The shipping industry I
The cost of sailing with ships can roughly be broken down into:
1) Crew. With a ship like Emma Mærsk having a crew of 17 wages and salaries pr ton transported is minimal. Just as an expression of the general trend.
2) Maintenance: Today much is achieve by flying in maintenance crews with spare parts and use preventive maintenance. Ships today have gotten rid of the cluttered engine rooms with all sorts of devices that have a habit of breaking down.
3) Capital cost: With interest rates as low as they are – and governments desperate to keep jobs at their shipyards – attractive finance packages are plethora.
4) Fuel is really the determining factor for the time being. Fuel cost derives primarily from moving through water. Water resistance is twofold: Friction and wave resistance.
- Friction is a function of wetted area and it is proportional to distance. The larger the ship the smaller the wetted area relative to volume: The surface of a sphere grows with the square of the radius; but volume with the cube – so the bigger the better.
- Wave resistance has something to do with how the hull displaces water. Look at a picture of Emma Mærsk at full tilt during tests. You can see from the water discharged from the scuppers that she is at speed. Look at the massive bow wave: IT ISN’T THERE!
Sometimes a simple picture tells you more than a balance sheet ever can.
It has always been a mystery to me how anybody can invest in a share without at least trying to get a fundamental grip on what that company is actually doing.
- Speed: The wave resistance increases with the square of the speed – thus the oil consumption for a given distance increases proportionally with speed.
The left picture shows an oil tanker underway. Look at the amounts of water splashed to both sides - that costs money – real money. The picture on the right shows a wrecked oil tanker – glad I’m not picking up that cleanup bill. Both pictures go some way to explain why pipelines have gained such popularity
Sailing from A to B involves costs to produce the offered capacity.
If a round trip takes 10 days at 10 knots the double capacity can be produced by doubling the speed to 20 knots at the cost of doubling the fuel cost pr. unit hauled. The marginal cost for the last unit of capacity produced thus varies with the square of capacity units produced.
After October 2008 the entire world has moaned that there was too much capacity and freight rates have gone down. But at the same time slow steaming has been introduced – halving speed – and thus halving capacity offered – still freight rates have not gone up!
Another thing is that for bulk items like grain the prices have gone up despite the lower transportation costs.
But as we have seen: Costs have not been reduced with the exception of the oil bill and there is a limit to that. The alternative is to lay up ships – or sell them off. Selling ship in such a market only depresses price – and thus realizing a loss as the ships have a higher book value than sales price. So to be honest that is not a solution. There is only one way ahead: Scrap the expensive old ships.
Shipping is the perfect soil for things like cartels to form. There are countless examples of price-fixing which helps keeping inefficient operators alive – and fatten the profits of the efficient. The problem with cartels is that at some point the solidarity breaks down. That is why these popular alliances really don’t stand a chance. The weaker members of the alliance are still operating above the cost of the stronger – and the stronger has all the capacity they need. At some point the marginal cost of the efficient is down to the marginal cost of increasing speed – thus taking over the market share of the inefficient by the simple expedient of lowering freight rates. There is of course a loss in revenue with lower rates; but at some point the discrepancy is simply too big.
This is basic economics marginal cost equals marginal revenue.
The shipping industry faces a major consolidation. Those who survive are the ones with lowest cost. There is not any expansion in demand in sight that can jerk up freight rates.