Wednesday, February 10, 2016

Drewry looks at how low bunker prices might impact carrier planning





Bunker prices are now at a low level not seen since the early 2000s. When bunker prices increased five-fold, to levels in excess of $600 per ton, container lines responded with a number of cost saving measures as they focused on bunkers as the biggest single cost item in their business.

However, with the complete reversal of that trend, and bunker prices now in the range $100-150 per ton again, Drewry Maritime Advisors has examined how this change in the carrier’s cost structure may influence the way they plan and operate their networks.

Slow steaming – and later super slow steaming – became popular when bunker prices rose dramatically in 2007/8; then when the global financial crisis reduced demand, slow steaming also had the advantage of soaking up the surplus vessels. When demand returned to more sustainable levels, lines continued with slow steaming because of the significant cost advantages, even when the full cost of the ‘extra’ vessel(s) had to be met.

However, with bunker prices recently approaching $100 per ton, where does this leave the advantages of slow steaming?

Drewry modelled ship system costs (vessel, bunker, port and canal costs) for an illustrative Asia to North Europe loop, using 11, 10 or 9 ships to provide a weekly service, and with bunker prices at $100, $300 and $600 per ton.

It is no surprise that at a bunker price of $600 per ton, a reduction in the number of vessels per loop would increase the effective slot cost. At a price of $300, there is very little change in slot cost if loop speed is increased, and the number of vessels reduced. However, at a bunker price of $100 per ton, there are clear cost savings from increasing service speed, and reducing the number of vessels per loop.

Drewry says, even so, container lines will probably not rush to speed up loops on the East-West trades. Lines and alliances have carefully planned their

networks, including terminal berth windows, based on their present slow steaming speeds. To increase service speed would require major replanning and disruption.

On the other hand, with bunkers being relatively cheap, we may see other steps being taken by lines. Extra calls may be added to loops, as the incremental cost of faster steaming will be lower. Schedule reliability should improve (as is already happening) – lines should be more willing to pay the cost of speeding up to achieve an on time arrival.

The analysts say that for a vessel size range from 8,000 to 18,000 TEUs, the impact of bunker price on economies of scale is fairly limited – for example when increasing vessel size from 8,000 to 14,000 TEUs, a saving in slot cost of 21 percent at a bunker price of $600/ton only reduces to a 16 percent or $100 saving.

Drewry also looked Panamax vessels of around 4,000 TEUs, looking at slot costs on the Asia to U.S. West Coast trade for vessel sizes from 4,000 to 14,000 TEUs. The slot cost saving in moving from 4,000 to 8,000 TEU vessels, which is 17 percent at a bunker price of $600/ton diminishes to zero at a bunker price of $100/ton. This conclusion was reached using a current market charter rate for a Panamax 4,000-TEU vessel of $12,500 per day, which although still relatively low, is higher than the rock bottom rates that were earned in 2013/2014.

Drewry concludes that a continuation of the current low bunker prices is not going to change the drive of the big carriers to utilize larger vessel sizes in pursuit of economies of scale, but it does represent a stay of execution for the smaller Panamax ships.

While there are other reasons why lines may continue slow steaming for the time being, a trend of increasing service speeds will reduce global requirements for tonnage. Drewry says lines should carefully consider this change when planning any orders for new vessels.


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