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Focus: Global Supply Chain and Logistics

Our Weekly Feature Article on Topics Related to Global Supply Chain & Logistics
 

From SCDigest's On-Target e-Magazine

- Oct. 21, 2014 -

 

Global Supply Chain News: As Price of Bunker Fuel Falls Rapidly, Don't Expect End to Slow Steaming Anytime Soon


Industry Economics, Capacity Fears Mean Carriers will Resist any Moves to Again Crank Up Their Speeds

 

SCDigest Editorial Staff

 

With rapidly plummeting oil prices, the cost for all the transportation fuels derived from oil are also in sharp decline, from gasoline to diesel to the bunker fuel used to power container ships.

Prices for Brent crude have fallen from a recent high of about $112 per barrel to just above $80 currently, a decline of more than 25%. That's puts the price of oil at its lowest point since 2010.

SCDigest Says:

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While slow steaming was really developed to lower the carrier's cost structure per tour, it also has in effect cut industry capacity, as the ships are simply tied up on the water longer for each tour.

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With a bit of a delay, the price for bunker fuel has fallen in step, with the price of one common marker, Rotterdam IFO 180, dropping from about $630 per metric ton since June to around $480 per ton this week, a decline of just under 25%.

If bunker prices stay low, could it mean an end or at least a decline in the now commonplace practice of "slow steaming," a technique pioneered by Maersk Lines in which container ships sail at roughly 25% slower speeds than the ships were designed for? This adds quite a few extra days to the ship's travel time, but in general shippers seem willing to accept the delays in receiving their goods in return for lower costs, achieved from fuel savings.

The answer is basically no, say the analysts at Drewry Shipping, due to both how fuel surcharges are handled in the container shipper industry as well as the impact a return to full speed would have on container shipping capacity.

As with other modes, container carriers moved a long while back to a "surcharge" type approach for handling variable fuel costs, a move meant to isolate them from the impact of changing bunker fuel prices.

The "bunker fuel adjustment" or BAF works such that some basic cost of fuel or "base bunker element" is covered within the ocean freight rate a shipper pays, with a BAF being applied when fuel costs pass a certain trigger point. As with fuel surcharges in the trucking industry, many ocean shippers believe the BAF might really be a profit source for the carriers, in response to which some of them negotiate to apply their own formula for determining the surcharge rather than using the carrier's calculations.

Interestingly, Drewry notes that "carriers generally only recover about half of their fuel costs via BAFs because sought after high-volume customers are often won over with BAF-free "all-in" contracts. This scenario means that carriers are much more exposed when bunkers are riding high, but it conversely means that there are fewer savings to give back to shippers as many customers were not paying a separate, variable fuel cost element in the first place."

However, if oil and bunker fuel prices were to stay at these current lower levels, then large shippers would expect to see lower all-in rates during the next round of contract negotiations, just as those undr BAF are seeing lower surcharges. But regardless, it means there is not much incentive for the carriers to move off the path of slow steaming, unless some reasonable mass of shippers would be willing to pay more - but now at a lower level than before - for faster service, and even that would only really apply to shippers on a BAF schedule.


(Global Supply Chain Article Continued Below)

 
CATEGORY SPONSOR: SOFTEON

 
 

Drewry nicely provides the chart below that shows the impact on the round trip fuel cost per TEU for various levels of bunker prices, where the clear cost advantage of the 18,000 TEU type megaships such as the Maersk Triple E fleet have over even previously considered large 12,000 TEU vessels.



But perhaps more important than all that, the container shipping industry has been suffering from overcapacity for several years, with that condition expected to continue for several more years as new ship deliveries continue, often of the megaship variety. That has led to continued low prices on many lanes, and great challenges for most carriers to achieve any real levels of profitability, certainly a factor in the rise of various consortia between carriers in the past couple of years (see Despite P3 Setback, Alliances and Consortia for Container Shipping Lines Likely to Continue On.)

While slow steaming was really developed to lower the carrier's cost structure per tour, it also has in effect cut industry capacity, as the ships are simply tied up on the water longer for each tour.

So, even if shippers were willing to return to normal speeds given lower bunker fuel prices, perhaps paying about what it cost before for slow steaming, the carriers will be in most cases in no hurry to accommodate, as the move would in effect add capacity and likely drive down rates and ship utilization.

Drewry says that "Turning on that tap of latent capacity would flood the main trades and send freight rates to the floor. In Drewry's opinion, there is no chance that containerships will get anywhere near their designed speeds of 24-25 knots in the next few years."

It looks like in an age of high velocity supply chains, slow steaming will still rule the day despite a changing cost picture.

What port delays are you seeing, and are chassis issues the main cause? Let us know your thoughts at the Feedback button (email) or section (web form) below.


 

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