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Is bigger better? Conversations with Jan Hoffman (UNCTAD)

May 12, 2021

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Container ships have become the hallmark of globalization and free trade. In the last two decades, there has been an exponential increase in both the size and cargo carrying capacity of container ships. The economists argue that the increase in size is justified because of the efficiency gains and scale economies that these giant ships now offer. But at the same time, a series of accidents at sea including the recent grounding of the Ever Given has led many experts to question the assumptions behind the increase in ship size. In this episode, Jan Hoffman from UNCTAD helps us understand the economic imperatives behind the increase in ship sizes and its implications for safety and resilience. Is bigger really better? Find out by listening to this podcast.

Keywords – podcast; resilience; suezblocked; maritimeaccidents; learningfromaccidents; systemsthinking

[00:00:06] Nippin Anand: Welcome to another episode of Embracing Differences with me Nippin Anand. This podcast series is meant to bring you different perspectives and concepts in safety. The idea really is to create space for thinking and reflection, not to reinforce any grand theories or our prior knowledge on a subject. The aim is to learn and grow, not to remain stagnant. And of course, as I keep saying there is no reason for you to believe me or any so-called expert but keep an open mind and be prepared to challenge your beliefs if you truly want to learn more than what you knew yesterday.

On 23rd March, 2021 at approximately 07:42 local time, one of the world’s largest container ships, Ever Given ran aground in the Suez Canal and choked one of the busiest waterways in the maritime geography and along with that 12% of the international trade for nearly six days.

Ever Given is 400 meters long, 60 meters wide and nearly 16 meters in the water. It is one of the biggest container ships in the world today. Watching her remain grounded and the frantic attempts to bring her back afloat reminds us of our vulnerability in the face of man-made disasters.

It is the uncomfortable truth that in the pursuit of profitability and efficiency we have arrived a position where we have lost control of our systems.

Container ships are a perfect example of both, the increase in size but also the marvel architect that has allowed us to reach where we are today with ship design and operations. Two decades ago, container ships about 200 meters long could carry just about 2000 containers. Today, a 400 meters long ship carries as many as 20,000 containers. Just double the length and an increase in more than 10 times cargo carrying capacity. Now that is a very clever design.

A key question in this podcast is how far can we go with the increase in cargo carrying capacity of these giant ships? Is bigger always going to win? Will there be an end to this?

To answer this question, I am joined by Jan Hoffman, from UNCTAD (United Nations Conference on Trade and Development). Let’s hear it from Jan.

Jan Hoffman [00:02:44]: That’s Jan Hoffman here speaking from Geneva. I’m working at UNCTAD -United Nations Conference on Trade And Development with a fantastic team of with more than 20 nationalities working on international transport and trade facilitation like helping our member countries especially developing countries to participate in trade, to benefit from trade, to make trade more efficient and through their ports, their customs automation, through their national translation, through WTO agreements, corridors, all type of thing amazing work where we combine 3 pillars of work – think, debate, deliver. So, we think we produce research statistics public goods you probably have seen if you are in that area, you might have our country profiles, our blog posts or statistics. That’s the thinking part. Then we provide a forum, we have expert meetings, we advise governments also a negotiation in other fora which may be more relevant for the traditions like we accompanied the members of the World Trade organizations and they came to an agreement on the WTO trade facilitation agreement. We are currently working with members of the IMO on how to decarbonize shipping. So, we work with them to assess the impact of those numbers for least developed countries. Our third pillar is delivering technical systems – working on the ground with ports, with national translation committees, with corridors on implementing a single bill in Jamaica, on reforming a portal, work in the Maldives as well or looking at facilities at border crossing. So, walking on foot from the Burundi to Democratic Republic of Congo to see that the work was done. It’s amazing I could go on and on but it’s a nice work where we think, we hope, convinced we do something good at the same time it is very international, very interesting, never boring!

Nippin Anand [00:05:11]: Great and within the context of port and logistics what’s your background like? What’s your experience? What’s your education? What’s your qualifications?

Jan Hoffman [00:05:22]: Well, formally I for me I have a PhD in economics from the University of Hamburg that covered, general economics, investment theory, microeconomics and so on. While I was studying I was lucky that my parents had a little shipping company so I have actually worked as a seafarer on the 1100 DWT twin decker where we started with the flag of Germany then we used the flag of Antigua Barbuda he started with German seafarers then we recruited Polish seafarers. This is another nice story to explain how international that business is. So, we had a German owner we had shipped flagged in Antigua Barbuda the agent was in Antwerp, the crew Asia, through Navigo Management in Cyprus and you would go from Turkey to Canada for example. But in the end, you end up with ten countries involved in this whole business with 11th countries was Ireland where Capt. Hoffman’s favorite drink was whiskey from Ireland. For me that was great so I was studying economics PhD and then living this. It was small company just one ship but I worked as the seafarer on this and I saw how we were flagging out, the loans, insurance, the contracts, the brokers and this of course helps now that I work for UNCTAD and produce statistical report.

