After covering the advantages and disadvantages of mega vessels for Container Carriers/ Shipping Companies, we will explore how these behemoths’ deployment affects Port and Terminal operators (another major stakeholder in the transport process).
Given that the primary benefit of mega vessels was in the form of economies of scale and lower slot costs, it is evident that the overwhelming bulk of the benefits devolves upon Carriers, i.e. the party that directly drives the upsizing decision.
Other stakeholders, such as Port/ Terminal Operators, are also significantly impacted by these mega vessels, but the disadvantages outweigh the advantages for them.
The impact of the deployment of mega vessels is felt immediately and directly by Port operators. At the same time, the positive effect will be seen in the long term and more from the overall benefits of structural improvements in the supply chain/transport process.
In this article, we will first explore the disadvantages for Port/ Terminal Operators and then the advantages.
1. Existing infrastructure at Ports is often inadequate to handle big vessels, hence their inability to handle mega container vessels could lead to loss of vessel calls and revenue
While ports invest significantly in infrastructure and planning for future anticipated volume growth is a crucial part of preparing the ports/ terminals business case, the investments in planning for the future are typically in the form of greater land parcels, which can be utilised as volumes increase and operations intensify.
Investments in building bigger berths / greater quay lengths are generally limited to a certain reasonable size, bigger than what competing ports are offering (to create a competitive advantage without having to invest an excessive amount to make a bigger berth/quay that will not be justified by future forecasted volumes).
Likewise, investments in cargo handling assets, such as cranes of various types (STS, RTG, RMG, Gantry), ITV vehicles, forklifts, etc., are generally at a level adequate to cater to future anticipated volumes (with a reasonable buffer), as investing more would involve additional CAPEX, more money is tied up in assets (which would be underutilised), incurring greater maintenance charges etc.
The underlying assumption is that volumes will increase but gradually over a period of time and that the growth in vessel sizes will be at a steady pace.
The implication of these factors is that most ports are geared to cater to normal growth. In contrast, some ports which have invested in greater capacity can handle above-average growth.
What they would find difficult to handle is a sudden steep increase in vessel size because that would necessitate deeper draught (and the associated expense and effort of dredging to maintain the draught at the requisite level), investing in bigger cranes, and other equipment.
While ports with adequate land parcels can handle more containers carried on vessels of the same size (or slightly bigger), in the case of a significant upsizing, unless there is a corresponding augmentation of the overall infrastructure, container handling equipment, and other resources, ports will be unable to service these mega vessels.
Container carriers do consider these factors before deploying bigger vessels. The business case specifies the trade lanes that these vessels will serve, as well as the ports of call (which generally is in the high volume trades, where there is sufficient cargo to fill a mega vessel and where the main ports have draught deep enough to accommodate mega vessels. An example is the Asia-Europe trade lane, one of the world’s largest trade lanes by volume, which has mega ports at both ends, such as Shanghai and Singapore in Asia, and Rotterdam in Europe).
Nonetheless, it remains a fact that several ports will not be able to accommodate these mega vessels – at least in the short to medium term – and hence will inevitably lose out on volumes and revenue, impacting their operational viability and commercial feasibility, which in turn hampers their sustainability and affects the livelihood of workers employed thereat.
2. Peaks and troughs of volume flow – so work allocation and resource and manpower planning is rendered more complex
The impact of the introduction of mega vessels on the overall quantum of cargo transported is counter-intuitive in that it does not necessarily lead to a sudden spurt in volumes. Instead, it creates peaks and troughs in cargo movement, leading to a more uneven flow of volumes.
The inference is that the port/ terminal doesn’t enjoy a sharp increase in volumes of total containers/ cargo handled but sees an increase in the parcel size per vessel call, which causes significant variations in cargo flows.
The port thus sees its monthly/ annual throughout remaining more or less constant but is compelled to make significant changes to its planning and operations process to handle the altered cargo flows.
To illustrate with the help of an example, where a port earlier received three calls from vessels of 5,000 TEUs each, it might, after upsizing, see a reduction in its weekly calls to 2 vessels of 7,000 TEUs each. So, while the overall volumes are, to a great extent, similar, the number of vessels/ services calling at the port decreases while the number of containers handled per call increases. Instead of receiving a vessel call once every two days (on average) in the first scenario, the port will now receive a vessel call once every three days.
