Suez Canal Blockade: Why are the Ships So Big?
Welcome to Capital Note, a newsletter on business, finance and economics. On today’s menu: big ships, bank effect, and the latest Suez lockdown. To subscribe to Capital Note, follow this link. The ships are very big In case you haven’t heard, there is a container ship wedged into the Suez Canal. Tugboats and bulldozers have been working since Monday to remove the 1,300-foot ship from the canal walls, and early reports suggest it could take weeks to be dislodged. The stoppage is costing $ 9.6 billion a day in maritime traffic, with container ships, oil tankers and livestock haulers waiting patiently for transit through the canal. While it is likely to be a one-time success for shippers and their customers, it raises a question: Why are container ships so large? Couldn’t they be a little smaller? The container shipping industry is a case study in economies of scale. The high fixed costs to build, maintain and fuel ships, plus the costs of port leases and customer contracts, stimulate a tireless effort on the part of shipping companies to increase their size. In The Box, a history of container shipping, Marc Levinson describes the industry’s push to scale in the mid-to-late 20th century: Larger ships reduced the cost of transporting each container. Larger ports with larger cranes reduced the cost of handling each ship. Larger containers, the 20-foot box, a favorite of shippers in the early 1970s, gave way to the 40-foot box, reduced crane movements and reduced the time it took to turn a ship around the ship. port, making more efficient use of capital. A virtuous cycle had developed: Lower costs per container allowed for lower rates, attracting more freight, supporting even more investments to further reduce unit costs. If ever there was a business where economies of scale mattered, it was container shipping. The first container ships to cross the Atlantic were less than 500 feet long. In the early 1970s, fast boats reached a length of 900 feet. In 1978, a single ship could carry 3,500 20-foot containers, more than the weekly cargo load that entered all US ports a decade earlier. When ships couldn’t get bigger, ports could. The amount of cargo moving through large American ports increased sevenfold in the 1970s, even as ports became more competitive. Because shippers enjoy little pricing power, they have to squeeze every last penny they can out of each vessel. Shipping companies are also very sensitive to macroeconomic factors, profitable during booms but cauldrons of cash during downturns. Only the most capital efficient carriers can survive economic cycles, and large ships are capital efficient. The result: 1,300-foot-long ships moving through 700-foot-wide canals. As with ships, shipping routes have escalated over time. Before the 1980s, ships operated on a point-to-point service, traveling through a fixed set of ports. While point-to-point service gave carriers more flexibility, allowing them to use different vessels for different routes, it also meant that vessels would often operate below capacity. “Sea-Land, for example, was a major carrier in the North Pacific, but Japan’s huge trade surplus with the United States meant it was carrying much more cargo east than west,” says Levinson. While longer routes could increase cargo loads, they generally led to longer wait times for customers, because ships on shorter routes would deliver cargo more quickly. However, in the 1980s, ships grew large and fast enough to circumnavigate the world in a profitable manner. A few intrepid entrepreneurs started the “around the world” (RTW) service. The first company to ship their ships on world routes was (drum roll, please …) Evergreen Marine, the operator of the ill-fated Ever Given ship currently trapped in Suez. Its first ships around the world made 81-day voyages, leaving cargo at each of the 19 ports of call. Evergreen still offers services around the world today and, although it has become an industry giant, its routes concentrate risks in a single ship. An outage anywhere in the world – bad weather, a mechanical failure, or, say, a ship stuck in a canal – can have repercussions on the global supply chain. Evergreen and other RTW carriers partially solve this challenge by using “feeder ships” that carry cargo to ports rather than dock their large vessels, but, as we learned this week, not all risks can be mitigated. And as supply chains become more integrated, bottlenecks like Suez become more important. The Suez Canal facilitates about 10 percent of world trade today, up from 7.5 percent in 2009. While blocking large ships is an orderly spectacle, it is unlikely to change international trade in the long run. term. They are called “economies of scale” because they are inexpensive and large carriers have achieved a significant reduction in the cost of shipping. Levinson finds that shipping rates dropped by roughly 50 percent in the 1980s alone. If the price of cheap shipping is an occasional blockage of the canal, so be it. Around the Web Brendan Greeley of the Financial Times explains the banking effect On Wednesday, the container ship Golden-Class Ever Given made an unplanned docking in the sand on both sides of the Suez Canal, halting trade between Europe and Asia. Evergreen Marine, which operates the Ever Given under a Panamanian flag, told the Financial Times in an email that the ship was suspected “of having encountered a sudden gust of strong wind, causing the body of the ship to veer off course. his course and ran accidentally. ” stranded. “At the push of the button, the boat was still where it stopped, manned by several tugs. It may be there for a while; you can check for yourself on VesselFinder. However, it is difficult to describe what happened as a” shore connection. “. Container ship groundings are not unheard of in the Suez Canal. Sand comes out of the canal floor at a ratio of 4: 1; if a ship rolls off the road, it will most likely dig a hard shoulder in The sand and wait for a tug. Last March, the OOCL Japan, a container ship the size of the Ever Given, had a mechanical failure in the Suez Canal, lost direction, made landfall, was refloated in several hours and continued on its way. Unemployment claims reached their lowest level since the start of the pandemic. Workers’ claims for unemployment benefits, a representation of the layoffs, fell to 684,000 last week from 781,000 the previous week. Lamations are now at the lowest point since mid-March last year, before the closures caused millions of layoffs. They are also below the pre-pandemic high of 695,000, a threshold that was not crossed in 52 weeks. “The recovery is really back in full swing and all the conditions for a real and explosive takeoff will be in place in the summer when hopefully we have reached a higher vaccination threshold,” said Julia Pollak, labor economist at the site ZipRecruiter jobs. . Random walk While bad for the world economy, the Suez mess will serve as a fruitful natural experiment for economists. Dartmouth’s James Feyrer analyzed the closure of Suez after the Six Day War to assess the effect of distance on international trade. It is difficult to distinguish between physical distance and differences in culture, taste, etc., which is why natural experiments can be so informative: the negative effect of distance on bilateral trade is one of the strongest findings in international trade. . However, the underlying causes of this negative relationship are less understood. This article takes advantage of a temporary shock to distance, the closure of the Suez Canal in 1967 and its reopening in 1975, to examine the effect of distance on trade and the effect of trade on income. The variation of the time series in the distance from the sea allows the inclusion of pair effects that explain the static differences in tastes and culture between countries. Therefore, the distance effects estimated in this paper refer more clearly to transport costs in trade in goods than the typical estimates from the gravity model. Distance is found to have a significant impact on trade with an elasticity that is about half that of typical cross-sectional estimates. Since the trade shock is exogenous for most countries, the trade volume predicted from the shock can be used to identify the effect of trade on income. Trade is found to have a significant impact on income. The time series dimension allows country fixed effects that control for all long-term income differences. Since identification occurs through changes in distance from the sea, the effect occurs entirely through trade in goods and not through alternative channels such as technology transfer, tourism, or foreign direct investment. – DT To subscribe to Capital Note, follow this link.