FLEET OPTIMIZATION: CHALLENGES AND SOLUTIONS
Article below originally appeared in the Maritime Professional Q2 print edition.
We don’t need to tell the readers of this journal that the global shipping market faces difficult challenges. To be sure, this is not the first time the maritime industry has found itself in troubled waters. Many of us remember the late 1970s, when hundreds of tankers were laid up at mass anchorages. Today, we face an evil “cocktail,” whose ingredients include (a) anemic shipping demand caused by the lingering downturn in world trade since the economic meltdown of 2008, (b) oversupply of tonnage compounded by the newbuild ordering binge of the previous decade and inability of shipbreaking capacity to remove aging tonnage to a significant degree, (c) disastrously low freight rates, (d) tightening credit, (e) rising bunker costs and (f) pending safety and environmental regulations driving up the cost of operating ships.
Given this confluence of business conditions, shipping companies face an uncertain future. Some have already bit the dust. Others will follow. The survivors will be the ones that adopt new techniques and technologies to manage their ships and fleets more efficiently. We believe that ours is a resilient industry which – although it reveals a disturbing trend to repeat the boom-and-bust cycles of the past – can rise to the challenges of adapting to new market conditions and technological advances. To that end, the ShippingInsight Fleet Optimization Conference (www.shippinginsight.com) in October will provide a forum for addressing these challenges and solutions. The conference will bring together senior executives from all segments of the shipping industry, including naval architects, classification societies, insurers, ship owners and managers, shipbuilders and technology suppliers to discuss developments, case histories, best practices and solutions to meet the unique challenges of the coming decade.
Rise and Fall
The first decade of this century witnessed a boom in demand spurred by economic growth and easy credit, particularly in the BRIC countries and the developing world. Even with the financial downturn in 2008, the decade showed solid financial gains for ship owners. The Clarksea Daily Freight Index, a weighted average of earnings by tankers, bulkers, containerships and gas carriers, reveals the extent of the falloff since then. The average freight rate during 2000to 2009 was $22.8K per day. Since then, the average is $13.2K per day, a drop of 42 percent.
Given the high cost of fuel and increased costs of compliance with new regulatory requirements, freight rates are now very close to operating costs, leading to razor thin margins, and in many cases operating losses. As credit tightens, shipping companies find themselves increasingly in desperate straits.
A major source of the problem has been the new construction boom of the last decade. Following the crash in 2008, many ship owners tried to cut their losses by opting to delay deliveries of ships on order or canceling contracts with hefty penalty clauses. Nonetheless, some of the new ships ordered during the boom are still coming into service, only to face an inherent imbalance of supply and demand. The slow growth rates of 4 to 5 percent are insufficient to overcome the overtonnage glut, although the situation may be mitigated to a certain extent by the increased efficiency of many of the newer ships, helping to ease the pinch of low freight rates.
As you would expect, orders for newbuildings have taken a nosedive. According to Clarksons Research Services, the orderbook in 2011 was down almost 45 percent from 2010, with only 1,250 orders placed. Projections for 2012 appear to be slightly above the 2011 ordering level with the longer-term outlook only marginally better. The falloff in new orders has created an overcapacity of shipbuilding resources, as the new shipyards constructed in China are just coming into play, putting pressure on prices for newbuilds. There are rumors of shipyards building “for spec” just to keep their facilities employed.
Meanwhile, the price of fuel continues its inexorable rise, squeezing already paper-thin margins. Bunker prices in Singapore, for instance, have risen from a range of $500/MT in late 2010 to $700/MT in the current market, a whopping 40 percent increase. Given the current overcapacity conditions, these increases cannot be passed through to customers in the form of fuel surcharges, and many publicly traded shipping companies are posting lower earnings, or even losses, as a direct result of the soaring cost of fuel, which accounts for some 45 percent of the cost of operating a typical ship. Interestingly, the airline industry has announced substantial raises in passenger ticket prices for this summer due the rising cost of fuel, and Delta Airlines has been reported to be considering the purchase of a Conoco-Philips refinery in Pennsylvania to hedge against rising prices in the future.
Costs of Compliance
Shipping companies face a new wave of regulations coming into force in the coming decade, with significant economic and operational implications. The cost of meeting the new standards for reduced sulphur oxides, nitrous oxides, particulate matter and greenhouse gases, especially carbon dioxide, in ship’s emissions will be substantial. Ship owners are studying on how best to comply with the Energy Efficiency Design Index (EEDI) and Ship Energy Efficiency Management Plan (SEEMP) requirements.
There is a high likelihood that ship owners in the future may be assessed a carbon tax based on the ship’s carbon footprint. EU regulators have already implemented a carbon tax on airlines, and shipping is almost certainly in their sights as a future target.
The new ballast water management regulations will likewise have a major impact on the bottom line for shipping companies. The cost of compliance is projected to total several million dollars per ship.
Under these conditions, controlling costs and increasing operating efficiencies become the “prime directive” for shipping companies in the decade ahead. The solutions fall into several categories. They include ship design and construction, fuels, hull performance, voyage optimization and asset management. These are the subjects that will frame the debate at the Fleet Optimization Conference, which will be held in Stamford, Connecticut, October 8 to 10. Experts will discuss subjects such as return on investment from new efficient ship designs, bunker management, LNG and hybrid fuels, integrated weather routing and onboard navigation systems, hull treatment options, key performance indicators (KPIs) and integrated communication/IT solutions for more efficient management of ships at sea.