The Economics of Giant Container Ships

Note: If you want to watch the video first, it is below

In July 2021, Evergreen Marine took possession of the world's biggest container ship: the Ever Ace.

Built for Taiwan-based Evergreen Marine, the ship is as long as the Empire State Building is tall from bottom floor to roof.

With a carrying capacity of 23,992 twenty-foot-equivalent units or TEU, these Evergreen A-class megaships take the record - set just the previous year - from HMM's Algeciras-class ships.

It can hold 10% more cargo than the infamous Ever Given, that one ship that got stuck in the Suez Canal.

These ships herald a new era of ultra-large container ships. And it is a bit of a surprising trend. What is pushing these container ships to get bigger? And is there anything keeping them from getting even bigger down the line?

Rise of the Ultra Large Ships

In 1999, an economist surveyed various container shipping lines and found that 78% of them believed that ships would not pass the 12,000 TEU threshold.

Ten years later in 2019, a survey found 89 vessels with carrying capacities over 18,000 TEU.

From 2011 to 2021, the number of new container ships around the world has grown by about 9% - from 4,933 to 5,450. The average number of new ships deployed each year has likewise stagnated.

Despite this, the fleet's global carrying capacity has exploded by over 65% from 14.4 million to 23.8 million TEU. Fewer ships, but vastly bigger ones.

The technology always existed to build a bigger container ship. But a bigger container ship also needs to be financially viable. Bigger ships exist today because the industry adapted to allow them to exist.

A History

The container shipping industry as we know it today begins with the 1960s. Up until then, things were shipped as general cargo in parcels, crates, and the like within a ship's cargo departments. This took a long time, and ships sat in ports for a long time doing nothing.

An American trucker named Malcolm McLean envisioned separating the tractor from his trucks and transporting them over the water. Containers can then be packed and unpacked away from the port. This minimized ship time at port and - perhaps just as crucially - bypassed unreasonably strong union port labor.

But since many ports at the time were not equipped to handle containers, pioneering container ships like the Ideal X were equipped with cranes to load and unload containers. This limited ships' carrying capacity.

McLean realized that container ships would never realize their full potential so long as the ports were not ready. He invested millions doing so throughout the decade. By the 1970s, container ships no longer needed cranes, allowing the biggest to expand to over 1,000 TEU.

Panama

After this, the next big limit had been the Panama canal. The big US-based shipping lines owned many ships that traveled between the American West and East coasts.

The Panama Canal at the time could not physically handle ships beyond the locks' 110 foot (33.53 meter) width.

If a ship cannot get any wider, then its length is also capped because a loaded ship will break in half like a Kit-Kat if it gets caught between the tops of two wave crests.

These physical limitations capped a ship's carrying capacity to about 4,700 TEU. At least if that ship wanted to go through the Panama Canal.

Ships that could were referred to as Panamax-class. The Canal would finally be expanded in 2016, and that created a new class called Neo-Panamax.

Anyway, for ten years from 1978 to 1988, Panamax class ships were seen as the physical limit of what the industry could sustain.

Economies of Scale

The thing about huge ships however is that they benefit from economies of scale. You spend less steel, crew, and fuel to run 1 ship carrying 10,000 TEU than two ships carrying 5,000 TEU each.

In 1968, the biggest ship was the Lancer class - 700 feet and 85 feet wide with 1,200 TEU of capacity. It was America's first purpose-built container ship.

The Ever Ace is 1,312 feet long (400 meters) and 202 feet (61.5 meters) wide. It is just about twice as long and twice as wide as the American Lancer class ship. But it has twenty times the capacity.

It got to the point where the benefits from these economies of scale finally overcame the Panama Canal's limitations. In 1988 American President Lines or APL introduced the first Post-Panamax class ship.

These ships could not sail through the canal. So APL shipped the cargo from Long Beach to New York via rail or road. They called it the United States "land bridge". Calling a 3,000 mile wide country a "bridge" to me sounds kind of amusing.

Port Economics

Container ship gigantism hit another stride in 2000. A variety of Asian countries developed powerful export economies, fueling the container shipping industry's growth.

In 2000, Maersk debuted its C-class of container ships, which broke records at 9,640 TEU. Unable to greatly increase the ship's width or its draft, which is a measure of a ship’s bottom to its waterline, designers opted to extend its length.

The C-class would be the largest container ships until Maersk again broke the record in 2006 with the E-class. The E-class was significantly bigger in all dimensions - length, width, and draft.

The reason for this explosion in size is tied not to ship unit economics, but rather to the ports those ships visited. Shipping is a two-way trade. A big ship that takes too long to get unloaded and reloaded loses all of the economies of scale it picked up at sea.

Bigger ships can cause port diseconomies to scale. A bigger ship has more containers to load and unload. But it can only stay at the port for so long, or else it risks missing the schedule. Yet at the same time, a good crane can only make a maximum of about 30 moves an hour. And simply adding more cranes mean they interfere with one another.

Furthermore, ports have to do significant infrastructure upgrades to handle bigger ships. Ports around the world had to dredge the sea floor to make it safe for ships with deeper drafts. They had to set up local IT and inland transport to handle the additional containers.