Thus, while it was possible to split the labour force and container handling equipment more equitably in the first instance (before upsizing), the port now faces a situation where it needs to employ enormous labour and equipment when a vessel arrives (because the volumes are higher). Once that vessel is handled, the labour and equipment will lie idle until the next vessel comes. So, the labour force will be stretched when a ship calls and will lie idle until the next vessel call.
This creates obvious problems with resource planning and allocation, besides increasing the time required for handling vessels (including the time the ship spends at berth).
3. Difficulties in planning the vessel
Planning a vessel involves a significant degree of complexity in allocating sufficient labour and equipment, ensuring an adequate number of ITV/ drivers, planning where to store the containers, accommodating the truck drivers who come to pick up discharged containers, inland evacuation by rail etc.
With smaller vessels and more even cargo flows, it is relatively easier to allocate appropriate resources equitably; however, handling the higher peaks created by the advent of mega-ships is far more challenging as the degree of complexity in planning increases exponentially.
The problem is exacerbated if a Port/ Terminal relies on a rudimentary planning system. The additional planning complexities may render the task beyond what its existing system can handle, thus creating room for errors and sub-optimal planning.
4. High CAPEX to build infrastructure to handle big vessels / extra volumes
Handling the new generation of mega vessels is far more demanding than handling the previous generation vessels. Given the structural differences between a mega vessel and a normal vessel, in terms of size/ dimensions/ length/ containers carried/ height of containers stacked on board/ number of bays etc., a port would, of necessity, have upgraded its infrastructure extensively.
This could inter alia involve considerable CAPEX towards building bigger berths to accommodate vessels of bigger length, dredging to deepen draught, bigger cranes which are capable of reaching across the breadth of the vessel and reaching the higher stacks, more trucks to carry the containers from the quay to the designated storage area, more storage area to store the greater number of containers, and finally, adequate manpower to handle the increased number of moves and operational activities.
To give an idea of the costs involved, it would be worthwhile to mention that bigger RTG cranes can cost around USD 2 million, while STS cranes can cost upwards of USD 10 million (depending on their handling capacity).
Likewise, dredging to increase a port’s draught (so it can accommodate bigger vessels) is also a very cost-intensive exercise. For example, when the Deendayal Port Trust at Kandla, Gujarat (in India) had floated a bid for a 3-year dredging tender, the winning bid by Adani Ports (APSEZ) was for USD 43 million.
It is thus obvious that a port would need to allocate an extremely high budget if it intends to ramp up its infrastructure to attract mega vessel calls. The proposed CAPEX project would most likely be multi-year, with total investments easily exceeding USD 100 million.
5. The massive upfront investment is a possible barrier to entry / competitive disadvantage.
The massive investment required upfront to develop the infrastructure required to handle big container vessels is often beyond the capacity of small or medium-sized port operators. This means that only a handful of global port operators have the financial wherewithal required to construct terminals that can handle mega vessels.
This effectively constitutes a barrier to entry in the ports business and creates a situation where a few entities dominate the industry. This leads to capacity concentration, thereby raising the risk of a monopolistic or oligopolistic market.
This is quite true of the ports and terminals industry today, where players such as PSA (Port of Singapore Authority), DP World, APM Terminals and Hutchinson Ports dominate world rankings and have a presence at most major ports globally. The other players in the market are companies like ICTSI, which focuses/ specialises in operating small and medium-sized ports/ terminals, or the terminal operating arms of the global container carriers, which includes CMAT Terminals (CMAT) – owned by CMA-CGM, and Terminal Investment Limited (TIL) – owned by MSC.
Apart from these, at the local or regional level, strong players might exist, such as Adani Ports and Terminals Private Ltd (APSEZ) in India and Government-owned terminals (such as in Nhava Sheva and Kolkata in India).
Not being able to handle mega vessels (or even vessels that are bigger than the average vessel size currently serving the trade) can put smaller port operators at a distinct competitive disadvantage vis a vis bigger players, as they will eventually lose out in the longer run.
The resultant capacity concentration could potentially distort the market and restrict competitive, fair play, proving detrimental to the interests of exporters and consumers in the long run.
