Slow steaming not necessarily a sulphur cap saviour
To a shipowner whose livelihood hinges on the demand for ships matching or exceeding their supply, the prospect of the global fleet shrinking dramatically, overnight, and without a painful loss of asset value must seem too good to be true.
But with the International Maritime Organisation’s (IMOs) 2020 sulphur cap set to shake up the market in less than 18 months time, much of the industry is viewing this as a realistic – albeit unintended – consequence.
“Amid the high cost of bunkers post-2020, charterers will most likely request owners to slow steam,” Ilias Lalaounis from shipbroker Intermodal noted in a recent report. “If the majority of the fleet is slow steaming, in combination with a possible increase of scrapping tonnage that can’t adapt on the new environmental regulations, we see less vessels competing over cargos, which will probably drive the market upwards.”
It is a viewpoint backed by host of analysts from across the shipping world.
BRS’s Alphatanker pointed out that the majority of vessels that have installed scrubbers to remove sulphur from their exhausts are likely to be engaged in charter voyages, and will therefore have their bunker costs paid for by the charterer. Those vessels without scrubbers will be soaked up by the spot market.
“These spot vessels will be running on compliant fuels (marine gasoil and/or ultra-low sulphur fuel oil), which are projected to be significantly more expensive than 380 cst fuel oil. Therefore, in order to reduce fuel-related costs and thus buttress vessel margins, it is likely that vessels without scrubbers will resort to running at lower speeds on ballast legs.”
At the Posidonia industry gathering in Greece in June, shipowners from across the industry stood up to extol the benefits of slow steaming.
Stamatis Tsantanis, CEO of dry cargo owner Seanergy Maritime Holdings, told the Capital Link forum that because of slow steaming, “2020 will be one of the best things to hit shipping for 20 years,” with the effect of reducing the dry freight market by 300 to 400 Capesize vessels.
John Michael Radziwill, CEO of Goodbulk, urged his fellow owners at the Tradewinds dry cargo shipowners' forum to throttle back their vessels. “We can slow down. The slower the better,” he said to large applause. Ismini Panayotides, CEO and founder of Pavimar Shipping, explained, “It’s simple economics – the fleet will slow down.”
This was echoed on the tanker side, albeit with a little less enthusiasm. Eddie Valentis, CEO of Pyxis Tankers, and Dynacom’s George Prokopiou and Nikos Tsakos all told the Posidonia Capital Link forum that slow steaming would become more prominent come 2020, although they emphasised that coping with the changes would require a toolbox of changes. “Fleets that include eco vessels will have an advantage over older units, so slow steaming will prevail,” Valentis said.
Yet owners should hold back from celebrating just yet. While slow steaming will certainly contribute to the industry’s response, it may not be the panacea that some owners are anticipating.
The first thing to note is that voyages speeds have already fallen as owners have looked to reduce fuel demand. Slowing them further may not bring extra cost savings expected.
Dr Elizabeth Lindstad from Norwegian marine research organisation Sintef Ocean noted that ships’ fuel consumption is minimised when they are travelling at their design speed.
Not only are the fuel savings from slow steaming most significant when reducing from the highest speeds, moving away from the vessel’s design speed in either direction – including going slower – increases fuel consumption.
“It’s the same as your car. The lowest fuel consumption is probably around 40 miles per hour (mph). If you go slower than this, the consumption per mile will increase, but it will be quite flat from 40 mph to 60 mph. Above that it really starts to increase,” she told Fairplay.
This concept applies equally to bulkers and tankers. Lindstad gave the example of a fully-laden 63,000 dwt Supramax bulker running on a fuel priced at USD500/tonne. Slowing from 15 to 12.5 knots would typically reduce fuel consumption by about 25 kg per nautical mile, from 180 kg/nm to 155 kg/nm. Yet reducing speeds further to 10 knots only cuts fuel consumption by around 10 kg/nm, from 155 kg/nm to about 145 kg/nm.
