07/17/2024
Advantages And Disadvantages Of Bigger Vessels For Exporters, Shippers & Cargo Owners
By
Jitendra Bhonsle
March 6, 2023
Maritime Law
In the last part of the series on the advantages and disadvantages of mega vessels for various stakeholders, we will examine the impact on Exporters/ Shippers/ BCO (Beneficial Cargo Owners), i.e. the entity owning the cargo.
Table of Contents
Advantages
1. Lower rates: Carriers can offer lower rates by passing on the benefits of lower slot costs.
The primary rationale behind deploying mega vessels is to generate economies of scale in terms of lower slot costs, which ensures that the profit per container level is higher even if freight rates remain at the same level (as the cost base has reduced).
While Carriers can thus reap higher profits, the reality is that in an intensely competitive environment, with matters worsened due to the high degree of commoditisation in the industry (thus rendering redundant to a great extent the traditional marketing differentiators such as service quality, speed, etc.), Carriers are often compelled to pass on to the Exporter/ Cargo owner at least a certain portion of the higher profit, to undercut the competition and retain business (or grow market share).
Big container ship
This trend became apparent as more carriers followed Maersk Line in ordering mega vessels. The resultant capacity glut caused a disequilibrium between demand and supply, which in turn exerted downward pressure on rates. As carriers augmented their fleets with bigger vessels, they realised that demand wasn’t growing at the same pace. They also had to ensure greater volumes and higher vessel utilisation rates to make their mega vessels a commercially viable proposition.
Carriers were therefore forced to resort to aggressive pricing tactics and attempt to undercut the competition to ensure sufficient volumes to fill the bigger vessels and thus justify the massive investments in upsizing.
Exporters were the unintended beneficiaries in this scenario and were consequently able to negotiate lucrative rates, reducing ocean freight procurement spending and boosting bottom lines. An added advantage was that with the lower procurement costs, Exporters were in a position to pass on some of the savings to their own customers and attract more business (a cycle that could, in theory, be repeated until it reached the end consumer in the chain).
This trend was quite pronounced until the advent of Covid, and only the highly severe capacity and equipment shortages reversed the trend post 2020. In the new year, however, as global supply chain pressures dissipate and capacity is more freely available, we will likely see a resurgence of the trend, early portents of which can be observed in the rapidly declining average freight rates across all trade lanes (as measured by various freight rate indices), and also in the willingness of Carriers to renegotiate the higher-than-average contractual rates agreed to at the peak of Covid-related disruptions.
2. Price wars post-induction of mega vessels can help exporters negotiate better freight rates
This point is a corollary to the first point about Carriers passing on some of the savings from mega vessels to customers. The difference between the two is that while sharing cost savings is a gradual exercise in response to evolving market conditions, price wars are, in essence, a tactic adopted by bigger Carriers to aggressively grab volumes from smaller carriers, who might not have the financial resources to compete and sustain in a prolonged low freight rate environment.
It has been observed in the past that one Carrier ordering mega vessels acts as a trigger for other carriers to place orders for mega-ships due to the fear of falling behind the competition and having a disadvantageous cost structure (as they have missed out on economies of scale). Subsequently, with the influx of excess capacity, Carriers find competition intensifying as each Carrier chases more volumes to ensure high utilisation levels for their newly acquired tonnage while the market size remains steady.
In this situation, bigger Carriers often initiate price wars, offering lower rates to undercut the competition and compelling other Carriers to follow suit. Even smaller carriers are forced to cut prices to match market levels, failing which they will have insufficient volumes to sustain operations.
While this is undoubtedly detrimental to the Container Shipping industry as a whole, affecting schedule reliability levels and landing smaller Carriers in a financially precarious position (thus raising the counter-party risks for their customers), Exporters generally find the situation to their advantage, as they can leverage their considerable volumes to negotiate lower freight rates and thus reduce their ocean freight procurement costs.
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This trend has been observed with each round of upsizing, and recent developments do not indicate any diminution in this propensity in the foreseeable future.
3. Lowering cargo footprint through lower emissions
One of the biggest advantages of deploying mega vessels, other than the economies of scale, is the lower carbon footprint and reduced emissions.
While Carriers primarily focus on the cost savings from bigger ships, the eco-friendly aspect is highlighted in great detail, especially in their annual CSR reports/ HSSE communications and while marketing their services to bigger customers.
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big vessel
Most big shippers are growing increasingly aware of their social and environmental responsibilities, making a conscious decision to reduce the carbon footprint of their end-to-end supply chains. This emphasis on ‘Green Supply Chains’ is also partly driven by consumer preferences, as studies have shown a marked consumer preference for eco-friendly products and services, to the extent of being willing to pay a premium for services with a lower carbon footprint.
