Slow burn

Slow burn Carriers resume slow steaming as slack season and recession collide with high oil prices and capacity glut.

By Eric Johnson

      One apparent byproduct of the global recession is that supply chains are increasingly less reliant on super-fast ocean transit times.
      The 'I need that shipment yesterday' mantra has often been replaced with a 'tomorrow will do, as long as the price is right' mentality.
      Shipping lines are, of course, leading the charge in this respect through expansive slow-steaming efforts in which ships are purposely slowed down on long-haul mainline trades.
      By adding ships to rotations and steaming slower, carriers are able to accomplish myriad goals. The added ships:
      ' Employ capacity otherwise idled due to low current demand.
      ' Enable carriers to cut down on fuel costs.
      ' Increase schedule reliability by allowing carriers a larger margin for error, all the while keeping weekly call frequencies to which shippers are accustomed.
      Slow steaming isn't exactly a new phenomenon, and it's an issue covered before (February 2008 American Shipper, pages 54-57), but the dynamics have changed much. Back then, oil prices had spiked, but demand was still high. Now, oil prices are rising as demand is weak.
      So carriers have considered more radical measures. Some are not only slow steaming, they're moving to 'super-slow steaming,' in which vessels are operated at speeds as low as 12 knots. Maersk Line set the ball rolling in October by announcing it was slow steaming all its Asia/Europe services as of November.
      In the weeks that followed, the CKYH Alliance, CMA CGM, Zim, CSAV and United Arab Shipping Co. all announced plans to slow down services. American Shipper affiliate ComPair Data discovered a New World Alliance transpacific service had been slow steaming since summer. The Grand Alliance now operates a 12-week service between Asia and Europe, thought to be the longest on record. Those are just some examples.

'There is no need to run the vessels so fast. We have invented this need.'

Dick van den Broek Humpreij Chairman, European Shippers' Council

      The primary impetus for slow steaming is rising oil prices, and by proxy, rising bunker costs for carriers. As the price of bunker crept near $500 per ton at the beginning of December (it was near $200 per ton in December 2008) the lure of cutting fuel consumption grew.
      'For every $20-per-ton increase in bunker fuel, there is an additional $20-per-FEU cost to carriers for voyages (from Asia) to West Coast ports and $38 per FEU for East Coast ports,' Brian Conrad, executive administrator of the Transpacific Stabilization Agreement, said in June, when bunker prices were around $400 per ton. 'If oil goes to $85 a barrel, that would translate to about $500 per ton for bunker.'
      That slow steaming has additionally allowed carriers to soak up whole ships' worth of excess capacity, making it that much more attractive.
      Slow steaming is no panacea for depressed container cargo demand and vessel idling, but former Maersk executive Jesper Kjaedegaard, who is now Mercator International partner and president of the Chamber of Shipping, told Lloyd's List in December that slow steaming would put to use about 200,000 TEUs of global capacity ' compared to an estimated 1.3 million TEUs in idled capacity and 3 million TEUs of projected excess capacity by the end of 2010. It may be a drop in the bucket, but every drop helps these days.
      For liner carriers, there are also environmental benefits from lower emission levels. Like with fuel consumption, there's not a linear balance between emissions and speed. A modest drop in speed produces much greater drops in fuel consumption and emissions.
      The press releases about slow steaming trumpet those fuel savings and emission reductions, but for shippers, the basic truth is that transit times will be affected.
      There are two questions then: Which legs do the lengthened schedules affect? And do shippers care about poorer transit times?
      There is ample evidence that dominant head-haul legs of major services will be affected least by the stretched-out rotations, with the backhaul bearing the brunt of longer transits. In other words, 12-knot speeds won't be employed uniformly throughout a rotation.
      Zim confirmed to American Shipper, in December that 'additional time is distributed among the legs along the route, with minimal effect in the dominant legs.' A westbound service on the Asia/Europe trade, for example, would only see a 1.5-day lengthening.
   'The Asia/Europe round trip could very well go from 63 days to 84 days,' said Jean Louis Cambon, head of the ocean management committee for tire manufacturer Michelin. 'But the 30-days westbound transit would remain. My understanding is that the transit time would be kept normal on the westbound. With 12 ships, stock levels will suffer, but we are willing to take slower transits if we can reduce our stock levels' by essentially storing stock on the transiting ships.
      It stands to reason that carriers wouldn't want to severely disrupt the supply chains of their higher paying shipper customers when fuel costs savings can be made on less lucrative backhaul cargo.
      As for the transit times, one shipper advocate said cargo owners and agents should rid themselves of the mentality that fast ocean transit is so integral to supply chains.
      'There is no need to run the vessels so fast,' Dick van den Broek Humpreij, chairman of the European Shippers' Council, said at the Global Shippers' Conference in Dubai in November. 'We have invented this need.'
      Robbert Jan van Trooijen, chief executive of the western and central Asia region for Maersk, said the lower demand environment and depressed ocean freight rates have already affected this mentality to some extent.
      'There is no motivation for shippers to ship large quantities well in advance because shipping costs are such a negligible part of total shipping costs,' he said. 'There is a much more cautious restocking policy than in the past.'
      Van Trooijen said Maersk is eyeing a radical approach to slow steaming, bumping up the number of vessels on its Asia/Europe loops from eight (when demand was high and transit times were super-fast) to 12 or even 14 vessels. He said that's the only hope carriers have to somewhat redress the balance between supply and demand.
      'The worst thing about a ship is that it's built and it floats,' van Trooijen said. 'It won't go away. The only way to address the situation is slow steaming, which can use up excess capacity.'

