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Price of Oil: Effect on the Ocean Transportation Industry

Price of Oil: Effect on the Ocean Transportation Industry. The Current Situation: Prices on bunker have risen 87% since the beginning of 2007. Fuel costs represent as much as 50-60% of the total ship.

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Price of Oil: Effect on the Ocean Transportation Industry

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  1. Price of Oil:Effect on the Ocean Transportation Industry The Current Situation: • Prices on bunker have risen 87% since the beginning of 2007. • Fuel costs represent as much as 50-60% of the total ship. • Ocean Carriers are required to recover these costs to maintain levels of service, meaning the price of shipping goods will continue to face upward pressures. • Recovery costs from cargo customers is a challenge when you consider that: • Vessel capacity utilization is not 100% • Trades are not necessarily evenly balanced (E/B-W/B) • Different trades and commodities can handle different levels of rates • If a cargo shipper pays less than its share of the fuel cost, it can only mean that other shippers must pay more, and/or the carrier fails to recover its operating cost, which is not a sustainable business scenario.

  2. FOR EXAMPLE: A Large modern container vessel with a container capacity of 7,750 TEUs and fuel consumption at 217 tons per day on a 14-day voyage would produce a fuel bill of $3,353,952 during a single round trip. This is with the cost of bunker at the price last May of $552 per ton. That’s$433 per 20 foot container or $866 per 40 Foot container Per round trip

  3. Price of Oil:Effect on the Ocean Transportation Industry Historical Comparison of Crude versus Bunker Fuel Price

  4. Price of Oil:Effect on the Ocean Transportation Industry Fuel cost cannot be done on a per-vessel/per sailing basis. A carrier has strings of vessels operating in scheduled service and must recover its total costs. Taking the previous scenario: if extended to a single weekly Trans-Pacific service using five vessels…….. The annual fuel bill would be $220 million (5 ships) X (217 tons/day) X ($552/ton) X (365 days per year) = $218,605,800.

  5. Price of Oil:Effect on the Ocean Transportation Industry • Approximately 1,500 ocean-going liner vessels, mostly containerships, make more than 26,000 U.S. port calls each year, providing American importers and exporters with efficient transportation services to and from roughly 175 countries. • Today U.S. commerce is served by more than 125 weekly container services. • The annual fuel cost for the services is tens ofbillions of dollars and continues to rise substantially.

  6. Inland Fuel Surcharges for 2008 Fuel has been a major component of carrier’s increased costs this year, but escalating inland Also pay a big role. With capacity tight, railroads are enjoying increasing pricing power and Have raised their intermodal rates rapidly. What had been a $1000 rate becomes $1500 over night - Ed Zaninelli, VP of Trans Pacific Westbound, OOCL Journal of Commerce June 30, 2008

  7. How carriers seek to obtain recovery of these rapidly rising fuel costs in the current market is a matter for commercial negotiations, but the significance and the magnitude and the consequences of the challenge continue to grow

  8. Price of Oil:Effect on the Ocean Transportation Industry Operational changes: Carriers have been responding to the high cost of fuel by utilizing a range of operational adjustments. Beginning in 2007, most container lines began restructuring their operations to address fuel prices. They have: • Redeployed ships among global trade lanes to optimize utilization • Consolidated services through multi-carrier alliances • Reevaluated service offering and removed capacity from some trade lanes • Consolidated routes to service more locations with fewer ships • Slowed sailing speeds to conserve fuel where possible within schedules • Slowed speeds and added a vessel to the weekly deployment adding capacity where possible • Ordered ever-larger vessels: By 2012 nearly half the capacity of the world’s container fleet will exist in vessels that are post Panamax – too large to move through the Panama Canal but not too large to move through the Suez Canal. • Shipping Lines continue to order vessels to achieve economies of scale: As of April 2008, the Global order book totaled 1,375 with a slot count of 6.6 million TEUs • Currently 12 vessels of 10,000 TEUs or more; 4 more by the end of 2008, 12 more in 2009. An additional 113 giant ships with a total capacity of up to some 1.4 million TEUs are scheduled for delivery in 1010-11 -Journal of Commerce, June 30, 2008 “new view of paradigm shift” • Improved monitoring of hull and propeller conditions to reduce resistance and improve efficiency • Adopted container transloading, street turns and other strategies to cut inland fuel costs Considering that these steps have generally already been taken by shippinglines,there are limited additional operational measures that vessels can take to further reduce fuel consumption per TEU.

  9. Price of Oil:Effect on the Ocean Transportation Industry Commercial Responses to the drastic rise in fuel prices: • Carriers for years have posted bunker fuel surcharges, but only rarely did they collect them. However with fuel prices up 87 percent since early 2007, carriers entered this Spring’s rate negotiations determined to recoup fuel costs. Fuel now accounts for 50 to 60 percent of the total cost of operating a vessel, according to the Transpacific Stabilization Agreement, discussion group of major container carriers in the Asia-to-U.S. trade. • In some cases, carriers increased their base ocean freight rates modestly but are collecting bunker surcharges of $400 per FEU or more. In other instances, carriers lowered their base rates $100 or more but posted bunker surcharges of $500 to $600 – a move designed to show customer that the lines had indeed stood firm on bunker surcharges • While in the past ocean freight rates were often inclusive of the bunker…..in 2008 the lines made floating bunker surcharges a key part of contract negotiations • Well over 90 percent of signed contracts for the coming year contain provisions for a floating bunker surcharge, as well as significant increases in the portion of the full, published surcharge level to be collected. • Shipping lines today are serious about enforcing bunker fuel surcharges. Shippers have accepted the higher bunker surcharges this year illustrating the newfound acceptance among shippers of the harsh reality of carrier costs. “Given the trajectory of fuel prices, which are approaching $600 per ton and have now more than doubled since the first quarter of 2007, the need for structural change in fuel recovery in the trans-pacific market was critical. - Ron Widdows, TSA Chairman and CEO of American Presidents Line

  10. Soaring fuel prices will continue to rise or at best , level out and this will • bring some dramatic changes to the Ocean Transportation Industry • especially in terms of economy of scale. • Port infrastructure development on the East Coast has generated • large and growing capacity increases in expectation of continued • significant growth of imports from Asia and West Coast port congestion. • The Panama Canal Authority, in response to similar considerations is • in the midst of a major expansion, two new sets of twin locks due for • completion in 2014. They will be able to accommodate containerships with • a capacity of 12,600 TEUs compared with the current Panamax size of • 4,400 TEUs.

  11. Environmental Measures, while important, add to the cost increases to Ocean Carriers. While the liner shipping Industry fully understands its responsibility to implement and adhere to these new environmental standards, it is essential that the environmental community and regulators also understand that fuel prices are already causing ships to minimize fuel consumption and minimize emissions. It is important to recognize that ocean shipping is the most energy efficient form of freight transportation. Recent estimates show that moving goods by ocean container can be 17 times more fuel efficient than transporting the same goods by air and 10 times more efficient than transporting the goods by road.

  12. Closing: Every sector of the economy is being affected by rising fuel costs. The ocean transportation industry is being particularly hard hit. While ocean carriers may provide the most fuel efficient form of transportation, they face an unavoidable imperative of recovering these rising costs if current service levels are to be Maintained. - World Shipping Council May 2, 2008

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