6. Ports are compelled to develop infrastructure to even stand a chance of bidding for Carriers’ business but without any guarantee that they will win business, in which case the investment is a loss
When Carriers start upsizing on any trade lane, the average vessel size serving the trade lane steadily increases as bigger and bigger vessels are deployed. Ports are then compelled to quickly upgrade their infrastructure to even be in the fray to attract services and thus compete on an equal keel with other ports in the vicinity.
After a port has invested in ramping its infrastructure, there is still no guarantee that it will win mega vessel calls. Ports which lose out in the race to attract mega vessel calls will find that their expenditure has been futile and that their additional capacity needs to be utilised. This lowers their ROI (Return on Investment) and might compel them to embark on a price war to capture services and ensure that their investment is not in vain.
7. Increase in storage space requirements for full and empty containers, which given real estate prices – especially when ports located in or near cities – can be very costly or sometimes not possible at all
Given the larger parcel sizes arriving on a mega vessel, ports are compelled to create additional storage space to accommodate the greater number of containers.
This involves the additional cost of acquiring more land, a sizeable cost item for the port operator.
Ports near cities or population centres will find the cost prohibitively high, as real estate prices in established residential areas will be higher than in locations away from cities.
Often, for such ports, it isn’t impossible to arrange the additional land required for storage, given that their proximity to cities means that no land parcel is available for expansion.
This can be a crucial constraint, impacting a port’s ability to handle mega vessels.
8. High gearing/leverage ratio
Since the financing of most port expansion or infrastructure augmentation projects inevitably involves a certain proportion of debt, it has a bearing on the port operators’ financial profile by increasing leverage levels, adversely impacting other financial ratios.
A highly leveraged company will find it inadvisable or unfeasible to raise additional debt at a subsequent stage to fund future expansion plans, as possible investors will baulk at lending to a company whose balance sheet is already burdened by high-interest rate payouts.
9. High-interest servicing burden/impact on cash flow
The assumption of debt to finance the infrastructure build-up to cater to mega vessels will mean that the port operator has a higher interest servicing burden, which will also impact their cash flows.
The port will be compelled to set aside a higher portion of its revenues to pay the interest due per annum and create a fund for retiring debt upon maturity. This means that the company has fewer free funds to invest in business or fund expansion projects (or even to pay out as dividends).
10. High maintenance and dredging costs
A concomitant of the initial dredging costs required to offer the deeper draught that is a prerequisite to accommodate mega vessels is that the deep draught has to maintain at all times. This involves a certain amount of maintenance at regular intervals, and an incremental cost is borne by the port to retain its ability to serve mega vessels, and an additional financial strain on the port operator’s balance sheet.
The extent of maintenance required depends on the topography and soil of the port. Ports which experience high levels of silting have to dredge at more frequent intervals and incur more costs.
The issue of silting/ dredging to maintain adequate draught can also be a bone of contention between the Port Authority and Terminal Operators, as generally, the responsibility of maintaining the necessary draught lies with the Port Authority, and the terms and conditions pertaining thereto are incorporated in the terminal concession agreement. Disputes could arise from contradictory interpretations of the contractual clauses or delays/ refusal to remove the silt at timely intervals.
Another challenge with dredging and other attempts to deepen or widen the port/ channels thereat is that environmental protection groups often oppose such projects, citing the harm to the environment and the local flora and fauna.
Thus factors such as environmental opposition, procedure to obtain the requisite approvals, and at times associated litigation can delay dredging projects for years, seriously undermine the business case for the dredging project, and delay the accrual of benefits expected therefrom.
An example is a port of Hamburg in Germany, where environmental opposition to dredging the river Elbe has hampered the port’s ability to serve cargo and cater to vessel traffic, especially when the river water levels drop close to the minimum navigable limits.
11. Carriers in a position to negotiate lower rates from Ports / Ports compelled to offer lower rates to Carriers – which also is disadvantageous to smaller carriers
By virtue of controlling greater volumes (and thus a greater proportion of the terminal’s business), carriers are in a position to make or mar a port’s fortunes. Being cognizant of this strength, Carriers negotiate from a position of advantage, leveraging their volumes to demand lower rates.
Ports/ Terminals are, in turn, compelled to accept lower rates simply to avoid losing a sizeable chunk of their volume, which could impact their revenue and cause them to lose out to competing ports in the vicinity, thereby jeopardising their prospects in the long run.