And now ending up in landlocked Switzerland in working on international shipping. But here we have Mediterranean Shipping Company is also just here in Geneva and I can see the offices when I look out of my window, So, there we are, in landlocked Switzerland.

Nippin Anand [00:07:30]: Great! That’s a nice place to be and very close to the discussion that we are supposed to have today. I’m really keen to understand from you; I’m not so interested in the perspective on the Suez accident as per say, which will probably take many months if not years for people to understand what really went wrong.

I’m really interested in how did we end up in a situation whereby, a 400-meter-long ship could choke the world’s busiest waterway and actually clog the economy of the world. That’s the critical dependence I’m really interested to understand from your perspective. I’m just so curious to hear what you have to say about it. How do you think we got to this stage and if there is some background and historical context to it? I’m I’ve got a very open mind you can start from anywhere you want.

Jan Hoffman [00:08:15]: It’s really a global impact. The freight rates that have surged most over the last weeks and months, even already before this Ever-Given incident. Other long distance freight rates to South America and western Africa also surged again after this incident. I said, “Why is that that their imports from China do not go through Suez so why do their freight rates surge? Well, what is happening is it’s a longer story thanks to the link to the covid impact where all of a sudden, we have demand for certain goods than we thought when the pandemic started. We had containers ending up in the wrong place because we have changed geography of trade. We have containers have difficulties coming back to where they should be because ports and dock workers who test positive, intermodal connection, their customs and many things are slowed down a little bit. All of a sudden, there’s a certain shortage of empty containers and prices went through the roof. It’s really the elasticity of demand is so inelastic.

There are other aspects to this, there’s some aspect of market concentration, there’s capacity management by the shipping line, so called blank sailings meaning they left containers where they should not have left them etc. But overall, in my view the strongest cause of this certain trade raises shortage of container. We need to build them. When it becomes expensive to lease an empty box and for your trade from Shanghai to Santos, Buenos Aires, you need many ships and many containers for many days. All of a sudden becomes more expensive. Normally distance does not matter that much in shipping but that is only if the assets – the ships or their containers are at normal prices but if all of a sudden leasing a container because there are not enough of them for the owner of the container – I am Evergreen or Maersk or Cosco and I have an empty container in Shanghai where do I put it on which ship do I put it with cargo? To Los Angeles or to Santos? More likely I am to put to use that one scarce container that I have, for a trade that moves with higher value goods to Los Angeles or to Rotterdam.

Who is paying the price? The one who would have liked to have it – in Santos or Lagos. So, I’m not sure if I was answering your question but I found it was a good answer. It just shows to how globalized shipping is. One of the effects of having these standardized containers is the same ISO standardized containers that I use on all these routes. Well then you have an issue with this size of the ships. A smaller ship would not have blocked the canal so easily for so long.

Maybe smaller ships could have passed or been freed earlier. So, there’s an issue with very big ships and co-incidentally that same ship Ever Given already had an accident two years ago in Hamburg with the same reason that was given that all of a sudden there were stronger side winds that pushed her to the side than were expected and it smashed into a little ferry that was in the port and just this morning I realized that I had actually taken a photo of the same, Ever Given that day in February, a bit more than two years ago.

So, I dug on and there she was – Ever given after an accident in Hamburg and by that time it was didn’t have a big impact but now you think of it maybe that would have made us think -Two times, same ship, same course.  But it’s a bit strange now.

Nippin Anand [00:12:53] That’s interesting  of course we don’t know the cause of the accident and it probably will take a while but what you’re saying is that this inelasticity as you very beautifully explained leads to a situation where you end up with a container ship loaded far beyond its capacity and we wouldn’t say it was far beyond its regulatory capacity or the limits of the compliance but what you’re saying is that it’s far beyond its normal capacity which then leads to a situation that creates more windage area. On a day with the high wind speed and gusts there is a possibility that this could have led to the choking of the canal. We don’t know whether that happened or not, but in one way what you what you’re helping me understand is the vulnerability of the container sector which is the result of multitude of factors – the availability of empty containers the way in which the trade moves and so on. Am I picking right?

