Thursday, July 19, 2018 | ISSN 0719-241X

Impact of economies of scale in modern port management

Experts analyze shift of focus in liner shipping and port operations
Edition of July 31, 2017

At first, when larger ships began appearing on the horizon in the mid 2000’s they were synonymous with market power and a consolidated business. Now, big vessels are protagonists of mergers, acquisitions and integrated operations of economies of scale that have become necessary to survive. This trend has generated one of the most important paradigm shifts the industry has had to face.

The paper PORT MANAGEMENT IMPLICATIONS FROM ECONOMIES OF SCALE IN THE LINER SHIPPING INDUSTRY, by Ricardo J. SANCHEZ, UN-ECLAC; Universidad Católica, Buenos Aires, Argentina; and Gordon WILMSMEIER, Universidad de los Andes, Bogotá, Colombia; Hochschule Bremen, Bremen, Germany; studies the challenge of achieving efficiency has questioned just how effective economies of scale really are, since larger ships needs more resources to operate and bigger port facilities with proper infrastructure to handle cargo, attend vessels appropriately and comply with environmental and social issues.

The “race for scale”

“Economies of scale occur when long run average production costs decrease as output increases. The high capital costs of ships are spread across a greater number of units (containers or tonnes of cargo) as more can be transported (…) Cooperation thus allows for sharing of resulting economies of scale.

At times it feels like the liner shipping industry is in a constant “race for scale”, competing against each other for who reaches the larger capacity and conquers more routes in less time and with significant profit; rather than concentrate on improving operational/financial efficiency. This race for scale has put additional pressure on port infrastructure, that is having a hard time keeping up with the fast pace of vessel growth and integrated operations between liners. “As container vessels become ever larger and the investments required by ports to accommodate them inexorably increase, the risk of losing services to another port and penalties for losing them grow greater. The industry’s attempts to mitigate this uncertainty are based on traditional strategies and imitating experiences and standard approaches of the shipping sector and other global corporations (…) The productivity of terminals in light of large vessels and decreasing and stagnating demand creates significant challenges for port operations,” reads the document.

Large vessels calling and reduced service frequency on terminals present a major challenge for terminals in terms of infrastructure, equipment and labour requirements. “Larger vessel calls create more pronounced demand peaks that put significant strains on terminal in terms of initial capital expenditure and on operational expenditure to accommodate larger vessels. Requirements could include a larger and greater number of ship-to-shore cranes, longer berths with deeper drafts at berth, and in access channels, larger and more densely stacked yards, and enhanced inland transport links,” the report highlights.

Need for consolidation

Thus, the deployment of larger vessels is, per se, challenging particularly as the cost of superstructure and availability of labour in some locations restricts the number of additional cranes than can be deployed on each vessel. The papaer proposes that the changing nature of demand requires less fragmented terminal capacity (fewer, bigger terminals needed in each port) which entails consolidation of terminals, both physically and in terms of ownership. In combination with the establishment of alliances in the liner shipping sector, this leads to significant alterations to service networks and port-call patterns.

As shipping liners continue to merge operations and create alliances, ports will have to implement a similar strategy and integrate network services and share information on large vessels calling at ports located in the same route, even if they are operated by different companies. In the race for scale, consolidation is key.

By MundoMarititmo

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