Anyone working in shipping will attest that bunker/fuel is one of the major expenses for any shipping company.
Here’s an article published in Maritime Logistics Professional briefing on critical points for shipowners and charterers to become more profitable.
Here’s an excerpt from that.
Bunker Fuel Cost
The cost of bunker fuel is an easy place to start. Fuel accounts for a massive 60% – 80% of the cost of a voyage.
Below are the ways an owner can reduce these costs:
Slow Steaming
Drag on a ship reduces “quadratically” with the speed, which is a fancy way of saying that going at twice the speed uses four times as much fuel due to the increased drag.
Slow steaming is typically done at 18 knots – anything less is considered ‘super slow steaming’.
Dropping speeds on a cargo ship from 27 to 18 knots can reduce fuel consumption by 59%.
Using 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.
Climatic conditions:
- A vessel in rough seas or in adverse weather conditions – vessels need to burn more bunkers to sail.
- If a vessel sails with the flow of the tidal currents – they consume less 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 favourable 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.
Carriers try to optimise bunker consumption by striking the right balance between transit speed and bunker consumption. This is done by ensuring that the vessel takes the shortest route while carrying export cargo on the head haul, which needs to reach destination markets in time.
On the backhaul leg, however, where the cargo is typically not time sensitive or involves
repositioning of empty containers, speed is not of the essence, wherefore Carriers sail at slower speeds.
Using Route optimisation software / technological tools
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 realise that investment in software can yield significant benefits in the form of reduced bunker expenses.
Using scrubbers
Using scrubbers ensures a quick return on investment/ faster breakeven and has the added benefit of widening bunker procurement scope in a high bunker cost environment.
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% sulphur 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, after which vessels can continue running on HFO, which is considerably cheaper than LSFO.
Given the widening spread between prices of HFO and VLSFO (USD 332/ tonne in Rotterdam and USD 538/ tonne in Singapore in June 2022), it makes economic sense to install scrubbers on vessels, so it can continue using HFO grade bunkers.
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.
Looking at the specific segments within the shipping industry, the limited levels of trading bunker derivatives are typically restricted to bigger shipping companies, with medium and smaller-sized companies almost exclusively relying on the spot market.
Carriers set freight rates based on their cost base, which also includes bunker costs. Carriers can estimate bunker price levels to some extent, given the extreme volatility in bunker prices on account of the multitude of variables involved.
It is to mitigate such risks and ensure minimal deviation from business plans/ revenue and profit projections that Carriers adopt hedging strategies to maintain a steady flow of bunker supplies at budgeted average prices.
Given the historical trend where oil/ bunker prices have been in contango, it is a very reasonable assumption that the bullish trend will continue in future as well, wherefore Carriers can reduce bunker spending and also exposure thereto by using bunker derivatives.
The slow but steady adoption of bunker derivatives has encouraged companies to launch future contracts.
Using the right bunkering port and incorporating it into the voyage or sailing schedule
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.
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 utilise their vast reserves of natural gas and earn precious foreign exchange in the process.
Energy Efficient ship engines and ship structure/ design
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.
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.
Another facet is the design of the ship’s hull, where innovations include a streamlined structure and bulbous bows.
Regular reporting and analysis of deviations between actual and planned consumption
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.
Prior to 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 a bunker are derived based on the expected bunker consumption, which in turn is calculated based on the route, distance, weather conditions, vessels fuel efficiency, cargo weight, etc.
Since this calculation is a fairly straightforward one and is based on historical data (fuel consumption on previous voyages) and known facts (such as cargo weight and distance), deviations from the budgeted bunker consumption would only be on account of contingencies or unforeseen circumstances; otherwise, the bunker consumption ought to be within the estimated range.
Carriers should have in place a system of reporting and analysis to monitor actual bunker consumption as opposed to budgeted bunker requirements and investigate in detail where there are unexplainable deviations of significant magnitude.
Such reporting and analysis processes should also include comparison with internal records, benchmarking against historical consumption for vessels of similar class, and competitors’ average bunker expenses.
Such analysis will not only help in controlling bunker expenditure but will also serve as a reference for future calculations, and learnings therefrom can be used to streamline bunker consumption even further.
Monitoring bunker consumption against established benchmarks also increases the probability of frauds being prevented or detected well in time.
Preventive policies and measures to avoid pilferage and fraud
Since bunkers are 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.
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Source: Maritime Logistics Professional