Jan Hoffman [00:13:57] Yeah, as I said, I really don’t know the technical parts and I’ve seen some write ups of conversations that supposedly took place between the crew, the captain of the ship and the pilot with disagreement of something. But it’s all very speculative and it seems also at that accident in Hamburg it seemed that there was nothing not legal and that it was all OK. But maybe the range of regulations that allow for this to happen maybe one needs to revisit it. I don’t want to make it as a recommendation but it’s not just me. My view is as good as anybody. But if you have two times this type of accident maybe the classification societies, the IMO, the insurance companies, the canal that allow or not allow. Like, when you’re through the Panama Canal, you have to unload the number of containers you cannot go as far as you can go in the Caribbean. So, I don’t know but at least it’s worthwhile considering.

Nippin Anand [00:14:56]: Indeed, and as you said we don’t know and we shouldn’t speculate in that area but what I’m really interested to understand from you is that even take one step back here to say that what is the economic need or the business need to have a ship of this size? What’s your view on that?

Jan Hoffman [00:15:18] From the carriers perspective it makes perfect sense to go for the big ships for two main reasons. One is there interested in the seaside you do have economies of scale. You double the ship size but you only increase the energy consumption per ton by the square of 2 something like this. Even Adam Smith and Marshall had in the textbooks flipping us the beautiful example of economies of scale. So, you save on that side. You do not necessarily save for the total door-to-door dollar. Once these big ships arrive in port let’s say on Tuesdays and have said 20 or 20,000 whatever containers to load and unload vis-à-vis, the alternative of having smaller ships arriving every Monday and Tuesday. So alternative A, one big trip every Tuesday 20,000 alternative B, two smaller ships is 10,000 every Monday and Tuesday.

For the shipping line is better to have the big ship. But if you have the port and you then have to have to have without a single gram of additional cargo there’s not one additional container nothing is just that you need wider cranes, big pier, bigger yard, more trucks waiting etc. So, all of this is diseconomies of scale. But that does not concern the carrier so the carrier so they keep investing in bigger ships.

The second reason why the carriers invest in bigger ships is part of the consolidation process. So, in a way, you consolidate cargo, ships and capacity and have this process of concentration. In addition to the mergers, you have alliances. There are only three major alliances on the main East-West trades like 90% of capacity. So, if the alliance then decides – I want to go either to Antwerp or Rotterdam or Bremerhaven or maybe two out of four for five of the trade. That are so much in a stronger negotiating position. So, this is not an oligopoly, this is an oligopsony. So, the client, the shipping lines are the client of the ports and they gain negotiating power vis a vis they are service providers of the ports. So, I think these are the two main motivations behind the proof for bigger ships. People have said it over and I would agree that this incident in the Suez Canal should not be taken as an argument to invest even more in this bigger infrastructure, but rather revisit the idea whether do we really need ships that are that big?

Nippin Anand [00:18:21]: That’s an interesting argument for the economies of scale for having bigger ships but one could also look at liner shipping as such. The philosophy of liner shipping goes back to from where it started from, was that ‘the ship must sail’. For a ship to sail and you must have a certain amount of cargo from a business perspective. Now when the world’s economy slows down then you don’t have enough cargo. What do you do then? Because that go runs the becomes the antithesis of liner shipping and I’m just trying to understand that the world that we’re living in today, how do you justify this business model when during times of economic crisis, as the world is going through right now.

Jan Hoffman [00:19:16]: We started out saying that the freight rates are actually extremely high right now because the demand did not go down as much as we would have thought and the profits of the shipping lines are huge. 2020 profits were very high here and also will be still in 2021. So, I don’t think this would be against the business model. Of course, these big ships only work when they are full and while this process of getting bigger lasted from since mid 2000s already and then even earlier like mid 90s. So, we have a very long shipping cycle that led to losses of the shipping lines for quite some time because while they were growing, they were ordering bigger ships. But what do you do with the smaller ships? You do not scrap them yes return them to the market – to the charter, owner, for example. So, the overall overcapacity was lasting for many years. Shipping lines were losing money.

Now you could say thanks to COVID, thanks to blank sailings they manage things through the alliances, thanks to the shortage of containers, all of a sudden, they are finally making profits and this may be also coinciding with the moment where we really now have reached a plateau that the ship sizes would not go up further. I’m not sure it’s probably a bit of both. The very high profits these days are the result of a combination of the shortage of containers and the capacity management of the lines, vis a vis, the demand that did not go down but actually some seconds increase so that’s the immediate impact for high profits and perhaps in the medium to long term hopefully ships will not get bigger any further.

