Archives for posts with tag: fuel cost

For the golfers contesting this week’s Ryder Cup, the impact of bunkers can be minimised through skill, practice and a little luck. For shipowners, bunkers are unavoidable, and over the past few years high oil prices have ensured that they have been a major handicap. Shipowners are getting plenty of practice at dealing with high oil and bunker prices, maybe they are due a change in their “luck”?

When an onlooker suggested he may have been lucky holing three bunker shots in a row, golf legend Gary Player famously replied “the more I practice, the luckier I get”. Well, over the past few years a combination of low rates and high fuel costs have given shipowners plenty of “bunker practice”.

Par For The Course

The Graph of the Week tracks the share of freight revenue accounted for by bunker costs. In the early part of the period shown, the low and relatively stable oil price ensured that bunkers did not become too much of a burden, with peaks and troughs corresponding to the strength of the freight markets. Then in 2007-08 oil prices started to rise steeply, but the strength of the freight market helped to cover the impact of rising bunker costs and ensure that the share of bunker costs remained below 50%.

In The Rough

However, in the wake of the global financial crisis, a combination of high oil prices and weaker markets caused the share of freight revenues accounted for by bunker costs to climb to much higher levels. This peaked in late 2012 and early 2013, when bunker costs exceeded 80% of freight revenue on the example tanker voyage, with the extra costs of low sulphur fuels generating even higher shares on some routes.

Driving Down Costs

Well-practiced shipowners responded by finding ways to reduce fuel consumption: slow-steaming, retro-fitting fuel-saving equipment and ordering “eco-designs”. They have found environmental regulations pulling in the same direction, and in a way helping. After all, the risk of ordering a slower but more efficient ship is greatly reduced if everyone has to do so to meet regulatory targets.

Out Of The Woods?

Further help has come from the 15% fall in oil prices since June resulting in a reduction in bunker costs (Rotterdam 380cst currently stands at $540/t, down from $601/t in June). Oil prices are on track for their third straight monthly fall, with a combination of sluggish demand and ample supplies seeing the benchmark Brent crude spot price drop below $96/bbl this week, the lowest level for two years.

Bunkers’ share of freight remains volatile and dependent on market fluctuations. Recently the percentage has started to fluctuate in a slightly lower range than previously as lower bunker prices have helped to reduce the fuel cost burden. However, bunkers’ share of revenue is still uncomfortably high for many, and shipowners have had to learn to deal with high bunker costs. For those currently in a position to benefit from lower prices today, is it luck, or is it practice?

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In the well-loved sitcom Absolutely Fabulous, Jennifer Saunders, Joanna Lumley and company provide an apt demonstration that even totally dysfunctional families can muddle through pretty well in the end, and have fun doing it. Could these comedy characters be a possible role model for regulating the shipping family?

Step Change For Regulators

As shipowners struggle with a long recession, escalating fuel costs and tricky credit, it’s easy to see why changing regulations seem like yet another chaotic burden in an already dysfunctional world. And, to be fair, the regulatory framework has made life harder in the last decade. Regulation of emissions, carbon footprint and ballast water have propelled regulators into the heart of shipping economics, leaving many owners struggling with hard choices about how to meet the new rules.

A Real Little Scrubber

Sulphur emissions illustrate how tricky things have become. Ideally regulations have a well-defined timescale and global adoption, but the sulphur regulations have neither. Although the timetable cuts the 3.5% global sulphur cap for marine fuel to 0.5% in 2020, the implementation date could be 2025 if the IMO’s distillate fuel study indicates supplies may not be available. And the global cap is not global either. The “Emission Control Areas” (ECAs) in North America, the Baltic and the North Sea have different rules. From next January ships trading in ECAs face a 0.1% sulphur cap.

Unquantifiable Options

More complexity is added by the options for getting down to 0.1%. One is to use eye-wateringly expensive distillate fuel; another is LNG; and the third is to install a “scrubber”. Since distillate fuel costs about 50% more than MFO, that’s unattractive, but LNG is unlikely to be much cheaper and scrubbers can cost in the region of $2-4m each.

Undecided Or Indecisive?

Luckily, the immediate decision is not too difficult because most ships will not spend long in ECAs. For example, a ship trading between Rotterdam and New York sails about 3,400 miles on the high seas, and around 20% of the distance is in ECAs. However, with more diverse trading the average over the year should be less, say 10%? From January 2015 a bulker sailing 300 days a year at sea, with 10% in ECAs, would spend an extra $0.2m a year on distillate fuel. Is it worth fitting a scrubber to save $0.2m pa? For bulkers no, but for ferries, offshore units and the like trading full time in ECAs, it might be. But when the global sulphur cap drops to 0.5% in 2020 the annual fuel bill will jump by over $2m, which would pay for a scrubber in a year or two, so that’s when the big step change in scrubber installation will happen. Unless, of course, the IMO defers to 2025.

Fabulous Future, Darling

So there you have it. Fuzzy regulations, but for most the economics are not too tricky. Intra-ECA ships should scrub up soon, global traders “wait-and-see”, and Transatlantic traders follow the ‘Ab Fab’ strategy – mix up a distillate cocktail and have a bit of fun! Have a nice day.

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