Drewry Shipping Consultants says no matter how low the oil and bunker prices go, it is confident that ocean carriers will not return to sailing container ships at their design speeds for fear of flooding the market with the latent capacity that has been held in check by slow steaming.
Despite bunker being the largest single cost for carriers, theoretically IFO price fluctuations should be profit neutral as the additional cost or saving from higher or lower bunker prices is meant to be passed on to customers through an adjustment to the BAF “Bunker Adjustment Factor” surcharge, Drewry explains in their latest article.
Drewry considers that carriers generally only recover about half of their fuel costs via BAFs because sought after high-volume customers are often won over with BAF-free “all-in” contracts. This scenario means that carriers are much more exposed when bunkers are riding high, but it conversely means that there are fewer savings to give back to shippers as many customers were not paying a separate, variable fuel cost element in the first place.
Therefore, lower bunkers are very definitely a profit tailwind for carriers, at least in the short term. Given the intense competition, Drewry expects that any sustained reduction in fuel prices will result in lower annual contract freight rates.
In a previous Container Insight Weekly analysis, Drewry discussed how slow steaming has not only helped reduce carriers’ fuel bills, but how it has also been used as an effective absorber of excess capacity.
Turning on that tap of latent capacity would flood the main trades and send freight rates to the floor. In Drewry’s opinion, there is no chance that containerships will get anywhere near their designed speeds of 24-25 knots in the next few years.
Drewry sees one practical side-effect of reduced bunker prices might see some carriers decide they no longer need to divert their services to cheaper bunkering ports like Vostochny in Russia, where fuel was reportedly USD 100-150 per tonne cheaper than in the main bunkering ports such as Singapore and Rotterdam before the recent decreases. If so, backhaul shippers could expect transit times to improve slightly for ships not having to make those deviations to Russian fuel stops.
Drewry believes that carriers will benefit from a prolonged drop in oil and bunker prices, as will shippers that currently pay variable BAF surcharges. However, slow steaming is not going away due to overcapacity fears.
Source: Drewry Shipping Consultants; Image: MAN Diesel & Turbo