From slow steaming to speed optimization
Speed is “an underestimated factor in the current supply-demand balances in shipping,” said Petter Haugen, an industry analyst at DNB Bank in Oslo.
Speaking late last year at a conference organized by Marine Money on the subject of slow steaming (or “speed optimization,” his preferred term), Haugen said high bunker costs have turned ship-operating costs on their head. Using a VLCC (very large crude carrier) as an example, he said for much of the 1990s, ship chartering accounted for about 80 percent of the cost of operating a vessel, fuel about 20 percent. Today, those numbers are reversed, with chartering at 20 percent and fuel 80 percent.
To find the optimal speed for a ship, the charterer must take into account both its charter cost, which increases as a ship slows down and days of hire increase, and fuel cost, which decreases as the ship slows.
“What it is all about is to find the point which minimizes total transportation cost,” Haugen explained. The charterer of the ship can then reduce speed until the point “where additional savings from speed reduction equals the additional cost of using extra days at sea.”
If financing costs are ignored, the speed which a charterer uses to minimize its cost and the owner maximizes its income are the same, Haugen said.
But once financing cost is accounted for, the charterer and the ship’s owner have interests that are no longer aligned. The charterer or shipper, who must finance the cost of its cargo, would like the ship to move more rapidly, while the ship owner can maximize his income at a slower speed.
In today’s low-interest environment, that is less of an issue, but as interest rates increase, charterers and shippers may increasingly want their ships to speed up to reduce the time their cargo’s in transit.
Haugen pointed out there’s a non-linear relationship between fuel consumption and speed — at some speeds a 10 percent speed reduction equals a 30 percent reduction in fuel consumption — while interest costs rise in linear fashion.
What that means, even in a case like the tanker business where cargo value and fuel cost move in lockstep, is that “it’s the bunker that wins. It is more significant that you save bunkers than that you have an increase in financing cost.”
Haugen said he’s often asked why owners did not optimize speed in the past. They did, he says; it’s just the design-speed of ships was at its optimal for three decades, until 2009 when bunker prices began to climb.
When he visits companies he said it’s the “graybeards,” older operators, who can tell him “about the last time we slow steamed. That was back in 1970s and 80s. It was not until 2009 again that it mattered and currently, it matters a lot.”
Ship owners in all segments have adopted slow steaming, Haugen said, adding it can be tracked with automatic identification systems that show containerships with capacities of more than 6,000 TEUs, for example, have dropped speeds from 26 knots in 2008 to nearly 21 knots this year.
Owners are motivated to slow steam because of the high cost of fuel, but this has a powerful secondary effect of reducing surplus supply. Haugen estimated as much as 27 percent of the capacity in the container shipping industry is tied up in the form of slower speeds.
A master thesis by Martin Streng, a student who completed his degree at Erasmus University in Rotterdam in December, looks at the effect of slow steaming on a supply chain level, for both carriers and shippers.
It’s hard to do his 60-page research paper justice in a few paragraphs, but Streng analyzed four shipping routes in detail, and found “while carriers can achieve significant benefits by slowing down to sailing speeds below design speed, shippers and consignees face substantial costs due to slow steaming.”
That savings comes from reduced fuel use, although Streng also calculates savings from reducing emissions of CO2, sulfur and nitrogen oxides. For example, CO2, he calculates savings using data from the European Emissions Trading Scheme. But Chris Koch, CEO of the World Shipping Council, notes this doesn’t apply to shipping.
Steng also pointed out that carriers face increased costs due to slow steaming, for example because of the need for additional ships in a rotation or containers. However, he said they “are low enough to make slow steaming beneficial for carriers.”
On the other hand, because of longer transit times, Streng said shippers and consignees face additional interest, depreciation, and insurance costs.
Combined, he said “slow steaming has most of the time a negative impact on a supply chain level. Especially on trades with lower volumes and less ships deployed, slow steaming implies costs on a supply chain level.”
Streng noted that a slight slowdown from design speed could, on some routes, “lead to a positive net effect on a supply chain level, but slowing down below those benchmark speeds leads to a loss on a supply chain-level. In today’s sailing markets sailing speeds of below 20 knots occur quite regularly, which thus implies that significant losses for the supply chain as a whole are made nowadays.”
Carriers are unlikely to increase sailing speeds because of the benefits they can achieve, while shippers would be willing to end slow steaming fast.
Streng suggested a compromise that might “satisfy both shippers and carriers is the principle of gain sharing. Shipper/consignees, for whom slow steaming has a substantial negative effect, might want to be compensated by carriers for this loss.
“Depending on the negotiating powers of shippers and consignees, they might be able to achieve some gain sharing,” he said. “Some of the gains of slow steaming for the carrier would be transferred towards the shippers and consignees. This gain-sharing principle could be executed via various ways, for example via the bunker adjustment factor.”