Shipowners slow steam their way to profitability

Ninety percent of the world's goods are transported by ship and, lately, much of that tonnage has been arriving late. "Slow steaming"-in which ships' speeds are purposely reduced to save fuel and related costs-is the maritime shipping industry's response to the high bunker prices, overcapacity, and reduced freight rates that have chipped away at company profits in recent years.

Shipowners' problems started in 2007, when fuel prices began rising rapidly. A ship's single-largest operating expense-between 40% and 60% depending on prevailing bunker prices-fuel costs doubled between 2007 and 2012. As the recession took hold, overcapacity in the shipping market reduced freight rates and compounded carriers' woes.

Slow steaming is helping to solve some of these problems simultaneously. By reducing engine speeds and increasing transit time between ports, the supply of idled ships has been reduced. More significantly, it has yielded huge fuel savings.

Owing to the design of the two-stroke main engine typically employed in larger merchant ships, reducing speed results in disproportionate fuel savings. As ship speeds slow to near 50% of peak, fuel use can drop by up to 90%. Of course, slower steaming speeds also result in lengthier transit times-and boost fixed operational costs such as seafarers' wages-which offset some of the per-mile fuel savings.

Numerous other variables affect the actual savings that accrue to shipowners as a result of reducing ship speeds, including wind, weather, current, and load. But Maersk, credited as a pioneer in slow steaming, has reported bunker fuel savings of upwards of 20% in recent years, which has helped return it to profitability. And along with the reduction in fuel use have come significant reductions in CO2, SO2, and NOx emissions-which are of increasing importance as new maritime emission regulations take effect in 2020.

On the other hand, slower steaming means longer supply chains for cargo owners and, potentially, higher costs for them where they need to fill ships with extra inventory to compensate for the lengthier transit times and cover the capital cost of the cargo. At a minimum, it requires that they build in additional time between the manufacture and sale of their products.

For this inconvenience, the carriers' response is that slow steaming provides cargo owners with added reliability. That is, when slow-steaming ships encounter adverse weather or other potential delays, they can speed up and still reach port on schedule-unlike those that are sailing at top speed and have no built-in contingency.

In any case, many shipowners appear sufficiently convinced of the advantages of slow steaming that they will continue with it once the shipping industry's economic fundamentals turn around. Maersk, for one, has commenced redesigning its ships to optimize the benefits that can be captured from slow steaming-and other carriers are retrofitting ships to achieve similar gains.

For the foreseeable future in the maritime industry, it appears to be slow steam ahead.

Alex Gray Senior Product Manager, IHS Maritime