Nippin Anand [00:21:26] That’s interesting point yeah that kind of makes sense so that we don’t know what the future is. There is no disincentive that would that would motivate shipowners to slow down or order smaller ships in fact, it’s the opposite is what you’re saying.

Jan Hoffman [00:21:43]: Yeah, there’s the new owners have been surges for new orders recently and effectively yes, they are largely the biggest ships that are being ordered not bigger than the existing. But this size range is the one that is being ordered currently.

Nippin Anand [00:21:58] My final question to you is that looking at it from a carrier’s perspective it makes perfect sense what you’re saying know looking at the size of these ships and looking at their worldwide operation how do you foresee the impact of these big ships getting bigger and bigger on the way the supply chain operates or entire value chain operates? For example, when I’m specifically looking at is that in the way the ports can handle these ships right from the time they enter into the port, perform cargo operation, leave the port and enter into congested waters. All those kind of things how do you see that the configuration of the chain living up to the to the ever increasing size of the ships?

Jan Hoffman [00:22:45]: It is a challenge for the ports above all, for the shippers, the clients actually want to say that the alliances and some of these trends do have a positive aspect there’s a lot of bashing of big ships and I myself also reserved good reasons not to promote the big the bigger ships. But the alliances that operational cooperation improves, increases the utilization of the ships it’s a bit like the One World or the Star Alliance in airlines and so on. So for the client, the alliance are not that bad you have more frequency they have higher capacity utilization, less over or actually more over-capacity in the sense of if you use it better you need fewer ships. You may even have over capacity so that happened at some point in time. So I think the alliances from the clients, from the shipper’s perspective are not necessarily bad. They do allow the providers to arrange to manage capacity and concentrate cargo. There’s also this aspect of the shipping lines investing in their own ports. So that’s also part of the picture that you were framing with your question.

So if the shipping line is also owner of an operate take, A.P Moeller Maersk operates a terminal in Buenos Aires and in Peru and then Maersk buys Hamburg Sud. Now, Hamburg Sud, used to go to the terminal in Cajo that is operated by Dubai Ports (DP World) and it used to the same terminal operated by Dubai Ports in Buenos Aires which is not linked to a shipping line. What happened after Maersk bought Hamburg Sud, they told their new daughter, “Please from now on, you no longer go to bed with the other guy you better go to APM terminal.” So all these aspects of what we are observing with the bigger ships of the alliance is the vertical integration. They really pose challenges to the policy makers to the ones who give out concessions on ports, ones who look at prices, at the consolidation at the anti-monopoly commissions.

It remains fascinating. We look at this at UNCTAD and measure somehow levels of competition. We give capacity building events or seminars workshops for national competition authorities. We work with the ports of their own reforms. There’s no one size fits all solution obviously but it’s a continuously moving picture. It’s fascinating that’s all we can say.

Nippin Anand [00:25:56]: Very fascinating the way you explain it. Thank you. What I’m hearing from you is that in this new way of life, in this new way of operating ships, maritime transport is somehow being subsumed into the wider global supply chain kind of models whereby, the balance of power have shifted from a ship owner or a ship operator with somebody who actually owns the value chain – the global logistics! And that has repercussions for how much you can do as a technical manager as a technical regulator about the ships and the ship’s configuration because most of it by largest dictated by the market. The market decides what is the best thing to do whether you should have a 20,000 TEU ship or you could do with the 10,000 TEU and the market believes that this is the way forward with the 20,000 TUE ship, then you simply have to adjust to those requirements and face those realities. Am I making a very sweeping assumption here?

Jan Hoffman [00:26:49]: You’re describing this trend of the vertical integration, of digitalization, of standards of door-to-door not just the container but also the information that would be another long interesting discussion. But I think that those who promote digitalization they can actually learn from the container because the container was developed by the private sector but it started changing the world and had a huge impact on global trade and logistics once it became global standard that everybody can use – the smaller, the bigger, the developing countries, rich etc.  and so, we hope something like this might happen in digitalization with standards for blockchain and other there some efforts. You know like we start with one topic and we end up with them with another one. Where do we stop?

Nippin Anand [00:27:43] What I took away from this conversation from you was there’s a very good reason that the ship sizes have increased to where they are. We may not have an answer to what happened in the Suez but we definitely can try to understand what motivates shipowners to build ship of this size that eventually become uncontrollable in certain situations to manage it. So, I think this is a prime example but this is what I’m trying to understand.

