Recently, the Nigerian Ports Authority (NPA) made history when the first largest container ship berthed at the Lagos Port Complex (LPC), Apapa, Lagos. In this report, OLUWAKEMI DAUDA examines the industry’s growth over the years.
OR many years, the shipping industry has undergone a revolution in scale, with the number of vessels of different sizes berthing at the ports.
No wonder, few days ago, the management of the Nigerian Ports Authority (NPA) made history, through the berthing of the largest container ship to ever call at the Lagos Port Complex (LPC), Apapa since its inception.
Ports
Ports are the hub of networks for waterborne transport and link countries with rest of the world; thus, they promote transportation and distribution in the cheapest way. Ports are more than just infrastructure that facilitate international trade; they also determine freight transport costs and help companies access international markets
The contribution of maritime transport is invisible to the ordinary people, but spread over various industries and institutions to such an extent that it can hardly be measured accurately.
What makes a port successful?
Effectiveness and efficiency are two interdependent components of port performance. Improving technical efficiency is only a partial solution. A terminal operator wishing to improve its cargo-handling efficiency could enhance berth utilisation through faster vessel turnaround
What is the economic impact of a port?
The benefits of ports are measured at an aggregate level by indicators such as value-added, employment, taxation revenue, and return-on- investment.
Speaking with The Nation, the former President, Association of Nigerian Licensed Customs Agents (ANCLA), Prince Olayiwola Shittu, said the Federal Government and the cargo owners are among the stakeholders who would benefit from the phenomenon of large vessels calling at the port and derive its maximum benefits.
With the big vessels calling at the port, he said, clearing agents would have a lot of work to do towards the end of the year. “That will translate to a lot of money for the government because for each container to be cleared, you have to pay duty and other dues associated with it.
“The interplay between demand and supply determines freight rates, and, therefore, essentially are non-controllable as carriers are compelled to embark upon cost-reduction initiatives to ensure higher profits from the same revenue levels. This led carriers to focus rigorously on each cost item, aiming to optimise their cost base.
“Thus, one of the major incentives for carriers to embark upon their upsizing spree is to avail of the economies of scale that mega vessels would offer. Carrying a higher number of containers per vessel would translate into lower capital and operating costs per container, thereby reducing the transportation cost per unit.
“As part of the quest for lower per-unit costs, carriers engaged in an unrelenting endeavour to upsize vessels, resulting in new records for vessel sizes being set every few years,’’ he said.
Research forum
An International Transport Forum (ITF) research report estimated that doubling vessel sizes over a decade resulted in vessel costs per transported unit reducing by one-third.
Other studies have estimated that replacing a 16,000 TEU vessel with a 19,000 TEU vessel, and assuming 90 per cent utilisation levels, would reduce slot costs by $50 yearly on average.
Economies of scale via lower slot costs
The primary rationale behind ordering and deploying bigger vessels was their economies of scale, which translated into lower slot costs. Since the recession in 2008-09, carriers were buffeted by the dual factors of deteriorating freight rates and a constantly increasing cost base, which undermined profit margins to wafer-thin levels (sometimes even to loss-making levels).
Increased market share
The most immediate impact and direct benefit of larger vessels is increased transportation capacity, which means that the carrier can carry a greater number of containers at the aggregate level. This automatically implies an increase in market share, enabling the carrier to solidify its position in the industry and establish itself as a preeminent player.
Carriers such as Maersk, MSC and CMA-CGM have utilised this strategy to good advantage, scaling up their capacity and widening the gap between themselves and their competitors to such an extent that there exists a chasm between these top-ranked carriers and the carriers below them.
To compete effectively with carriers of overwhelming size, competitors have been compelled to either place orders for bigger vessels or resort to other tactics to bridge the gap in capacity and ensure that it doesn’t become a competitive disadvantage.
Examples include the Japanese-owned carriers MOL, NYK and K Line merging their container business to form ONE, or COSCO being formed with the integration of COSCO Container Lines and China Shipping Container Lines, besides the intense merger and acquisition that the industry has witnessed over the last couple of decades.
Using scale as a competitive differentiator
Carriers embarking upon capacity augmentation programmes aimed to create a competitive differentiator in their favour, endeavouring to widen the gap with competitors to such an extent that it becomes the carrier of choice for shippers and exporters, especially bigger ones, simply under the diverse range and size of its product portfolio (so to some extent it is the default choice simply because it offers services to most common origin-destinations combinations).
With greater capacity, carriers can offer more space at lower rates. Competitors who do not or are not capable of similar investments find themselves at a distinct disadvantage, as they cannot, in the long term, stand up to the financial and operational clout of the bigger carriers, thus leaving them particularly exposed in an ultra-competitive market and also vulnerable to takeovers/buy-outs by cash-rich players.
