The Hindu Business Line : Mega box ships to come calling soon

THE next two years, 2006 and 2007, are going to be the "peak season" for new deliveries of container ships. The container vessels due for delivery in next couple of years will increase the total capacity by 3.9 million TEUs, or around 55 per cent of the present world container fleet of around 7.3 million TEUs. A lot of the new capacity will be in big ships, with around 30 per cent of orders for vessels of 8,000 TEUs and above.

Two important issues emerge in this context. What will happen to freight rates? Will too many mega ships cause the freight market to crash? And, are the ports and related sectors ready to handle these vessels?

This is important because it takes about a year to build a mega container ship but many more years to set up a new container terminal, or even to expand the capacity of the existing terminals, and to put in place related facilities.

First the freight issue. Interestingly, major container operators are not particularly worried about the probable fallout of the increased tonnage in the freight market. Not without reason, though. The growth of the market in past few years has been fast-paced, and it is likely to remain so for some more time.

According to one estimate, the container trade is to grow by 8-14 per cent in the short term, and 6.5 per cent annually between 2007 and 2010.

Besides, as is pointed out, the ship-owners must have done their homework well on the probable growth of the market before investing in costly tonnage. After all, no ship-owner would like to make unviable investments.

There is another point. With carriers facing rising costs from expensive charter rates, fuel, port operations and new container ships, the additional burden, it can only be expected, will be passed on to shippers. One thing is clear: the days of low transport cost are over.

The major container operators are of the view that the shippers must accept this and be prepared for high rates if they want the carriers to provide the kind of service they demand in terms of capacity and transit times.

They insist on long-term relationships with their shippers, who must understand the cost pressures and, therefore, the imperatives of raising rates.

While some shipping lines emphasise the need for educating the customers about the various elements of costs and where they are coming from, others prefer a more aggressive approach, suggesting that the carriers must stand up for increases in rates and force them through.

The unrelenting pressures from shippers to reduce rates must be countered firmly.

Still a third section of the ship-owners has warned against the temptation to gain market share by cutting rates, stressing that the carriers must stand united; otherwise, they themselves have to be blamed if they don't earn enough to pay for the new tonnage to be needed to participate in the growing world trade.

And then there is the issue of port facilities and port-related capacity. The port sector is lagging behind in preparation for mega ship deliveries. The construction of the new terminals and the expansion of the existing facilities are often impeded by long-drawn planning procedures. Also, compliance with the environment protection measures and putting in place a new set of stringent port security and maritime rules take a long time.

Operationally, a mega ship will cause congestion. A new 8000-TEU vessel will probably disgorge about 6,000 TEUs on the quay-line of a hub port as compared to 2,000 TEUs by a 5,000-TEU capacity vessel. Which means, a mega ship has to stay at the berth for a longer period.

Also, the key trade lanes will see big ships calling at hub ports within hours of one another. Which means, as a mega ship stays in the berth there will be several others lining up for berths.

The cumulative effect of all this is that there will be congestion.

The problem of congestion hit some of US west coast ports badly last year and is likely to cause concern in several European ports this year.

Even Jawaharlal Nehru port had been a victim of the same. The situation is likely to worsen in the coming years. Remember, the 12,000-TEU vessels are not far away.

There are other issues. The hinterland too has to be developed to be able to cater to the requirements of the new capacity vessels.

Otherwise, the supply chain will not work effectively and customer requirements will not be met. This will push up the cost. In fact, the maritime logistics chain is likely to be overstretched.

The new generation mega ships will need ports with deeper draughts. This will limit the number of ports they can call at. Transhipment will increase and, with it, the repositioning of the empties.

As it is, according to Drewry Shipping Consultants, transshipped containers account for 100 million TEU movement, representing 28 per cent of the total handled and the repositioning cost of the empties last year amounted to a staggering 16.5 per cent of the combined carrier income.

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