via sea freight and almost all the components for solar panels as well as new battery technologies are also imported.

According to the Clean Energy Council in 2014, small-scale solar was responsible for 15.3 per cent of Australia’s clean energy generation and produced 2.1 per cent of the country’s total electricity. The typical solar system of 2kW in Australia will prevent between 1.75 – 2.05 tonnes of carbon dioxide entering the environment depending on the mix of carbon generating energy is being offset.

According to EcoTransIT a pallet of solar panels, which would typically be enough for three houses generate 690 kg or 0.69 tonnes of CO2e for transit via Road-Ship-Road from China to Australia , which at $25/tonne = $17.25.

Therefore a credit of $26.5 could be realised when a credit of $43.75 (1.75 x $25) is introduced.

Demand – Passive House in Australia

The demand for energy is also being addressed with the introduction of Passivhaus to Australia. Passive House (Passivhaus) was developed by Wolfgang Feist and Bo Adamson with the first Passivhaus residence build in Darmstadt, Germany in 1990. Passive House, according to the Passive House Institut is a building standard that is truly energy efficient, comfortable, affordable and ecological at the same time, more simply Passive House can be explained in 90 seconds

The Passive House movement in Australia is growing but is still at a fragile and embryonic stage. Overseas experience has shown that for housing the cost increase for Passivhaus is generally 3-5% of build cost. LAB Design has shown if the build cost premium was 10%, for a $300K build in Toowoomba, Queensland at 8% interest rates a passive house is approximately $1000 per year more cost effective when considering both running costs and interest payments.

The major challenge for Passive House in Australia (and other nations far from the Passive House component manufacturing hubs) is and the cost and availability of two key components for a Passive House: high performance windows (typically double glazed in Australia); and Mechanical Heat Recovery Ventilation (MVHR).

In the short term, importation of high performance components is cost-viable to produce the performance outcome and to provide the industry behaviour change incentive by increasing volumes and reducing cost of high performance windows and MVHR.

According to EcoTransIT the windows for the Toowoomba Project generate 870kg or 0.87 tonnes of CO2e for transit via Road-Ship-Road from Europe to Australia , which at $25/tonne = $21.75

However, the PHPP (Passive House Planning Package) calculation of two variants of the Toowoomba project, one to Passive House Standard the other to existing Australian Standards, realises a reduction of over 4.5 tonnes of CO2e per annum.

I discussed the issue with Elrond Burrell, an architect working at the forefront of Passivhaus design in the UK. He provided some insight from his experience in the UK where the Passive House industry is far more developed than in Australia. “In markets where Passivhaus is still relatively new, most of these components need to be imported. Over time, as demand increases, the market matures and local manufacturers can start to meet the demand for components of the highest energy efficiency performance.”

In Australia, the mere mention of a carbon levy without thorough modelling and education will be met with resistance and provoke the perception that it is yet another cost and hence a barrier to Passive House. A $21.75 cost however is quite small, and may be offset with a $112.5 credit. Considering the ongoing emissions reductions of a Passive House, we can’t afford to lose momentum.

Useful links

OECD work on environment and trade

Greening Household Behaviour: The Role of Public Policy

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

Ship to surf John Valentine All rights reservedShayne MacLachlan, OECD Environment Directorate

Newcastle, 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

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

Kiln have produced this interactive map showing  movements of the global merchant fleet over the course of 2012, overlaid on a bathymetric map with statistics including a counter for emitted CO2 (in thousand tonnes) and maximum freight carried by represented vessels (varying units).

The Impact of Mega-Ships

Ship-size

Olaf Merk, Ports and Shipping expert at the International Transport Forum (ITF), OECD. We are co-publishing this post with the ITF’s Transport Policy Matters blog

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.

A 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 TEU ships being introduced in North America, and 14,000 TEU 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.

Useful links

ITF work on maritime transport