Drewry report says increased slow steaming is on the horizon

While ocean carriers leveraging slow steaming in an effort to reduce fuel costs is not entirely new, a recent report from London-based maritime consultancy Drewry Maritime Research suggests there is more to come, especially in a few key trade lanes.

The Drewry report highlighted how the “freight war” currently taking place between Asia and Europe and between Asia and the United States, coupled with the hefty addition of increased vessels, will subsequently result in forcing carriers to increase slow steaming activity.

“Although slow steaming continues to be a contentious issue with shippers, more is on the way as fuel prices remain stubbornly high and ocean carriers can no longer absorb the bill due to the parlous nature of their finances,” Drewry said.

In the report, the firm said that ocean carriers continue to lose money due to:
-the freight rate war taking place between east-west trades and surplus capacity;
-31 ships each with more than 10,000 TEU (Twenty-Foot Equivalent) capacity due for 2013 delivery, coupled with carriers running out of space to lay up unwanted 8,000 TEU vessels cascaded out of the Asia-Europe trade lane; and
-insufficient cargo growth between Asia and the U.S. and Asia and the East Coast of South America

Regarding the last point, Drewry said that means that more vessels will need to be laid up or further slow steaming will need to be introduced, with the latter being most logical because it was hard to justify through most of 2012 due to high freight rates.

“But with east-west freight rates now plummeting to sub-economic levels again, ocean carriers can return to the view that ‘shippers get the service they pay for’ by further releasing pressure on their vessels’ accelerators,” Drewry said. “They have a wide margin to play with, as shown in the following tables of the three fastest and slowest services from Asia to Northern Europe, and from Asia to the West Coast North America.”

And it added that further vessel reductions between Asia and Europe and between Asia and the US, should be expected soon, resulting in longer transit times, with improved schedule reliability due to the greater opportunity for making up lost time.

“If you are an ocean carrier you have a few choices—basically to find a way to use the ship or to park it, the marginal costs become zero so the best thing to do is to extend your rotation and keep throwing capacity into these trades and slowing them down so you are using less fuel,” said Ted Prince, principal consultant at T. Prince and Associates LLC and a partner at Surface Intermodal Solutions. “You are not changing the rotation at all, instead it is taking longer because you are slow steaming and all of the port commitments are fixed. You are not adding more ports; the amount of time you are at sea keeps increasing as a percentage of the rotation because you are slow steaming. What Drewry is pointing out in data is that you slow the export return more than you slow the import arrival. Overcapacity has been there awhile but it is acute now.”

Paul Bingham, economics practice leader at CDM Smith, explained to LM that Drewry is right about the main elements of the slow steaming situation and its implications.

One reason for this, he said, is that the container trade demand is still soft, rates are weak and the new large vessels continue to come out of the Asian shipyards adding to the capacity overhang problem.

“With fuel prices still high, the carriers are faced with either lay up or slow steaming, so I think the option most frequently will be a continuation of further slow-steaming,” said Bingham. “The attempts to soak up the extra vessel fleet capacity are constrained somewhat by the port sequence and weekly service requirements of strings, but the slow, incremental increase in average numbers of ships deployed on the East West trades matches my perception of what the carriers have been doing.  I believe the carriers will continue to follow this path because it is the most logical under the circumstances.”

Addressing the shipper impacts of slow steaming, Bingham said that slow steaming magnifies the sailing time differences between nearest physical ports and the most distant all-water route gateway ports.  For North America, that benefits the likes of Prince Rupert or even California ports compared with all water services via Panama or Suez for Asia routes, he said, but for the majority of shippers who can manage their supply chains and their inventories, this is more of another factor in their need for planning in advance. 

“Interest rates are generally low so inventory costs are not as much the issue as the sales cycle management,” he said. “Longer-term shipper sourcing strategies may be affected by slow steaming for commodities where time-to-market is more critical and where air cargo isn’t a viable option financially.  In other words one could see some near-shoring decisions at the margin from extended slow-steaming.”

As for faster service as a slow steaming alternative, Bingham noted that the container ship market doesn’t seem to yet have shippers willing to pay premiums for faster service,  but if enough of them did he said the carriers would respond with higher-service for higher-costs, but the current situation is that that there aren’t enough of such shippers to pay for a string of large ships to be run at higher speeds. 

“The concentration of cargo on larger vessels means less ability for carriers to differentiate themselves for certain shippers, as the carriers chase lowest slot costs in a race to be profitable at low (commoditized) liner rates,” he said.