Bunker Tailwind for Carrier Profits

Crude oil fell to its lowest price in five years last week. What are the potential bunker cost- savings that carriers can expect?

Figure 1
IFO 380 bunker prices (Rotterdam, US$ per tonne)

Theoretically, the recent fall in oil and bunker prices should not have any bearing on carrier profitability as their exposure to fuel cost changes should be negligible thanks to BAF “Bunker Adjustment Factor” surcharges that are meant to pass the cost on to shippers.

However, as most long-term industry observers will attest, in container shipping reality and theory rarely meet. As mentioned in the Container Insight Weekly article “?Fuel speed ahead?” Drewry estimates that carriers in general only recover about half of their fuel costs. This is because BAF is often not applied in contracts to entice new (usually big volume) customers and also because ships are never fully utilized. Oversupply and trade imbalances increase the chances that the weaker leg of the round voyage will not contribute enough cargo sales to cover the fixed fuel costs, meaning that carriers are never fully compensated.

Figure 2
Estimated distribution of container shipping unit costs, FY2013

If bunker fuel prices were to remain constant at their current prices (see Table 1) throughout 2015, which we accept is a big assumption; the potential fuel savings for carriers are considerable. For the purpose of this analysis, Drewry has limited the scope to the Asia-North Europe trade, which is the natural home of the new breed of Ultra Large Container Vessels (ULCVs).

Table 1
IFO 380 and MGO prices at leading ports, $/mt, 11 December 2014

Assuming the above mentioned bunker costs represent the 2015 average and a round voyage of 77 days, the estimated annual saving for a single 18,000 teu vessel versus the forecast average for 2014 would be $5.7 million. For a single 12,000 teu ship – the average size currently used in the trade – the estimated saving is $4.75m. Therefore, the total annual fuel saving for a single service using 11 ships of 18,000 teu would come in at around $68.8m. These calculations do not take into account the introduction of new IMO sulfur limits from the start of next year.

Using the same assumptions and based on 100% ship utilization, lower fuel bills will actually narrow the cost advantage of the biggest containerships. For example, the bunker cost per round-voyage slot for an 18,000 teu ship in 2015 will come down by $67 to $123 per teu, whereas for a 12,000 teu ship the reduction will be $83 to $153/teu, a differential of $30 rather than $46 in 2014.

Figure 3
Estimated Asia-North Europe Total Round Voyage Bunker Costs, USDm

Figure 4
Estimated potential annual bunker savings for Asia-North Europe containerships, 2015 versus 2014, USDm

This cost data is an extract from the maritime freight cost modelling of Drewry Supply Chain Advisors, a Drewry consultancy unit which advises exporters and importers on freight procurement.

The absolute level of bunker expense on any trade route will vary from one carrier to the next, depending on the number of ships deployed, their fuel efficiency and consumption requirements dictated by the slow steaming strategies. However, it can be said that all carriers will benefit, no matter how big their ships, if lower fuel prices persist. Those with a more pronounced big-ship fleet profile stand to see a lower fuel cost reduction in percentage terms on account of their existing higher per slot fuel efficiency, but they will still be able to squeeze out more absolute fuel cost savings. To give an idea of the carriers that will have the biggest ships and lowest unit costs, Table 2 gives a summary of the existing fleet and orderbook for ships of 14,000 teu and above.

Table 2
Carriers with containerships of above 14,000 teu, active or on order as of December 2014

One likely side benefit from prolonged lower energy prices is the stimulus it will give to consumer and corporate spending (outside of oil-dependent economies/sectors). Higher demand should translate into better ship utilization, as long as carriers do not speed ships and increase the effective slot capacity. This in turn will improve the average bunker slot costs for carriers.

A downside for carriers from lower bunkers is that it will undermine their attempts to lift freight rates as shippers will expect to see much of those fuel savings passed on. Drewry understands that this sentiment played a part in carriers having to backtrack from recent US West Coast port congestion surcharges.

Carriers have shown that they can make money as long as unit costs are cut harder than unit revenues. Those that have previously been giving away free, or at least heavily subsidized, bunker passes will need to take that into account when negotiating contracts, otherwise their base cargo rates will be unnecessarily dragged down by the expectation of a lower fuel element, which might not have existing in the first place.

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All carriers stand to gain from lower fuel costs, some more than most, but the competitive and over-supplied nature of the market means that the principal beneficiary will be shippers.

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Source: Drewry Maritime Research, http://ciw.drewry.co.uk/