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The economics of slow steaming

The economics of slow steaming
Slow steaming is no longer a new concept to shipping. The practice of deliberately slowing down the speed of a ship is in fact a common operating feature of today’s shipping market as a way to lower costs by reducing fuel consumption. And with shipping lines trying to stay profitable in the present weak freight market, slow steaming has proven a good way to trim operating expenditures so as to boost the bottomline.

But as the shipping market is cyclical, people are starting to question whether slow steaming, which makes economic sense in a bearish market, is here to stay for good, or will ships return to normal speed or even sail faster when the boom years eventually come.

Slow steaming started around 2007 to 2008, the period when the market started to experience an oversupply of shipping tonnage, declining freight rates, and increasing bunker prices. This operation has grown in popularity ever since, as shipping lines cited a variety of benefits that slow steaming could offer. While one of the most cited reasons of slow steaming is to reduce air emissions and bring about a more environmentally-friendly operation, more underlying causes are to absorb excess tonnage and to cut down on fuel consumption and bunker bills.

Indeed, slow steaming offers cost savings and reduced emissions and it seems that even most shippers have more or less accepted the practice. There are already talks in the market that slow steaming would be a normal way of ship operation for the future.

Soren Retz Johansson, port captain at Denmark’s Norden Shipping with businesses in the dry cargo and tanker segments, made it clear: “We are doing everything we can to slow steam.” In the container segment, Johansson highlighted that the new generation, mega-sized 18,000 teu containerships are designed specifically to slow steam, pointing to a long term resolve by lines to employ this modus operandi.

There are others who disagree and consider it as merely a temporary fix for shipping companies during a time when their bottomlines are hit. As a matter of fact, slow steaming is quite a complex issue, affected by more factors and its impacts are also broader than most people generally realise, according to Ma Shuo, a professor of maritime economics and policy at World Maritime University (WMU) in Sweden.

“Shipping lines purposely reduce the speed of ships for a variety of reasons, but particularly due to economics,” said Ma, who is also Vice President (International) of WMU since 2001. He was speaking at a public lecture held at Singapore’s Nanyang Technological University on Tuesday.

Based on a recent market survey of over 200 liner and tramp companies, 75% apply slow steaming to various extents, according to Ma. A ship is slow steaming when it runs at 21 knots, down from a full speed of 24 knots. The ship will be in extra slow steaming mode at 18 knots and super slow steaming at 15 knots.

“I consider slow steaming to be affected by an interplay of six forces or factors. But basically the most important and dominating factor is freight rate,” Ma told the audience at the lecture. “This means that when freight rates are high, speed has to be high.” Apart from freight rate, the other five factors are bunker cost, ship cost, cargo cost, interest rate and environmental cost.

Ma’s research mentioned that each key player in the shipping trade has their own objectives for the ships to hit an optimal speed in order to gain the highest economic benefit, or highest gross profit per day per vessel. The objective of optimal speed for carriers is “maximisation of surplus”, while the objective for shippers is “minimisation of cost” and for the society is “maximisation of social surplus”, especially in a competitive market. “Ships had been sailing fast before the current downturn, therefore the optimal speed changes with the changing market conditions. The key is knowing that there are six factors that will influence the optimal speed,” Ma explained.

To calculate the optimal speed, Ma applied the six factors into a feasible model of a 8,000-teu containership sailing between Shanghai and Rotterdam with a distance of 12,000 miles and 100% load factor. The bunker price is assumed at $650 per metric tonne (pmt), plus a ship cost of $100m, containers worth $20m, operating cost (crew, insurance, maintenance) per day of $8,500, value of cargo at $60,000 per teu, annual interest rate at 3%, emission cost of $30 per tonne of fuel consumed, and a freight rate of $800 per teu.

The calculations showed that with freight at a lower $600 per teu, the optimal speed would be 17 knots, rising to 19 knots for freight of $800 per teu, 24 knots for $1,200 per teu and 27 knots for $1,400 per teu, meaning that the optimal speed becomes higher in a firmer freight market.

“During the previous shipping boom, had anyone heard of slow steaming? Shipping companies would be foolish to slow steam back then when freight rates are high and it made sense to sail at the fastest speed in order to achieve higher turnarounds for each vessel,” Ma said.

The cost of bunkers is considered the second most important factor affecting the speed of the ships. Slower vessel speed equates to lower fuel consumption and this applies to all ship types and sizes, according to Ma. With bunker prices at expensive levels today, slow steaming will only make more sense. Ma’s research showed that the optimal speed for a vessel would be 25 knots if bunker prices are at $400 pmt, 21 knots for $600 pmt, 18 knots for $800 pmt and 16 knots for $1,000 pmt.

“In the near term bunker costs are unlikely to weaken. Moreover, new ships introduced into the market are mostly made to slow steam, hence slow steaming will continue at least in the short to medium term,” Ma noted.

“In the end, the optimal speed will be determined by the six factors. As to the question of when will be the end of slow steaming, no one knows,” he said.