This factor is contingent on the degree of competition that the port faces. Suppose there are ports/ terminals with comparable infrastructure which offer a viable alternative to Carriers. In that case, the carrier is in a stronger position to negotiate under the threat of shifting its volumes away. On the other hand, if the port/ terminal is the only gateway in that vicinity which possesses the capacity and infrastructure to handle mega vessels, Carriers will not have an alternate option, and the balance of power during negotiations will be in the ports’ favour.
12. Creation of quay-side bottlenecks and congestion
When a mega vessel arrives at a terminal, it occupies a larger portion of the available quay length. Also, due to the higher number of containers to be unloaded and loaded, more cranes, ITV and manpower will have to be allocated to service the vessel. Finally, after all this, the time taken to handle the mega vessel will still be greater than that for smaller vessels, which means that other vessels arriving around the same time will have to wait for the berth to be available while the mega vessel is handled.
This can create a small queue of vessels, which could worsen during inclement weather/ labour strikes etc.
While weather and union issues affect ports handling smaller vessels too, the impact on ports handling mega vessels is higher because the greater volumes at stake and the required handling time compound the impact of these common factors.
13. Creation of congestion and delays at land-side
Due to the greater parcel size of each mega vessel call, as well as the phenomenon of peaks and troughs that we examined earlier in the article, the flow of cargo/containers is such that there are a higher-than-average number of containers at certain times, i.e. when a vessel calls the port.
This means that an unusually higher number of containers need to evacuate from the port (in addition to the export containers that are gated into the port in time for the vessel call). Since the number of containers is greater, the port’s storage space will experience greater utilisation levels and, consequently, higher handling times. In comparison, the greater number of trucks coming to the port will create greater queues at the port gates, increasing the Truck turnaround times.
The net consequence is an increase in total waiting times. If aggravated by other factors (such as inclement weather, systems outages, and delays in vessel arrivals), it can quickly spiral into pockets of congestion on the land side.
14. Delays in evacuating cargo – as more containers are delivered simultaneously, existing rail, road and barge connections cannot evacuate all containers simultaneously, wherefore some containers will inevitably be delayed.
Ports and Terminals have a certain amount of rail and road carrying infrastructure, capacity for which is designed keeping in mind historical volumes and anticipated future growth.
With the advent of mega vessels and the sudden increase in container parcel size, the existing inland evacuation capacity could prove inadequate to cater to the higher number of containers (unless the port has initially planned for a very high degree of buffer in terms of excess capacity, which generally is not the norm – given the high investment involved).
In this scenario, it is inevitable that rail and road capacity will be constrained and that some containers will be delayed beyond average evacuation times.
15. Mishaps and accidents can cripple ports – by blocking access channels
Mega vessels, by virtue of their bigger size, pose more operational challenges than their smaller counterparts. Therefore, it is obvious that the magnitude of repercussions in mishaps or accidents involving mega vessels can have far more debilitating consequences than accidents involving smaller vessels.
An excellent case is when the Suez Canal was blocked for six days in March 2021 following the grounding of the Ever Given, a 20,000 TEU vessel. The ramifications of the blockage of a vital trade artery were felt in the form of a rise in vessel and cargo delays, which were a prominent contributor to the global supply chain disruptions that followed for the rest of 2021.
In the case of ports and terminals, if a mega vessel were to run aground, it could completely block the access channel and prevent other vessels from calling at the port, thereby effectively rendering the entire port inoperative.
Since freeing a mega vessel would be a humongous task, the time taken for the port to return to normalcy would be considerably more than in the case of smaller vessels.
16. More potential cargo loss and Insurance claims in case of accidents or untoward incidents on board
The cargo value on board a mega vessel is considerably higher simply because it carries more containers. In case of untoward incidents such as fire on board or containers falling overboard, the potential losses can be crippling and higher than the historical average.
This can lead to the declaration of a general average, which will impact a greater number of shippers, lead to record amounts of insurance claims, and potentially harm the environment.
Even P&I companies have flagged mega vessels as a cause of concern and are now offering joint P&I cover to ensure that the risks are spread (as opposed to a single P&I Club providing coverage).
