The Hindu Business Line : Shipping trends: Transhipment versus direct sailings

Two distinct choices are likely to evolve for the customers in course of time — low freight shipment in large ships linked to feeder service, or direct sailing to destinations in small or medium size ships on payment of normal freight.

To gain from the economies of scale, sizes of shipsaregrowing to unimaginable proportions. Several new orders for post-Panamax ships, due for delivery before 2008, have carrying capacities that exceed 8,000 TEUs each. Ship sizes are set to go up further to 18,000 TEU capacity, the maximum size based on the depth limit in the Malacca Strait, the main shipping channel between Indonesia and Malaysia.

A recent study demonstrates how the cost of carrying a container is drastically reduced as the ship size increases. It is evident that the operating cost of transporting a container for a day on board a ship of 15,000 TEU capacity would be about $9. In other words, the transport cost of a container on a voyage from a transhipment port near India to another transhipment port in Europe would be less than $100 if carried in a large-size ship. Considering the current freight rate of about $1,500 per container for India-Europe sector, the huge cost advantage of operating a large-size ship is well evident.

The crew cost is almost constant, irrespective of the size of ship because of the very lean manning scale now. Similarly, a rise in bunker cost is marginal as the size of ship increases.

Fast turnaround at transhipment ports gives ships more time for sailing. This correspondingly helps ships earn more freight. As a main-line ship calls at few transhipment ports and not at several ports, there are considerable savings in port dues payable by ship to ports.

Shipping companies have achieved further cost reductions by jettisoning on board cargo handling costs such as stevedoring. Modern shipping has devised new terms for carriage of goods by sea. One is free in and out. This frees the ship-owner of expenses of cargo handling at the loading and the discharging port.

Need for bigger ports

As ships grew in size, even big ports supported by good hinterland are too small to serve them. Transhipment terminals at strategic locations on the main sea routes, therefore, began serving main-line vessels. Ideally, such transhipment terminals can be away from urban centres so that urban centres may retain magnificent waterfront free of dust and din of transhipment terminals that function round the clock.

In this sense, some transhipment terminals such as Freeport (Bahamas) look futuristic with the plan to position itself as an "offshore island" for the US for transhipment. The Vizhinjam transhipment port, proposed to be located 16 kmfrom Thiruvananthapuram, neatly fits into this genre of futuristic terminals

There is a widely held belief that exporters and importers would benefit by these cost advantages. But the fact is quite to the contrary. In shipping, prices are not cost driven. They tend to be market driven. The market for shipping freight is controlled by large shipping conglomerates, which form into regional alliances and conferences for sector-wise freight fixing.

The India Pakistan Bangladesh Ceylon Conference (IPBCC) is the consortium of shipping lines that controls freight between India and Europe. This shipping conference traces its beginning to 1875. The end of such freight-fixing cartel is in sight. The European Union has initiated action to see that ship-owners fall in line with the European Competition Law, at least two years from now.

High freight rates

As of now, shippers, that is, exporters and importers are made to bear high freight rates and arbitrarily fixed charges such as THC (Terminal Handling Charge) and CDC (Container Detention Charge) in ports as determined by ship-owners. The demand for direct sailings to destinations is growing. A few cargo generating hinterland ports have started to offer discount on port dues to ships that sail direct to destinations. If this trend gains momentum, ships would again be drawn to cargo generating hinterland ports. This was the norm until two decades ago. Two distinct choices are likely to evolve for the customers in course of time — one of them is low-freight shipment in large ships linked to feeder service through transhipment. The other is more convenient direct sailings to destinations in small or medium size ships on payment of normal freight.

Both trends to coexist

Both trends are likely to coexist because exporters of commodities working on low margins may not be averse to transhipment.

On the other hand, shippers forming part of supply-chain logistics and serving as global link to manufacturing and distribution of goods require assured schedules of direct sailings.

If developing countries succeed in gaining improved market access for manufacturers in developed countries, the demand for direct sailings is likely to firm up.

This emerging situation calls for caution while sinking huge public funds in greenfield transhipment infrastructure, unless a public authority joins as equal partner by contributing the use of strategic location as its share of capital.

(The author is Secretary, Water Transport Workers Federation of India.)