Freight Rates Beating “Unbeatable” Record Lows?

Jose Carlos Nunes on LinkedIn Pulse has posted this interesting piece.  Container rates are going lower than anyone expected, and still more huge ships are being built. He raises the question whether there is an upper limit, say 24000 TEU.  Perhaps shipowners should quit building them.

I’m wondering if the major carrier alliances have created an oligopoly out of what used to be perfect competition.  If that’s the case, shipowners ought to be planning capacity taking into account others’ strategic reactions to what they do.  A Cournot oligopoly is ideal for modeling capital intensive capacity decisions.  The observed behavior is currently not that of an oligopoly, but in repeated Cournot games we get convergence to the Cournot equilibrium distribution of capacities rather soon, say for instance in a 30 person managerial economics class in a single class period or less.

So maybe waiting is in order. Ocean shipping executives are clearly smarter than economics students. Maybe they know something we don’t.

I’m wondering if a real options argument does not apply also.  If you don’t build, you are out of the game, since the big ones are so efficient they push the cost down so dramatically.  Building is a hedge against the possibility the equilibrium may be far higher than 24000 TEU.  The option cost is simply the ship cost,  not small, but small in comparison with losing the business completely.

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According to a recent research by Drewry Maritime Advisors, last year witnessed a record intake of new ships in the container shipping industry. World Maritime News mentions “there were 209 new ships

Source: Container Shipping 2016 Outlook | Freight Rates Beating “Unbeatable” Record Lows | Jose Carlos Nunes | LinkedIn

Of course all this ignores the ports and the question of whether they can keep up in terms of handling the bigger ships.  Clearly the number of ports accessible will decline, unless we figure out how to float a boat with less draft, and we will have a hub and spoke port network with transloading rather than direct service. Just like the airlines.


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