As anyone working in the shipping industry will attest to, bunker (or fuel) is one of the biggest expense items for any container shipping company. According to most estimates, bunker costs comprise circa 50% to 60% of a carrier’s total operating expense, thus making it by far the largest component of the carrier’s variable cost base.
Volatility Of Bunker Prices
Matters are aggravated by the inherent volatility in bunker prices, which show violent fluctuations consequent to global geo-political tensions and are dependent on the actions of a cartel of oil-producing nations. These fluctuations in price make it difficult to estimate expenses and budget for forthcoming periods or set freight rates to reflect costs to a reasonable degree. Apart from this, bunker, though proportionately tied to business volumes/ containers transported, is not a completely direct function thereof (as would be the case with Terminal Handling Charges, which are, in essence, the straightforward product of the THC quantum charged by the port/ terminal/ stevedore and the number of containers/ quantity of cargo handled), and is, therefore, an area where companies need to adopt a multi-pronged approach and resort to innovative strategies to reduce bunker consumption and overall bunker spend.
Over the past couple of decades, bunker prices have typically been on an upward trend, save a few years of global downturns and recessions, which meant that shipping companies were left staring at ever-increasing bunker spending, year after year.
As a consequence of the wafer-thin margins that the container shipping industry has historically experienced (before the super profits in 2021 and 2022 that can primarily be attributed to global supply chain disruptions, widespread port and quayside congestion, and Covid-induced lockdowns), as well as the cyclical nature of the industry, Carrier’s have focussed rigorously on reducing their cost base, with Bunker being the prime area of attention, by it comprising over half of overall operating expenses.
Tactics Adopted
- Slow steaming and Super-slow steaming
The concept of slow steaming essentially involves sailing the vessel at slower speeds to reduce bunker consumption. This is the most prevalent tactic used to regulate bunker consumption, as well as one of the most effective. Its effectiveness stems from the fact that the correlation between vessel sailing speed and bunker consumption is not a straight linear equation but rather a quadratic one, implying that as the vessel sails at slower speeds, the corresponding drag on the vessel decreases by an even greater magnitude.
In practical terms, this means that the quantity of bunker consumed decreases in greater proportion than decreases in speed, enabling commensurately higher savings through even a relatively slight reduction in sailing speed.
Studies conducted on the effectiveness of slow steaming have concluded that reducing speed from 27 knots to 18 knots reduces fuel consumption by as much as 59%.
Under slow steaming, a vessel that typically sails at an average speed of 20-24 knots will instead sail at a speed of around 18-20 knots.
A further extension of this tactic is super slow steaming, where the vessels sail at an even slower speed of below 18 knots.
A relatively sophisticated variant of this concept involves using slow steaming only per commercial considerations rather than being implemented as a standard policy.
Here, a vessel will sail at its normal speed on the head haul voyage (when it is laden with export containers from manufacturing-dominant hubs in Asia, bound for the major consumption centres and markets in Europe and North America, while on the backhaul leg (the return journey, when the vessel will carry a lower quantity of containers, most likely lower in value than was carried on the head-haul leg, or repatriate empty containers), the vessel will sail at a slower speed.
Slow steaming was first introduced in the mid-2000s when global trade and container shipping were experiencing a boom. With container volumes transported globally growing at a healthy rate, bunker prices too were rising sharply, resulting in carriers’ annual bunker bills increasing manifold.
Maersk Line was one of the pioneers, having introduced slow steaming on its major main haul trade routes, and the trend slowly caught on as other carriers, upon becoming cognisant of the potential cost savings, started to reduce sailing speeds to the point that it ultimately became a firmly entrenched industry practice.
- Using alternate/optimal routes
The choice of routing impacts the level of bunker consumption in far more ways than is obvious.
Whilst Carriers typically would prefer the shorter route when planning their service network and sailing schedules, the distance involved, though the most obvious factor, is not the only parameter that determines the vessel route. A host of other factors are evaluated while determining the route, such as climatic conditions, tidal forces, etc.
This is so because in rough seas or adverse weather conditions, vessels need to burn more bunker to sail. Likewise, if a vessel sails with the flow of the tidal currents, it consumes lesser fuel as compared to if it had been sailing against the force of the tide.
Carriers, therefore, try to set or revise proforma sailing schedules and align routes with favorable sailing conditions. This also includes checking weather forecasts for inclement weather conditions and rerouting the vessel as necessary.
