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| Shipping Industry Tumbling in Global Inflation |
[2008-11-12 ] |
Chen Xiangyan
In 2007, the international crude oil price soared up by 70%, iron ore 95% and copper 40%. In the past two years, the prices of agriculture products like wheat, corn and bean also dramatically increased. The even worse global inflation has led to chain reaction of shipping market, in particular the operation risk brought by skyrocketing oil price.
Era of Global Inflation
A US consulting firm publicized a report titled ¡°Are you ready for the era of inflation?¡± Inflation has spread beyond the States to all over the world.
Skyrocketing International Oil Price
Indisputably the rocketing oil price is now the most heated topic and has caused worldwide panic and tension. As subprime mortgage crisis gets more serious and US dollar continues depreciation, the price of international crude oil roared up to sky high. The sensitive nerve of international oil market is further troubled by strike of Britain petroleum workers and US/Iran conflict at Persian Gulf . International oil price is continually making historic record. It seldom turns down after breaking level of USD120/barrel on May 5th and the oil hits all-time high of USD143.67 on June 20th.
Soaring Price of Grain
The Food and Agriculture Organization of the United Nations (FAO) pointed out in its latest research report that the international grain price soared up with horrendous increasing margin in the past 24 months, say 112% of wheat, 75.1% of bean and 47.3% of corn, among which the prices of wheat and corn hit historic high of the past decade. All the nations and regions have to spend 2% more on grain import, which amounted to USD734 billion. In particular, the developing nations are forced to spend 5% more on grain import.
Upsurge of Coal and Ore Prices
From 2004 to 2007, the production of world crude steel increased by 8.9%, 5.8%, 9.0% and 7.5% respectively and China 's growth rate even reached 23.2%, 24.6%, 18.5% and 15.7% in the past four years. The seller's market of iron ore pushed forward the price of ore due to unprecedented strong demand. Bao Steel reached agreement with Brazilian CVRD in February upon price increase of 65% of ore fines and 71% of lump ore. On June 23rd, this giant Chinese steel plant reached agreement with Australian Rio Tinto on price increase of 79.88% and 96.5%, higher than the contracts with CVRD.
Since the beginning of this year, the international coal price also reached historic high, which is mainly caused by change of global energy consumption towards coal. As major coal suppliers, Australia and South Africa are restricted by their infrastructures. China , Indonesia and Vietnam also cut down export volume to meet domestic demand. Therefore, the coal price also soared up.
Chain Effect upon Shipping Market
The prevailing price increase of large-amount commodities has brought forth chain effect upon the shipping market: increase of operation cost by soaring fuel price, which leads to increase of ocean freight; the price increase and expected increase of iron ore as well as uplifted level of ocean freight cause serious port congestion. The price increase of steel plate also pushes up the shipbuilding and repairing costs.
Carriers' Profits Squeezed by Skyrocketing Fuel Price
As for oceangoing service, fuel cost holds larger portion in transport cost. For instance, Beihai Ocean Transport consumes about 2 500 tons of diesel oil every year. Owing to continuous growth of diesel price, it spends additional fuel cost of RMB18.75 million in 2007 with a year-on-year growth of 22.39%. And the fuel expenditure accounts for 33.92% of total transport cost, much higher than previous 29.30%. According to the statistics of GL, an 8 000TEU container ship generally consumes USD36 million of fuel, which accounts for 63% of voyage cost. CI-online even uplifts such percentage to 80% in its latest publication. However such cost was merely USD11 million three years ago, one third of total voyage cost.
Freight Increase
Menaced with growing operation cost and shrinking profit, shipping companies have to uplift ocean freight and charge more PSS to shift such financial burden to downstream users. At present, the international trade demand of three major dry bulk goods (ore, coal and grain) is still strong but dry bulk transport becomes less efficient due to serious port congestion, which also promotes increase of transport cost.
Severe Conditions of Ore Delayed at Ports
Owing to soaring ore price and serious global inflation, quite a few domestic trade dealers have made gambling on iron ore and enlarged import volume, especially ore produced in Australia . Therefore, before conclusion of negotiation on new supply contracts, huge amount of Australian lump ore and ore fines has been piled up at terminal yards.
The deteriorating conditions of port congestion greatly reduced ocean transport efficiency. Less effective carrying capacity and marked-up ocean freight have considerable negative effect upon Chinese steel plants in negotiation of ore supply. The actual ore market is not so prosperous as we expect.
