Last Friday, for the first time since last October, oil prices closed below $70 per barrel at $69,87 per barrel after declined for the eighth day in a row. Although the nine-month rally in oil prices appeared to falter as a gradual sell-off that began in late October gained momentum, for the shipping sector, energy costs remain in high levels, thus lifting shipping operating costs. Since last January, during the worst economic recession of last decades, oil prices have gained 59.85%. OPEC members are satisfied with the current price and they don’t schedule to change their daily volume of exports in the forthcoming meeting in Angola on December 22.
On the other hand, ship owners have every reason to worry about the prospects of oil prices, as according to all estimates they will rise during 2010, as demand is predicted to strength. The International Energy Agency predicted Friday that global oil demand will rise more than previously anticipated next year.
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.
According to analysts estimates economic recovery is for the moment slow and fragile and the recent rally in stock markets does not feet the basic economical fundamental. In contrast, oil demand is a more accurate “index” as it anticipates the true condition of economy. As they note “How do you know when the economic recovery really begins? It is when real oil demand growth appears. Not just artificial demand growth being propped up with smoke and mirrors, but demand growth that comes with solid economic activity and global growth.”
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