Rising Bunker Fuel Prices

Imy Clarke - On behalf of Alchemy Recruitment, October 13, 2014

Bunker fuel can account for more than 70% of a shipper’s expenses for a single voyage. So it’s no surprise that the fluctuating price of fuel is a big issue for shipping companies. With a continuing rise in the cost of oil and new environmental measures, many companies have to completely rethink their supply chain.

The first question to ask is why is the price of fuel on the rise? The first cost comes from the fluctuating prices of crude oil, the derivative product. Due to constantly varying levels of supply and demand and geopolitical issues with countries who own vast quantities of the oil fields such as the Middle East and Russia, the price is never fixed, but is rarely ever low. The second major cost comes from the refinery. Over the past few years refineries have moved away from standard bunker fuel towards higher-grade fuel, mainly since this provides a higher profit margin. As a result, the available amount of bunker fuel is diminished, and the cost rises. Yet, as if crude oil refinery wasn’t expensive enough, new environmental policies look set to push the cost up even further.

As of 2015, any shipping vessel within the 200 nautical mile boundary of the North American Emission Control Area (ECA) will require fuel with a sulfur content of no more than 0.1%, far less than the current 1%. By 2020 the International Maritime Organisation (IMO) also looks set to lower the sulfur cap for other regions from 3.5% to 0.5%, again a big change. With the increased processing that will be required to limit the fuel to these sulfur levels, the cost of bunker fuel will invariably rise dramatically. CSL Group, a short sea shipping company based in the Americas, calculated that each ship would bear roughly $815,000 of additional annual fuel costs. Yet, with higher-grade fuel offering better profit, who knows how much attention refineries will pay to processing enough of the new fuel?

So, what are companies doing to limit the impact of these rising fuel costs? Ultimately, they are altering the entire supply chain. Increased fuel costs mean increased transportation costs, and as such companies are drastically changing their strategies. Some companies are increasing the number of warehouses and the size of their warehouses, minimizing distance from distribution centre to consumer and allowing the shipment of large quantities to take advantage of economies of scale. Other companies are ‘nearshoring’ their manufacturing, again to be nearer the consumer, since cheap manufacturing costs are offset by increased transportation costs. Through gaining a suitable grasp of the entire supply chain, increased fuel prices don’t have to be as bad as they may at first appear.

Posted in categories: Costs and Expenses, Shipping
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