We notice that ocean-going container ships have once again slowed down. This is due to the down turn of the global economy, which also affects the operations of shipping companies. Slowing down helps to save on fuel costs and prevent a decrease in freight revenues.
There are two ways to achieve profitability in the shipping industry. First, operationally, when cargo or passengers are transported from one port to another in such a way that the revenue received exceeds the expenses. Second, profit can be achieved through tonnage management, which means selling, buying and chartering vessels at the right time to have an efficient and affordable fleet at the right time. Both of these factors can be influenced by the speed of ships.
The first benefit of slowing down the driving speed is a reduction in fuel consumption, as a slower moving ship consumes less fuel. This is especially significant at a time when the price of fuel is high.
Another benefit is related to price competition in the freight market. Slower ships mean less shipping capacity is available, which can lead to higher freight rates. This helps shipping companies to improve their financial situation during the economic downturn.
Low-speed mode reduces fuel consumption
The ship’s cost level is most significantly affected by fuel costs, capital and crew. Fuel can account for up to 75 percent of the total costs, and the faster the ship travels, the higher the fuel costs.
Figure 1 shows the relationship between fuel consumption and speed. It turns out that even a few knots of the fastest ships can reduce fuel consumption significantly, even by several tens of percent.
Figure 1. Ship’s fuel consumption in relation to speed.
The decrease in speed increases freight revenue
The ship’s revenue is also affected by its capacity and frequency. Larger ships can carry more cargo. In addition, in good times, when cargo transport demand is high, shipping companies can benefit from being able to speed up transport. Faster transportation of products means greater frequency, i.e. more departures and thus the possibility of transporting more cargo. This can bring a considerable amount of additional invoices to the shipping company every year.
Figure 2 Cyclicality of the shipping market
The same principle also applies to the opposite situation. When there is a downturn in the global economy, the amount of goods to be transported is too small compared to the available ship capacity. In that case, the shipping companies should slow down the speed of the ships, in which case they will transport less goods, and the global shipping capacity will decrease. This can help prevent freight rates from falling.
It is also good to take into account that usually when the demand is sufficient, shipping companies invest in new ships. However, often the investments exceed the actual need, which leads to an excessive increase in sea transport capacity. This in turn leads to a bear market after a few years. Well, that’s another story. Currently, the world economy is slowing down, and there is an oversupply of ships on the market. That’s why shipping companies should slow down their driving speed, which helps to reduce the decrease in freight revenues.
The article was previously published in Finnish in the online magazine for maritime professionals Navigator Magazine on June 20th, 2023.
Tales of Talsinki 