The Solution to a Demand Spike Lies in Innovation Not Overcapacity

The Shipping & Ports session of the Future of Logistics conference continued with the focus of the discussion shifting to the present and future cargo processing capacity of ports and terminals.

Panellists for the session were:

Shahab Al Jassmi, Commercial Director of Ports and Terminals, DP World

Kim Larsen, VP of Commercial & Business Development (Ports)

Lars Jensen, CEO, Vespucci Maritime

Lars Jensen, who also moderated the session, asked the panellist why ports and terminals had not built enough capacity to deal with the current surge in demand?

Shahab Al Jassmi responded by saying that the way ports calculate capacity depends on the anticipated dwell time of containers. Giving an example he said: “Let us assume a terminal has a calculated capacity of 1 million TEU based on a dwell time of 7 days.

“Now imagine if empties were not offloaded fast enough or transit cargo failed to move on in time. Those seven days can become 10 or 12 days. That straightaway causes a 50% increase in your capacity utilisation.”

According to Mr Al Jassmi, connectivity of the global shipping network has a direct impact on individual ports and terminals. Disruptions in the global network have often proven to be the cause of congestion at ports. DP World is in constant discussions with all customers and shipping lines to facilitate smooth exchange of containers within the global network and reduce the number of blank sailings.

Mr Al Jassmi expressed confidence that the shipping and ports industry were achieving more stability with each passing week and, "Things are going to get more stable in 2022.”

Replying to the question Kim Larsen said that innovation was the key to increasing throughput and not just adding more capacity.

The sudden surge in cargo volumes during the pandemic quickly absorbed whatever excess capacity was present and building new infrastructure and purchasing more cranes is a process that takes years. So meeting the capacity challenge in the near term required creativity and out-of-the-box thinking.

Elaborating further Mr Larsen said, “You don’t plan on your peak. You plan on what your long-term growth trajectory looks like so you can retain a financial return on investment that is acceptable.”

Mr Larsen added that the pandemic and its resulting surge has blown the just in time (JIT) concept completely out of the water and we don’t have a predictable supply chain today. Referring port and terminal operators Mr Larsen said, “We have to become a lot more efficient. That’s why you need a lot more innovation.”

"Could anybody have predicted this will happen? I don't really think so. However, the situation as it stands right now, we are dealing with it as best as we can and we welcome any customers who are planning to come into the Arabian Gulf because I think we can cope with more," Mr Larsen concluded.

Lars Jensen said, “Today we are moving more cargo than ever in history and there is absolutely no indication that the number of ships now is the problem. The problem is that they are stuck in queues outside ports and terminals.”

Mr Jensen added that it was not a question of port efficiency but the problem lay with moving the cargo further inland on trucks and trains. The inland problem needs to be solved to free up the ports which in turn, will free up the ships. “And that is going to take a long time. We cannot build our way out of this with ships.”

Pointing to the overcapacity built up by shipping lines coming out of the financial crisis 10 years ago, Mr Jensen said that the pace of new buildings in the last decade has significantly come down and today the gap between average and maximum capacity is much reduced than earlier. So the shock we can absorb today is smaller than what we had been used to in the past.

According to Mr Jensen, this is unlikely to change moving into the future because in the medium and long term nobody in the supply chain is going to be willing to pay more for assets that are able to absorb occasional spikes in cargo volumes but otherwise sit idle for most of the time.

Pointing to the “older” shipping industry of tankers and bulkers (vis-à-vis container shipping), Mr Jensen said that it has been relatively normal for shippers to pay much higher costs for short periods from time to time over the last 30-40 years.

“The reason that nobody wants to pay for overcapacity is that the money you save for most of the time far exceeds the cost of those tiny intervals when supply chains become stressed,” concluded Mr Jensen.

Read More: Port Congestion is a Consequence of Global Ripple Effects