In 1930, the legendary shipowner Erling Dekke Naess bought a 12,417 dwt tanker. 50 years later he reminisced that “Everyone said it was too big, but I went ahead anyway. They were right. I tramped it round the Med but couldn’t get a cargo”. It ended up in lay-up. So even shipping legends have difficulty with ship size decisions (and he was an economist too).

Surging Upwards

Bigger ships play a crucial part in sea transport and over the last 150 years they’ve got much bigger. Many of today’s ships are 10-20 times bigger than a century ago and the economics remain compelling. But unfortunately it’s not just a matter of cost savings. In practice the ship size investment decision has three key dimensions: cost, utilisation and flexibility.

Cost: Bigger Is A Bit Better

 “Bigger is better” is the easy part of the investment decision. Bigger ships cost less, use less fuel, and have lower OPEX per unit of capacity. So using the biggest ship possible is ideal if you have a steady trade. But as the ship gets bigger, the relative saving diminishes. For example, a 2750 TEU containership costs around 30% less per TEU than a 1700 TEU vessel. But jumping from 2750 TEU to over 8000 TEU saves only around 12% per TEU. Bigger ships save even less, with fuel and OPEX following a similar pattern.

Utilization: Empty Is Awful

 In a tough market every saving is crucial, but if you can’t fill the ship, being cheap does not help and this can be a logistical minefield. For example in the forest products trade, replacing a 3,000 dwt logger with a 10,000 dwt ship cuts cost per dwt dramatically. But if shippers can’t assemble enough cargo to fill the ship, it’s a loser. This is an even bigger issue on the liner trades where ships must sail to schedule. Big ships get filled in the boom, but what happens in recessionary periods?

Flexibility: Way Out Of A Fix

Thirdly, there’s the flexibility of access to cargo and key ports. This is a difficult decision, since it depends on charterers, and it explains why bulk ship sizes tend to creep up very slowly. For example, the standard Capesize bulker has been 170-180,000 dwt for a decade. The trade is easily big enough to use much bigger ships, but is it worth the risk?

VLCCs are the classic case study. Between 1967 and 1979, VLCCs grabbed a 58% market share. It seemed like a no-brainer, but in the 1980s oil traders took over cargo from the oil majors, and long-haul oil from the Middle East to the Atlantic was replaced by short-haul trade. The VLCC share has since fallen to 38%. Today containerships are going through a similar transition, with the Post-Panamax fleet surging from a 5% to a 58% share.

 Are Containers Different?

So there you have it. Ship size is difficult and battle-worn bulk investors take small steps. Stepping out of line can be tricky.  Of course “this time it’s different” in the container business – but Sir John Templeton famously described those as the four most expensive words in the English language. Have a nice day.

SIW1160

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