An example was the South Korean carrier, HMM, which after the bankruptcy of its compatriot Hanjin Shipping, had to rely on government’s support to survive. Apart from availing itself of government’s funds, HMM’s management attempted to stay commercially relevant by joining one of the three main A A container carrier alliances, plans for which were thwarted until they ordered mega carriers (and contributed them to the joint services offered by the alliance).
Ability to offer lower prices/ undercut smaller competitors
The economies of scale and lower slot costs from operating bigger vessels reduce the carriers’ cost base and increase their profit margins, leaving them well-poised to undercut the competition by offering lower rates while still not compromising excessively on profitability.
By passing on the benefits to shippers and exporters, carriers can capture market share from the competition and maintain their margins at stable levels, resulting in higher revenue and overall profits.
Conversely, smaller carriers with a higher cost base and hence lower net revenues would be disproportionately affected if they were to cut their rates to counter competition (which would be a necessity in normal times in a highly commoditised market, where any carrier would need to match competitors rates or risk losing business), as their margins would then fall below their competitors, impairing their cash flows, profitability and ability to raise capital.
Over the years, this tendency to undercut prices to grab incremental business has often triggered debilitating price wars, which have bled smaller container carriers to bankruptcy. As more competitors jump into the fray to protect market shares and drop freight rates to match the competition, the resultant downward pressure can drive rates into the loss-making territory.
A prime example was Hanjin Shipping, then the world’s seventh-largest container carrier, which abruptly closed operations in 2017 following losses of unsustainable proportions. Hanjin’s business was subsequently acquired by HMM, the other South Korean national carrier (which also enjoyed government support) and the newly formed SM Line.
In this intense survival of the fittest battle, as smaller carriers are forced out of the market, the resultant easing of competition makes the position of the bigger players stronger, as they control a bigger share in a more concentrated market and exert greater influence on freight rates, being in a better position to rationalise capacity and adjust supply to demand.
Better deals with ports and terminals due to larger volumes
Another advantage of owning mega vessels and hence controlling greater volumes is that the high volumes make the carrier more attractive to ports and terminals. Ports can see a big increase in their business and volumes if they secure a contract with one of the bigger carriers.
The additional business will, in turn, lead to increased revenues for the port and also helps their ancillary business activities such as Maintenance and Repair, CFSs, drayage, etc.
With the stakes being significant, ports are willing to offer better rates/volume rebates/ additional discounts to attract carriers with bigger vessels/volumes.
Carriers benefit from this by a further reduction in their cost base, putting them in an even more advantageous position viz a viz smaller competitors.
More environment-friendly transportation
While one of the most environment-friendly modes of transport, the shipping industry is still in the crosshairs of global environment protection agencies, with intense focus and debates about the level of emissions they are responsible for. This is because though less polluting in comparative terms (compared to other modes of transport), due to the sheer volume of internationally traded cargo transported by the shipping industry (80 per cent of global merchandise by most estimates), the total amount of emissions generated by the shipping industry is massive.
According to a World Economic Forum report on emissions, the shipping industry contributes 3.2 per cent of global CO2 emissions yearly. If the shipping industry were to be considered a country, it would be the sixth biggest emitter of CO2 (bigger than Germany).
Since bigger vessels consume less fuel per container transported, the emissions at a per TEU level are lower than for smaller vessels. Thus, bigger vessels are more environmental-friendly and contribute to lowering the total emissions of the shipping industry.
More fuel efficiency/less bunker consumed on container basis
One of the main ways bigger vessels help to curtail costs is through reduced bunker consumption, which assists carriers as bunkers can comprise up to 60 per cent of their total OPEX. With the deployment of bigger vessels, the bunker consumed per container decreases, thus lowering bunker and total costs.
Another, and more structural, reason for lower bunker consumption is that the bigger vessels are of relatively recent construction, using the latest technology, and optimised to run at lower average speeds, which increases the vessels’ overall efficiency and by design are such that they require lower bunker.
The vessel that called at Lagos port
The Singapore-flagged Kota Cantik, operated and managed by Pacific International Lines (PIL), is a 6,606 TEU containership with a draught of 11.6 metres, length overall (LOA) of 300 metres and beam of 40 metres.
The historic berthing of the vessel was witnessed by officials of the NPA, PIL and APM Terminals, Apapa.
APMT excited
“We are excited at this historic achievement. We thank the Nigerian Ports Authority for maintaining the channels and for professionally piloting the vessel to the port. Without the effort, support and approval of NPA, this would not have been possible,” Terminal Manager, APM Terminals Apapa, Steen Knudsen, said.
He also admitted that one of the advantages of bigger vessels is economies of scale through lower slot costs for consignees.