If the Supramax’s objective is to minimise fuel consumption, then the optimal speed is around 9 knots, with fuel consumption of 137.5 kg/nm. Below that the fuel consumption starts to increase.
In addition to this, Lindstad explains that there are other factors that contribute to overall cost of each vessel journey, such as newbuilding costs, Capex, Opex and time charter costs, as well as bunker fuel. Vessels can slow down, saving on their bunker fuel costs, but this means that many of these expenses are higher per voyage, as it takes longer for the vessel to reach its destination.
For this reason, she calculates that the speed that gives the lowest overall cost per nautical mile for the Supramax would be 12.5 knots, at a cost per mile of around USD112/nm. If the vessel were to slow down, the cost per nautical mile would rise significantly – increasing exponentially the slower the vessel goes.
Slowing from 12.5 knots to 10 knots would increase the cost by about USD5/nm, for example, but slowing down a further 2.5 knots to 7.5 knots would increase it by USD22.5/nm, from USD115/nm to USD137.5/nm.
Data from IHS Markit shows that so far this year, Capesize bulkers have travelled at an average speed of 11.3 knots, against their design speed of nearly 15 knots, while very large crude carriers (VLCCs) travelled at an average speed of about 12 knots, against a design speed of nearly 16 knots.
Given that vessels are often already travelling at below their design speeds, it indicates that there is a limit to how much slower vessels can travel.
However, this does not mean that vessels will not slow steam at all, Lindstad said. Vessels operating in a weak market may deliberately slow down on ballast legs in order to take capacity out of the market, instead of acting to save fuel.
“In reality, fuel consumption is also lower in ballast, so it doesn’t make sense to slow steam on the ballast leg to save money,” she told Fairplay.
Those vessels that are operating in a strong market will have even less incentive to slow down, with Lindstad pointing out that traditionally vessels operating in such a market speed up on their ballast legs to secure more cargoes.
Lindstad’s calculations are backed up by data that shows that, even in periods of extreme market weakness, speeds have not gone significantly below their current level.
On laden voyages, the ability to slow steam is also limited by the demands of charterers.
Anoop Singh from Braemar ACM research commented that if crude and product markets are backwardated then sellers benefit from the prompt delivery of cargoes and charterers ensure vessels move quickly, especially on their laden voyages.
Limited crude storage capacity in many refineries also means that they are often reliant upon deliveries of crude happening at relatively specific times. Any disruption to this because of slow steaming would not be welcome.
“You can negotiate with the charterer on rates, but they have the upper hand when negotiating speeds. When tanker freight gets tight, owners might get the upper hand, but even in a moderate market, it would not be easy,” Singh told Fairplay.
“The tanker market is already so low that we are already at the bottom of the speed curve, it’s hard to see it can reduce much further.”
On the dry side too, “generally charterers specify a minimum speed” in the charter agreement, one broker told Fairplay, noting that weak market conditions up to 2017 had not resulted in significantly slower speeds on laden voyages.
On top of this, owners and technical managers point out that slowing a vessel down is not as simple as lifting your foot off an accelerator. “There are some critical speed ranges on all engines, and ships must avoid running in that range of revolutions to avoid vibrations and damage,” the technical manager of one dry and wet shipowner told Fairplay. However, he noted that “as long as [the vessel] has a proper spare and the main engine is designed to do so,” ships should be able to slow steam.
Yet, for other fleets, slow-steaming could be much more technically challenging. “The problem [with slow steaming] isn’t the relationship between the oil price and the market, it’s whether the engine will allow you to do it,” one major dry bulk shipowner told Fairplay. “On our fleet, we can’t. With some Japanese fleets you can. It depends on the ship.
“On ballast legs you will see slow steaming, but will it be the primary way that shipowners deal with the IMO changes? No. They might be able to reduce consumption by a bit by cutting down on speeds, but that’s about it.”