Steel Price Hike Boosts Shipbuilding and Repairing Cost
The price hike of iron ore directly influences its downstream steel plants. According to the latest report of some Japanese economic websites, the Big Four Japanese steel plants reached agreement with CVRD and accepted price increase of 65% of import ore from Brazil . Later on these steel producers are planning for price increase of steel products with considerable increasing margin.
Nippon Steel Corporation and Mitsubishi Heavy Industry reached agreement on price increase of 40% of thick steel plate for shipbuilding. In other words, the latter will pay additional 30 000 Yen per ton in the future. Likewise other big steel plants and major shipbuilders in Japan all follow such criteria. And for Japan 's shipbuilding industry, it means additional cost of more than 200 billion Yen. The shipbuilding cost kept going up for consecutive six years with the largest increasing margin in 2008. More seriously, such price increase is not limited in Japan but spreads worldwide.
As steel price continues upward trend, the profit of shipbuilding industry gets further squeezed. Generally speaking, steel plate accounts for 25% of total building cost. The calculation of authoritative institute shows that 30% of price increase of ship steel plate will cut down around 7% of building profit. According to the statistics of customs by the end of the past year, prices of 6mm plate, 10mm plate and 20mm plate respectively went up by 35%, 42% and 30%.
Ship repairing market is also under heavy pressure. McNamara forecasts annual growth of 5% of ship repairing and maintenance cost. Ship repairers made higher quotes which in turn uplift operation cost of shipping companies. Vicious cycling is taking shape.
Countermeasures of Shipping Companies
Follow Changes by Flexible Strategy
The international grain demand continues expansion but it is even worse that the major production bases all round the world do not have big harvests due to various reasons. As giant producer, the United States enlarged export volume via dry bulk transport. But considering shortage of carrying capacity of bulkers, trade dealers turned to containerization. But the grain products are also piled up at ports due to shortage of export boxes.
If there had been enough outbound containers, the US grain export volume in the past six months should have increased by 20-30%. Thus we can see the overall price increase of international large-amount commodities and global inflation will definitely change trade layout or even trade patterns of all nations and regions, which then leads to cargo supply change on relevant shipping routes. Therefore, the global carriers should accordingly adjust their business strategy.
Reduce Speed for Energy Saving and Exhaust Reduction
The shipping companies suffering skyrocketing are trying every effort to cut down cost and one of the feasible measures is to reduce service speed. Hapag-Lloyd pioneered the action since August 2008 and reduced the speed of all its 140 ships from previous 23.5 knots down to 20 knots. At the beginning of this year, the market leader Maersk also declared to reduce ship's speed. COSCO Container Lines recently announced to reduce average service speed by 10% but maintained all shipping routes.
Under fair weather, if the speed is lowered from 26 knots to 22 knots, an 8 000TEU container ship may cut its daily fuel cost by 46% (from USD96 147/day down to USD52 225/day) and annual saving of fuel cost will be around USD15.81 million.
Meanwhile, ships are under heavier consensus pressure of ¡°Exhaust Carbon Reduction¡± of international society. In early April, 900 representatives from more than 160 nations and regions held the first round UN negotiation on climate change in Bangkok and discussed involvement of ocean and air transport into reduction plan of green effect exhaust. Lower speed also has positive influence on reduction of pollutant.
However, shipping companies must ensure service quality after reduction of ship's speed. Generally speaking, they have to supplement some carrying capacity or adjust calling ports.
Adjust Calling Port for Cost Saving
Port charge plays an important role in ship operation cost. So the shipping companies are trying to rationalize calling ports and calling sequence.
Whether to increase or reduce calling ports relies on cargo transport demand, namely slot utilization rate as well as relevant costs. Most shipping companies are continually making adjustment but they are quite cautious about change of transshipment centers. In general, shipping companies will consider the following factors in decision-making: will the time of port calling become more economic effective, i.e. will the change shorten ship's delay time at port? Will new port charge help reduce cost and improve efficiency? Will the relevant laws and regulations benefit the operation? Shipping companies may participate in construction and operation of some key ports to realize saving of transshipment cost.
Popularization of Energy-saving Plants
Shipping companies should pay special attention to the latest technology trends on ship's market and may timely test the economic benefit of advanced and practical energy-saving devices. In February, NYK started up new energy device test on dry bulk carriers. A set of fixed blades is installed at fore part of propeller, which may save 4% of fuel oil. It was firstly installed on a log carrier in June and once successful it will be popularized among NYK fleet.
In addition, it is of extreme importance to order highly fuel-efficient ships. Even 5% of energy saving means extra revenue of USD2 million per annum.
There are other ways of cost saving such as right partner and cooperation mode, crew training for ship maintenance, etc. Shipping companies may also choose the most suitable way of ship chartering.
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