“Carrying a higher number of containers per vessel would translate into lower capital and operating costs per container, thereby reducing the transportation cost per unit. Also, since bigger vessels consume less fuel per container transported, the emissions per TEU are lower than for smaller vessels.
Thus, bigger vessels like the Kota Cantik are more environmentally friendly and contribute to lowering the total emissions of the shipping industry,” Knudsen said.
What the PIL Nigeria said
Speaking during a reception for the vessel and its crew, the Managing Director of PIL Nigeria, Kevin Taylor, said consignees and the Nigerian economy will benefit from the vessel call.
“The customers in Nigeria have more opportunities to get cargoes in Lagos and also for competitive exports,” Taylor said.
NPA reacts
The Port Manager, Lagos Port Complex Apapa, Charles Okaga, said he was happy with the berthing of the vessel, barely two weeks into his resumption at the port.
“The port is the major trade facilitation platform and when vessels of this type berth, it reduces cost of shipping and consumer goods because all of these costs are put to every shipment. But if you pay less for shipment and logistics, the landing cost will also reduce and that reduces inflation while strengthening the ability of people to afford consumer goods,” Okaga said.
The milestone has put NPA on the map
The Harbour Master, Lagos Pilotage District, Captain Daniel Osiakagum, said: “This milestone has put the Nigerian Ports Authority on the map to say that 300 meters and over vessels will be handled subsequently and we are ready for 350- to 400-metre vessels in Lagos Pilotage District. This means that waiting time will be reduced outside and Nigerian Ports Authority will make more revenue for government.”
Head of Operations, APM Terminals Apapa, Karan Tariyal, expressed delight at the berthing of the containership at the terminal. He also commended the management of NPA and its Harbours Department for their approvals and professionalism in the handling of the ship.
Also, the Commercial Manager, APM Terminals Apapa, Temilade Ogunniyi said: “The bigger the vessels you berth, the lower your cost and this leads to economies of scale. It also improves the pace of the operations at the terminal, leads to efficiency, reduces waste and delivers a faster turnaround time of vessels, which is a huge benefit to the economy.’’
Crash import cost, says MSC
An importer, Mr Balogun Adelaja, said the successful berthing of MSC Maureen in Lagos would help the country reduce costs and create economies of scale for importers and exporters.
He said he was happy over the largest containership ever to berth at Lagos ports, which is sailing under the flag of Panama, 6,750 20-equivalent units ship with a draught of 12 metres, a length overall of 300 metres, and a beam of 40 metres.
Balogun said the berthing of the ship would bring significant economic benefits to Nigeria.
Boost to Nigeria’s export drive
He said in addition to the economies of scale that the vessel would bring, it would also boost Nigeria’s export drive as it would depart the country’s shores with export commodities meant for the international market.
The feat, according to him, will help in reducing costs and create economies of scale for importers and exporters. “Tin Can and Apapa ports remain very important for the economy. So, if larger vessels come here, it will be a great benefit to every one.We have seen that we can do it and this will make Lagos more competitive because the larger the vessel, the lower the freight rate becomes in terms of imports and exports,” he said.
Also, a maritime analyst, Adedayo Olowoporoku, described the berthing of the vessel in Lagos as a great achievement. “It is a good news seeing for the first time, a 300-metre length overall vessel coming into Lagos port. So, it is going to give more capacity to the shipping lines and bring more business to our country,” he said.
Container shipping
Like many forms of transportation, Olowoporoku said: “Container shipping benefits include economies of scale in maritime shipping, transshipment, and inland transportation. The rationale of maritime container shipping companies to have larger ships becomes obvious when the benefits, in terms of lower costs per TEU, increase with the capacity of ships. Thus, there is a trend towards increasing the size of ships, but this may lead to diseconomies in other components of container shipping.’’
For port terminals, he said: “The growth in ship capacity comes with increasing problems in coping with large amounts of containers to be transshipped over short periods of time as shipping companies want to reduce their port time as much as possible (improved ship asset utilisation and keeping up with schedule integrity).
“Larger cranes and larger quantities of land for container operations, namely temporary warehousing on container yards, may become prohibitive, triggering diseconomies of scale to be assumed by port authorities and terminal operators.”
Inland transportation congestion
For inland transportation congestion, he said: “Growing capacity, such as more trucks converging towards terminal gates, leads to diseconomies. Because of technical innovations and functional changes in inland transportation, such as using rail instead of trucking to move containers from or to terminals, it is unclear what is the adequate capacity beyond which diseconomies of scale are achieved. The fundamental point is that diseconomies are a challenge that impacts several segments of the transport chain which the Federal Government through the NPA must look into and address quickly.’’
