Dealing with giant vessels: Fees on extremely large vessels can be exponentially hiked

After blocking the Suez Canal for more than a week and hugely disrupting the movement of goods by sea, the Ever Given—the monster container vessel 400 metres long and nearly 60 metres wide—was finally moved to the Great Bitter Lake for full inspection. During this period, about 100 ships of various sizes queued up on either side of the Canal, waiting for a chance to pass through. World trade took a huge beating and the ripples of this incident will continue to reverberate across the globe for some time to come.

The trend towards huge container vessels actually started about 15 years ago when the Emma Maersk, the first of these vessels, was pulled from the Danish shipyard, in which it was built, by five tugs and escorted slowly to sea. But the Emma Maersk, with a carrying capacity of about 11,000 TEUS (twenty-foot equivalent unit, based on the volume of a 20-foot-long shipping container), was herself a baby compared with the modern giants. The Ever Given can carry up to 20,000 TEUs, and is correspondingly larger than the Emma Maersk. Today, there are close to 100 such ships either plying the oceans or under construction in different shipyards. So, is it time to prepare a balance sheet and see how much we benefit from such vessels?
It has always been assumed that larger container carriers add to efficiency and reduce transactional costs of foreign trade. So, if occasionally such vessels run aground in a narrow channel and cause serious disruption to world commerce, it is looked at as a price we pay for lower freight and speedier transport of goods across the world. This assumption is now being challenged.

Given their humungous size, there are only a limited number of ports where such vessels can call. When they do, the strain placed on the port is enormous. Because these vessels are so wide, they can only be serviced by special Post-Panamax cranes, with a boom that extends 60 metres across the ship. Not only are such cranes extremely expensive, but they also require a high level of skill to operate. Pilots escorting these vessels through the approach channel of the port need a very high degree of skill to ensure that no part of the ship comes in contact with the side of the channel. Such pilots take a long time to acquire the necessary skills and replacing them is difficult. The port must ensure availability of a large number of powerful tugs to escort such large vessels. In spite of being escorted by four tugs, the Ever Given’s bow got stuck on one side of the waterway.

Once the ships are berthed and the special cranes are used, the port must cope with the rush of containers that would normally have come in on several smaller ships in a staggered manner. Huge numbers of import containers must be offloaded and stacked in such a way that they can be loaded easily on trains or large trucks. Loading and unloading as many as 10,000 containers at one time on a vessel puts immense pressure on ports. But things do not stop there. Difficulties in evacuating huge consignments of import cargo from ports can seriously affect the reliability of the domestic supply chain. Delays are inevitable when cargo is bunched up in large quantities, and these delays affect industries that depend for their inputs on imported cargo.

All this would have been acceptable if it led to an increase in the business of the port and a rise in its profitability. However, the increased parcel size of each vessel is entirely neutral to the earning capacity of the port. Cargo coming in large parcels does not mean an increase in cargo handled. That remains unchanged because it is a function of the trade policy of a country. How much you import or export depends on how closely you are linked to the global economy. Having one or two large vessels or several smaller ones makes no difference.

What about the freight that customers pay for their cargo? After all, the incremental cost of carrying an extra container falls when more containers are loaded on the same vessel. So, if customers benefit from cargo carried by large vessels, there could be a strong argument for supporting them. Unfortunately, this does not happen. Ship-owners themselves admit that though slot costs (the cost of carrying an individual container) are much smaller on large vessels, this does not translate into lower freight rates because these are a function of demand and supply and have nothing to do with slot costs.

During the early stages of the pandemic when demand was low, freight rates fell dramatically. In the last six months, demand has boomed, and with it freight rates. In fact, the fear is that the Ever Given incident will give a handle to shipping lines to raise freight rates because of the delays caused by bunching of vessels and the consequent pressure on offloading cargo at ports and dispatching it to the hinterland. This will negatively impact the efficiency of the supply chain and the profitability of manufacturing. It has prompted the Secretary General of the Global Shippers Forum to remind the shipping companies that the Suez is a canal in Egypt, and not an excuse to price gouge customers.

It is becoming increasingly clear that such vessels help only their owners who benefit from lower slot costs and higher freight. International trade suffers because the smooth flow of goods is heavily dependent on free passage through a number of tiny, vulnerable and highly-congested waterways like the Suez Canal, the Panama Canal and the Strait of Malacca and the Strait of Hormuz. If large vessels that cannot be easily manoeuvred in such narrow confines block these waterways, the whole world suffers. When the Suez Canal was being built, Ferdinand de Lesseps was accused of overdesigning it. Now, at 300 metres in width, it struggles to accommodate modern vessels.

Since all countries have a stake in the efficiency of the global supply chain, there should be a concerted move, perhaps at the International Maritime Organisation, to protect sensitive waterways from the possibility of disruption. For one, fees for such large vessels can be exponentially hiked. The same can apply to vessel-related charges at ports. Already, such charges vary with the GRT (gross register tonnage) of a vessel—a higher GRT leading to higher costs. But there could be an exponential rather than a proportionate increase for vessels above a certain size. Huge opposition from ship-owners will naturally follow such steps, but it is likely to be restricted to those who own such ships, and the bulk of ship-owners do not. The most drastic step would be to ban vessels above a particular size from using the Suez Canal. This would mean going around the Cape of Good Hope to access the East from Europe, an increase in sailing time by 10-15 days. Drastic solutions undoubtedly, but desperate times call for desperate measures.
Source: Financial Express