Cheaper Fuel: A Short Lived Benefit For Shippers

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A drop in fuel prices can be a welcome break for global shipping.  However, the slashing of costs for an industry struggling to recover from its worst downturn can be short lived.

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A drop in fuel prices can be a welcome break for global shipping.  Many shippers believe that such types of benefits may only be short-lived, as the firms may get motivated to ditch the practice of slow steaming.  This practice was started in the year 2007 where ships were operated below the maximum speed to save cash after a jump in fuel prices.  The slowing down of Chinese economy and an increase in the speed plus number of trips on some routes may put pressure on cargo rates in a sector already distressed by overcapacity.

Mats Berglund, Chief Executive at dry bulk shipper, Pacific Basin Shipping said, “Low bunker fuel prices are a negative factor as they lower the freight rate level at which ships will speed up and thus increase shipping supply”.  So far the prices of Benchmark 380-cSt marine fuel prices BK380-B-SIN in Singapore have come down to around $250 tons. This price range was last seen during the global financial crisis during year 2009.

The lesser bill for marine fuel has helped companies like Hong Kong’s Orient Overseas Container Line and Singapore’s Neptune Orient Lines to cut down its operating cost by 25-40 percent in the first half.  Maritime consultancy Drewry has estimated a saving of $69 million this year over 2014, assuming average bunker prices of $370 a tonne when operating with eleven 18,000 TEU (20-foot equivalent units) ships on a single Asia-Europe route.

Supertankers, in particular, are increasing their speed on empty return voyages between Asia and the Middle East.  They are accelerating from 10 to 13 knots so as to cut down the average sailing time between Singapore and Fujairah in the United Arab Emirates, for example, by three days.  But this could escalate the spending by about $15,000 on the route for a very large crude carrier. This additional fuel costs may make sense for the tanker segment or bulk carriers but not for ballast leg.  (A bulk carrier transports commodities including iron ore, coal, steel products and grain while a ballast leg refers to a ship without cargo.)

Tim Huxley, managing director of Hong Kong-based Wah Kwong Maritime Transport Holdings and a cargo ship owner said, “We have seen some requests (from charterers) to go faster on the tankers in ballast legs, but not on bulkers.”

Drewry informed that the shipping sector is concerned about the impact of China’s slowing economy, whose share in global containers have almost doubled between 2000 and 2014 by around 30 percent.  The Baltic Dry Index has hit an all-time low of 509 this year, and now recovered to 1,000.  But it was in its peak at index level 12,000 in May 2008.   This Baltic Dry Index relates to the basket of dry cargo freight rates. At the same time, tanker freight rates had hit a five-year high of $95,000 per day for a VLCC voyage from the Middle East to Japan on July 20th 2015.  This got stronger by robust demands from Asia although there is a weakening sign in Chinese crude demand and car sales.

Source: Reuters

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