More Needed. Yet some are urging even more radical measures.
      Germanischer Lloyd board member Hermann Klein predicted in November that 14 knots would eventually become the normal speed for containerships, in contrast to speeds of up to 26 knots that previously delivered ultra-fast transit times, according to a Lloyd's List report.
      'So now is the time to go back to slow motion,' Klein said.
      He noted the emphasis on super-fast transit emerged in the 1980s, when oil costs were low, and gathered momentum even as costs rose due to pressure from supply chains based on just-in-time concepts.
      Now the paradigm may shift back, simply due to the cost pressures carriers will face on both sides until demand rebounds. Even then, he said he couldn't foresee ultra-large containerships steaming at speeds of 24 knots simply to save a few days' sailing time.
      The maritime news and research service Alphaliner agreed. In November, it predicted the days of the eight-week Asia/Europe loops were gone.
      'Alphaliner predicts that eight-week rotations on this route will disappear if fuel oil prices remain above $400 per ton, based on simulations for 6,500-TEU, 8,500-TEU and 12,500-TEU ships,' it said. 'With fuel prices at the $400 per ton level, eight-week service rotations on the Far East/North Europe route suffer a 2 to 6 percent cost disadvantage compared to nine-week rotations, taking into account the costs of the additional ship needed to maintain weekly sailings.
      'The cost disadvantage will rise to between 6 and 10 percent when fuel prices reach $650 per ton. The cost disadvantage is higher for loops deploying smaller ships, since the proportion of fuel costs to vessel costs is higher, as the larger ships enjoy significant unit cost advantages compared to smaller vessels. Therefore, it becomes more cost effective to deploy additional ships at slower speeds as fuel prices increase, and the bigger the ships, the better.'
      Alphaliner said the average Asia/Europe loop length has stretched from 8.1 weeks in 2005 to 9.2 weeks currently. Only one ' an Evergreen-China Shipping loop ' is run on an eight-week rotation.
      'From a technical viewpoint, slow steaming is very efficient because the fuel oil consumption grows exponentially as speed rises, making high speed a luxury in an expensive fuel era,' Alphaliner said. 'Roughly, a 10 percent increase in speed asks for a 30 percent increase in fuel consumption. This is also the reason why high speed can be found mainly on large containerships, as the supplementary fuel oil financial load can be spread over a huge quantity of containers.'
      In a separate report on fleet management and the effect of high oil prices, Alphaliner said high bunker costs and increased slow steaming could close the supply-demand gap in the global containership fleet sooner than currently projected.
      'A 50 percent surge in the fuel oil bunker price (to $650 per ton) would bring the containerships supply-demand balance to equilibrium six to 12 months earlier, all other things being equal, due to the increased demand for vessels created by extra-slow steaming,' Alphaliner said. 'However, it remains uncertain what the impact of higher oil prices above the $100-per-barrel mark would have on the global economy, and thus on trade. This uncertainty renders fleet employment projections difficult as the impact of high oil prices has opposite effects on ship demand.'
      Notable by its relative absence are slow-steaming initiatives on the transpacific, where fast transits have come to be the norm (services link Japan with the Pacific Northwest in a week and South China with Los Angeles in as few as 11 to 13 days).
      The primary reason for the paucity of slow-steamed services on that lane is the types of ships deployed. On the Asia/Europe trade, carriers use their biggest vessels, as ports in Asia and Europe are best equipped to berth and unload such ships. But the larger vessels are also where the most significant savings, on a per-slot basis, come from slow steaming.
      There are only a handful of services left on the transpacific that use 8,000-TEU-plus vessels, meaning the services between Asia and Europe are more appropriate for application of slow steaming.
      However, the situation on the transpacific could well change in 2010, with Neil Dekker, editor of Drewry Shipping Consultants' Container Forecaster telling American Shipper that 'we suspect the extent of slow steaming in the transpacific will increase in 2010 as carriers seek to absorb as much capacity as possible.'
      Slow steaming: it could be coming to a trade near you.