Why do large container ships enjoy greater economies of scale than smaller ships?

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In general, and putting aside for the moment the reason larger container ships (and so-called “supertankers” used to transport oil) can prove costlier, shipping by large ship is more cost-effective because of the economies of scale they provide. Crew sizes on container ships are small, with as few as thirteen...

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In general, and putting aside for the moment the reason larger container ships (and so-called “supertankers” used to transport oil) can prove costlier, shipping by large ship is more cost-effective because of the economies of scale they provide. Crew sizes on container ships are small, with as few as thirteen or fourteen people on a single large vessel. As personnel costs are a minimal consideration, the ability to transport much greater volumes of cargo aboard a single vessel than is possible with smaller ships means that shipping costs are lower. Cargo is stored in large containers that are pretty much universally measured at twenty feet in length (thereby providing for the standard form of measurement used for cargo ships: Twenty-Foot Equivalent Units, or TEU) and the more such containers transported on a single ship the lower the aggregate cost of shipping. Large cargo ships simply provide a more cost-efficient method of transporting over water.

While large cargo ships offer greater economies of scale, they do carry limitations or price tags that exceed those that accompany use of smaller vessels. One of these limitations is the number of ports available globally capable of handling very large vessels. Not all ports are created equal. Large, deep-water ports suitable for large container ships can handle all sizes of vessels. Smaller ports, however, may not be suitable for large ships, which must consequently use alternatives that may require additional costs associated with moving cargo over land to compensate for greater distances to destination. Another problem with larger ships is the insurance cost associated with greater volumes of cargo. Inevitably, a cargo ship or, more problematic, an oil tanker, will crash against rocks, become grounded through poor seamanship or extremely harsh weather conditions, or collide with another vessel, and the cargo load will be lost. Obviously, the more cargo lost, the greater the monetary loss. This risk drives up insurance costs for shippers.

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A large container ship enjoys economies of scale over smaller container ships because the cost of shipping a TEU (twenty-foot equivalent unit) for a day declines as the ship gets larger.  This is because the costs of the fuel that the ship consumes each day can be divided up between more TEUs.

The main cost of operating a container ship is the fuel that it uses.  Of course, the amount of fuel used is somewhat affected by the weight that the ship carries.  However, the effect of the added weight is not large enough to offset the gain in fuel efficiency that comes when more containers are loaded on the ship.  This means that costs will decrease as ship size increases, which is the definition of an economy of scale.  As we can see in Figure 7 of the paper in this link, a 4000 TEU ship can be more that 20% cheaper to operate (in costs per TEU per day) than a ship that holds 2000 TEU.

Economies of scale in large container ships, then, come from the fact that they use less fuel per TEU per day than smaller ships do.

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