1. More volumes per vessel/ service
The fact that mega vessels can carry more containers means that they have a correspondingly higher number of containers to load and discharge at each port.
This, in turn, means that the port/ terminal handles more containers when a mega vessel calls vis a vis a smaller vessel, so the port records a larger average parcel size and volumes per service when mega vessels call at the port.
2. Can concentrate Marketing and Sales efforts on a few big/ target customers – reducing SGA expenses
Since mega vessels are generally operated by bigger container carriers (or by Container Alliances), ports and terminals can concentrate their sales and marketing efforts on the big carriers and attract sizeable volumes. The greater utilisation and occupancy percentages mean that winning business or securing calls from a few big container carriers is sufficient for a port to generate enough volumes to ensure high capacity and asset utilisation.
This ensures that the port/ terminal can focus its efforts and resources on targeting the bigger carriers and thus save the time, effort and resources on attracting and servicing a wider customer base.
3. Increased reliance on the hub and spoke model benefits both bigger and smaller ports.
An inevitable outcome of the widespread prevalence of mega vessels is the increasing adoption of the hub and spoke model. Since mega vessels can carry more containers, the total number of services is lower, and the fact that mega vessels need infrastructure (draught, cranes, etc.) of a certain minimum size to be able to call a port implies that the number of ports that can accommodate these mega vessels is limited.
Therefore, the hub and spoke model is useful for ensuring optimum port coverage whilst maintaining the benefits of economies of scale generated by mega vessels. Container carriers deploy mega vessels on volume-heavy trade lanes (such as the Asia-Europe trade) and restrict port calls to only the biggest ports in the region (such as Jebel Ali in UAE, Colombo in South Asia, or Singapore in South East Asia).
Volumes destined for smaller ports in the region are then discharged at the bigger port (as the mega vessel cannot call smaller ports due to infrastructure constraints). After that, they are delivered to the intended destinations on smaller (Feeder) vessels.
This creates more container moves from the same number of containers transported, benefitting both the mother/ main ports and the smaller/ feeder ports.
4. Attracting one big service can enable a port can leapfrog over the competition.
Given that each service will bring more volumes than in the past and that the overall number of services will have decreased, inducing a mega vessel service will mean that a port has successfully increased its volumes, especially relative to its competitors, thereby enabling the port to widen the gap between itself and competing ports substantially.
This improves the port’s performance in absolute terms and strengthens its competitive position.
5. Drives innovation – in terms of technology for optimising space and other resources
The various challenges associated with handling mega vessels and the pressure it places on the port’s infrastructure, resources and productivity have compelled ports to be more innovative and focus on technological solutions.
The intent is to ensure optimum utilisation of limited resources (such as berth space, storage yard space, cranes, vehicles used for inter-terminal transfers etc.) to increase productivity through better planning and thus handle higher volumes with minimal impact on productivity or turnaround times.
An example is the adoption of high container stacking technology, which enables a port to stack containers higher than the industry norm, thus enabling them to use existing space better and handle more containers with the same yard size.
Another example is the adoption of software for allocating and monitoring trucks and vehicles used for intra-terminal transfers. ITV’s are trucks used to transport containers as they are unloaded from a vessel at berth and carry these containers to the allocated space in the storage yard. Multiple trucks are assigned to each vessel, which moves the discharged containers to the designated yard and then comes back to pick up another container, all in a continuous flow.
In this process, planning and productivity is often sub-optimal and can vary from vehicle to vehicle, depending on several factors such as the speed and skill of the driver and allocation of workload. With software/RFID attached to each vehicle, it is only a matter of using the software to track each and every movement of the truck (including the route taken, stoppages, the overall time taken etc.) and the number of containers carried/ trips made.
This enables the port/ terminal management to identify the relatively less productive vehicles, investigate reasons for lower productivity, and thereafter provide training or take other measures as deemed appropriate.
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Jitendra has over 20 years of international experience in the Container Shipping, Ports and Logistics industry, spanning 3 diverse geographies, wherein he has been involved in the commercial and strategic aspects of the container business. After working with market leaders like Maersk Line, Hapag-Lloyd and Adani Ports, he took a sabbatical and is currently undertaking independent consulting. assignments, besides pursuing his passion for writing. In his spare time, Jitendra likes to read, write and travel.