These upgrades cost money and are of questionable economic benefit for the ports themselves. Bigger ships don't load or unload appreciably more cargo at any individual port than their smaller brethren. Large ships often have to make calls at multiple Asian ports, picking up containers at random to meet capacity.

At some point however, the shipping industry dragged the ports kicking and screaming into making sufficient upgrades. This freed the ships to get yet larger. The shipping lines essentially offloaded the cost downsides of their bigger scale to the ports.

So if the ports aren’t so keen on these upgrades, why do them? It’s because of the lines' increasing market power.

Consolidation and Alliances

The Global Financial Crisis shook the shipping industry. It accelerated an industry already on the road towards bigger shipping mega-companies.

In 2008, the top 10 liner companies accounted for 26.2% of global container fleet capacity. By 2020, this figure has sharply risen to 83%.

Liner companies have merged with their peers or taken over their business. For instance, when Hanjin Shipping filed for insolvency, its competitor Hyundai or HMM picked up the remaining container traffic and consolidated its position as Korea's biggest carrier.

They have also diversified in other parts of the transportation value chain in a bid to squeeze more profits out of the service.

Evergreen Marine Shipping for instance is part of a bigger conglomerate, Evergreen Group, which also includes EVA Air and Evergreen International Hotels.

Bigger companies by themselves are financially capable of ordering and filling bigger ships. In addition to this, the industry has established shipping alliances between these giant companies to further capitalize on economies of scale.

Alliances are technical cooperation agreements. The participants do their own marketing and sales, but pool their capacity in order to make sure their ships are full when they set off from port.

Global shipping alliances do not engage in price fixing. This differentiates them from the old shipping conferences - which had ruled to be illegal many years ago.

There are three alliances right now - formed in 2017. Together, they control 81% of the industry's capacity. It is effectively impossible to compete without being a part of a global shipping alliance. And this consolidated market power has in turn helped push through the latest round of port upgrades.

Green

I want to add one final thing about green energy and environmental regulations. The maritime industry has come under increased scrutiny for its massive carbon emissions. Ships run on heavy fuel oil. They contributed 2.5% of all human generated carbon dioxide equivalent emissions in 2018. All things being equal, this will grow into 2050.

The International Convention for the Prevention of Pollution from Ships or MARPOL Convention was first adopted in 1972. Starting in 1997, they have passed a variety of regulations with the goal of bending this carbon emissions trend.

In 2005, they adopted a major appendix to include more limits on sulfur dioxide and other emissions. One noticeable policy is the sulfur cap, which required ships to use fuel oil with lower sulfur content starting in 2020.

Compliant fuel is harder to come by and costs more. An alternative would be to install scrubbers that take out the sulfur and either store it onboard or toss it into the sea.

You can also build or retrofit a boat to run on Liquified Natural Gas. For instance, CMA CGM's Jacques Saade, the first 20,000+ TEU ship to run entirely on LNG - 23,000 TEU with 25% less CO2, 99% less sulfur, and 99% less fine particles.

Side note. There's been some exploration of battery powered container ships. So far this is not possible for mega ships on a Pacific or Atlantic ocean route. Mega-ship batteries need to cost just $20 per kilowatt hour and have a 6,240 mile (10,000 kilometer) range. But perhaps for a host of smaller feeder ships it can work?

Anyway, these are expensive options but they favor bigger ships. For instance, it is estimated to cost $35 million to retrofit a 23,000 TEU ship to run on LNG - over 20% of its total value. You can still spread those costs across all that TEU while benefitting from fuel economies of scale.

Bigger ships are one of the major contributing reasons why maritime carbon emissions declined in the ten years since 2007.

30,000?

When it comes to maximum ship size, the industry has pushed through every previous forecast. And the economics of scaling still apply. So a few people have gone all out when it comes to their latest predictions - limited only by the literal physical size of the shipping routes.

For instance, you have the proposed class of Malaccamax container ships. These have a draft of up to 68.8 feet (21 meters), the maximum acceptable depth for passing through the Strait of Malacca between the Malaysian peninsula and Indonesia.

A container ship that big would have a total capacity of 30,000 TEU. Industrial projections predict that such ships are expected to arrive some time in 2025-2026.

One regression study predicts this ship would be 1,486 feet (453 meters) long, 236 feet (72 meters) wide, and have a draft of 56.7 feet (17.3 meters). Others have even larger estimates.

However, it feels like the industry as it is today is not ready for such a monster-sized ship. Economic models hint at declining returns to scale at the 20,000 TEU neighborhood. For instance, the difference in terms of daily operating costs between a 23,000 and 20,000 TEU ship is just about 1%.

At the same time, this mega-ship would be unable to traverse the Panama and Suez canals. And few ports would have the depth and crane capacity to handle it.

If you ask me, I think the industry is not quite there yet. 30,000 TEU ships are probably still coming, but due to environmental, technical, and regulatory reasons, you probably will need to wait a few years beyond 2025 before they start coming about.