Rise in oil price lifts shipping operating costs

The increase in oil prices has shot up the bunker or fuel cost of ships that, in turn, has added to the operating costs of shipping lines that are finding it tough to pare costs.

The rise in crude oil price over the year is hurting regional and global shipping lines where it hurts the most, said shipping industry executives and analysts.

Hovering around $75-76 a barrel currently, the crude oil price has more than doubled from its lowest level (after the global financial crisis) in December last year when it fell to about $30 a barrel.

"In the current condition, increase in petrol cost and low movement will make the shipping industry more vulnerable. Normally, shipping companies hedge their requirements based on the market analysis. So, on a short run they are protected. But if it continues beyond stage they are forced to come up with Bunker Adjustment Factor ," said Shankar Subramoniam, General Manager for UAE at Clarion Shipping.

Bunker adjustment factor, also called bunker surcharge, is the extra charge levied on the shippers to counterweigh oil price fluctuations.

However, shipping analysts believe increasing bunker surcharge is not sufficient to meet the total costs of ship movement.

"The cost of bunker rates has gone up significantly because of the rise in oil price this year. Although shipping lines charge bunker surcharge from their clients, but that is not sufficient to meet their operating cost," said Joel Rodricks, Director Sales and Marketing at Maersk Kanoo (UAE), Dubai.

Global container shipping lines are expected to lose about $20 billion (Dh73.46bn) in 2009 because of low freight rates and downturn in various businesses, he added.

In order to cut costs, the normal measures shipping line are adopting is to identify key routes and assess the need for certain port call. If they find the volume is less they make it as a feeder port or withdraw the port of call, said Subramoniam.

The cost cut area will be more towards own office operation costs, such as outsource to agency and job reduction, he added.

"In the container shipping sector we have noted the popularity of route shares as a means for container lines to cut costs, with one time rivals joining up to offer the same services and so enabling companies to continue to operate in a number of markets, but decreasing their exposure as the companies all commit vessels," Michelle Byrne, Head of Shipping and Freight Transport, Business Monitor International, the global industry research and analysis firm based in London, told Emirates Business.

Companies operating in the container, bulk and liquid markets have all engaged in vessel lay ups to cut costs, as the idling of ships allows, for example, companies to save on crew wages, she said.

 

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