Jan Hoffman [00:28:09] I think we can understand over the story behind this what led to this situation, what could should have been done different, I’m not too sure what could be done different in future, I am not sure but as I said I would not be promoting the bigger ships and infrastructure but yes, let’s rather look at more flexible, more resilient solutions, different options of the routes, of modes of smaller ships and network collections. But this we hope this was a one-off exercise and the one good thing this had it really brought shipping to the world news into the press end and mainstream media which I think is a good thing but very odd promoting now, so that the supply chain to keep functioning.

Nippin Anand [00:29:17] Indeed, the invisible suddenly became so visible, so conspicuous. Any final word from you?

Jan Hoffman [00:29:27]: I think what I find particularly fascinating is how this incident in one point really had these global repercussions and I don’t think the repercussions are quite as huge as have been made up now, But the bigger impact and more fundamental change was the high freight rates resulting from the lack of containers and concentration and the behavior of the shipping lines. I think this is over several months affecting the world. This has the bigger impact on global trade of one incident and then the other big impact of the covid crisis is on digitalization which actually is a positive effect that now that customs officer, port operators, transport workers, they realize from it’s not such a bad thing if we can move towards digital solutions e-payments pre arrival processing single windows so I like to have something to learn a concluded we have to lock in, the progress made during lockdown. There’s a lot of progress being made and shipping is more in the news which is good now let us lock in that progress and keep the ships moving and ports open in trade flowing.

Nippin Anand [00:30:52] What do you think?

Stories of ships going aground at sea are not uncommon. But what makes the Ever Given case unique is at least twofold. The sheer size of the ship and the critical dependency of a precise point where the ship went aground in the Canal that drew global attention into this case. In a few days, the perception of the Suez Canal shifted from being a waterway that connects Europe with Asia to critical infrastructure, the functioning of which, is so essential for global economy and political order.

It reminds us how vulnerable we have become in the face of modern technology.

There are many examples of mammoth size ships running aground and creating havoc. The grounding of the MV Rena and off late, the APL England created very similar patterns of big size ships ending up into a catastrophe in environmentally sensitive coastal areas.

From my own research at the Nottingham University nearly 10 years ago, we hypothesized what would happen if a large size container ship ran aground at the entrance to Port of London. Again, we were surprised by the critical and very sensitive dependencies within the Thames River.

Depending on where the ship would sink in the river, it could lead to:

  • Cutting off sugar supply to the rest of the UK given that 68% of the sugar supply comes from the port of London or used to at that time.
  • If there was an oil spill near Essex area, the whole of Essex could lose power supply because the power plant draws cooling water from the Thames River.
  • The aviation fuel and the fuel supply to the supermarkets in the whole of South East region of the UK could be isolated for weeks to come by.
  • And we can talk about many more critical dependencies that we can talk about

It is clear that both size of these ship and the location in which the accident happens are critical factors that can have huge impact in undermining the economic and political order in the world that we live in today.

So back to the key question – is bigger really better?

Yes, for the ship owner who wants more economies of scale.

Yes, also for the shipper who wants more choices and capacity utilization on trade routes.

Yes, also for the ports and port configuration that seems to be aligning so well with this hub and spoke arrangement – a very synchronous model of large ships trading between major hub ports and smaller ships and other forms of transport that are capable of reaching out to hinterland areas that were earlier out of reach of international logistics.

But not quite for the end operator and the society at large that bears the negative consequences of the failure when the infrastructure collapses and we find our disaster management plans and contingency strategies so ill-prepared to deal with the situation.

Perhaps it is time to revisit the work of Charles Perrow and find ways to reduce the size and concentration of the technologies of future if we genuinely want to create a better future.

Nippin Anand [00:34:35] Thank you for taking the time to listen to this podcast. I hope the time you spent was worthwhile. If you think the podcast has made you think, slow down and reflect, I have achieved my purpose. Please share it with others in your community so that messages reaches far and wide.

I spend a lot of time thinking, researching and producing meaningful content. If there is a specific top you’d wish to know more about, please let me know. If I can, I will make every attempt to create something meaningful and valuable to you. If you have a topic that you would like to discuss with me, please feel free to be in touch. Particularly if there is something you don’t agree with. Disagreements are always fun.

I wish to also remind you that all my podcasts, related reference material and transcript for each podcast is available on my website, www.novellus.solutions. You can also get in touch with me on the same website or through LinkedIn, Twitter or my personal website, www.nippinanand.com.