Is there a danger of diseconomies of scale?

It is important to be aware of some of these. Changes in market demand, linked to large units of capital equipment have the potential to produce high levels of output – but if demand is at a low level, capital will be under-utilised leading to excess capacity and rising average total costs.

Some large units of capital may not be transferable to other uses if there is a switch in consumer demand due either to sufficient lack of demand in other areas or operational restrictions. This is clearly applicable to the container shipping market and the potential for shifting fortunes in the market.

Diseconomies of scale may appear when the units of production, the very large containerships, grow beyond the scale of production that minimises long-run average cost. The rise in the long run average cost is caused by diseconomies of scale.It is often difficult to pinpoint exactly the causes of diseconomies of scale, however management theorists often point to issues related to control of the productive units and the coordination along a large supply chain that needs to fill a ship of 12,000 teu every week.

As we consider the 10,000 teu-12,000 teu ships, all coming on stream during a period of unprecedented trade growth, we need to consider the above economic theories. Let’s consider the Europe-Asia trade where the demand and volumes are sufficiently large to sustain these ships.

A string of eight ships is ideal,sailing at around 24.5 knots with a minimal number of port calls, however the same string travelling at 21.5 knots would require around 40%- 50% less bunkers. Alternatively, more ports of call would need an additional vessel, at a cost of $165m, around $50,000 per day,plus the extra fuel costs.

The question is, at what point does the equilibrium between additional fuel costs and asset cost break, causing a shift in the slope of economies of scale. Have we reached this point of diminishing returns?

BEN HACKETT