Apart from this, there are commercial and operational considerations at play as well.
- Using Route optimization software
Over the past few years, a plethora of technological solutions have been developed, which aim to help Carriers with inter alia planning their voyages, determining optimal speed, using AIS to forecast weather conditions, etc., all of which are then used to determine that routing option and schedule which involves the least amount of bunker consumption.
Driven by the growing complexity of international trade and transport, these tools are rapidly gaining in popularity, especially with the growing usage of LSFO (necessary to comply with the latest IMO regulations regarding GHG emissions).
Carriers increasingly realize that investment in software can yield significant benefits in the form of reduced bunker expenses.
- Using scrubbers
Especially useful in a high bunker cost environment, using scrubbers ensures a quick return on investment/ faster breakeven and has the added benefit of widening bunker procurement scope (in terms of a greater number of bunker suppliers and bunkering locations).
Carriers have seen a massive increase in their bunker spending post the implementation of stringent rules relating to GHG emissions. The new regulations impose a cap of 0.1% sulfur emissions, which can be achieved either by using LSFO or installing scrubbers on vessels. Being a more refined version of the bunker, LSFO commands premium rates and is also not as widely available, causing the demand-supply mismatch to exert inflationary pressure on bunker prices.
In this scenario, a cost-effective option is to install scrubbers on vessels, post which vessels can continue running on HFO, which is considerably cheaper than LSFO.
- Bunker futures/derivatives
As with most commodities, Bunker fuel too has a fairly evolved derivative market, where Carriers can hedge their bunker requirements and try to maintain stability in bunker expenses.
It is, however, not as frequently used in shipping as it is in other transportation industries (for example, it is estimated that Airlines hedge upto 60% of their bunker requirements).
Looking at the specific segments within the shipping industry, the limited levels of trading bunker derivatives is typically restricted to bigger shipping companies, with the medium and smaller-sized companies almost exclusively relying on the spot market.
Carriers set freight rates basis their cost base, which also includes bunker costs. While Carriers can estimate bunker price levels to some extent, given the extreme volatility in bunker prices on account of the multitude of variables involved, Carriers are unwillingly compelled to assume the risk of bunker prices rising more than anticipated, in which case their budgets and balance sheets will be negatively impacted.
- Using the right bunkering port
As with most commodities, the prices of bunkers vary depending on the location. Globally, there are a few major bunkering locations, primarily catering to their geographical regions, where the majority of ships traversing the region bunker up. Prominent bunkering locations include Singapore, Rotterdam, Hong Kong, Fujairah, Panama, etc., each of which is a recognized center of global/ regional maritime trade.
It, however, often happens that for geo-political and economic reasons, some countries offer bunkers at lower prices to induce vessels to call at their ports to fuel up. The intent is generally to utilize their vast reserves of natural gas and earn precious foreign exchange in the process.
- Energy-Efficient ship engines
Since vessels are typically designed to run at a certain speed, the vessel’s engine is so constructed as to operate efficiently at this speed. Thus, the engine design is a constraint in implementing the policy of slow steaming and can thus reduce anticipated bunker savings (or partially negate the savings through higher engine maintenance costs).
Since slow steaming is now the norm in the industry, most new vessels being ordered are designed for sailing at slower speeds, which helps greatly in reducing bunker consumption.
- Regular reporting and analysis
Given that almost all modern commercial vessels are connected through the internet, there is a mass of data available on all aspects of operation, including bunker consumption.
Before a voyage/ launching of service, the shipping company estimates its profit from the service by estimating costs (including bunker) and the expected revenue.
The cost estimates for bunker are derived basis the expected bunker consumption, which in turn is calculated basis of the route, distance, weather conditions, vessels fuel efficiency, cargo weight, etc.
- Preventive policies and measures to avoid pilferage and fraud
Since bunker is very expensive, people involved in the bunker supply and procurement process often find it extremely lucrative to indulge in various malpractices, as even a small fraction of the overall bunker procured can be valued at significant amounts.
It is for this reason that the probability of malpractices being perpetuated in the bunker procurement process is quite high, ranging from instances of pilferage to large-scale fraud.
Common malpractices include bunkers being adulterated or being off-specification, bunker suppliers under-delivering the quantity ordered or at times short-changing on the quantity ordered in collusion with the crew.
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Source: MarineInsight
