[Shaun @ Tru6]

RECORD FUEL PRICES PLACE STRESS ON OCEAN SHIPPING

May 2, 2008

Shipping lines worldwide are struggling as crude oil prices topped an
unprecedented US$119 per barrel this week, in turn pushing marine bunker fuel
prices up past $552 per ton – a $26 per ton increase since the end of March
alone. Bunker prices have risen 87% since the beginning of 2007.

Fuel costs represent as much as 50-60% of total ship operating costs,
depending on the type of ship and service.

Ocean carriers are required to recover these costs to maintain levels of
service, meaning the price of shipping goods will continue to face upward
pressures.

To illustrate the effect of the rising fuel costs, consider the following
example of a large modern container vessel used in the Trans-Pacific trade with
an actual, maximum container capacity of 7,750 TEUs (twenty foot equivalents)
or 3,875 FEUs (forty foot equivalents).1 With the cost of bunker fuel at $552 per
ton, with fuel consumption at 217 tons per day, and a 14 day voyage, a single
round trip voyage for this one vessel would produce a fuel bill of $3,353,952.
This number could be greater for a number of reasons, such as if the voyage
were more than 14 days, or if the vessel were smaller and less fuel efficient per
container, or if schedule delays required the vessel to speed up to stay on
schedule.

Recovery of fuel cost from cargo customers is a challenge when one
considers that vessel capacity utilization is not 100%, that trades are not evenly
balanced (e.g., U.S. Trans-Pacific exports may utilize only half of a vessel’s
capacity), that different trades and commodities can handle different levels of
rates, and that fuel prices continue to rise. If a cargo shipper pays less than its
share of the fuel cost, it can only mean that other shippers must pay more, and/or
the carrier fails to recover its operating cost, which is not a sustainable business
scenario.

Fuel cost recovery cannot be done on a per-vessel/per-sailing basis. A
carrier has strings of vessels operating in scheduled service and must recover its
total costs. Thus, the above example scenario, if extended to a single weekly
Trans-Pacific service using five vessels, would create an annual fuel bill to the
carrier of $220 million.2

Approximately 1,500 ocean-going liner vessels, mostly containerships,
make more than 26,000 U.S. port calls each year, providing American importers
and exporters with efficient transportation services to and from roughly 175
countries.

Today, U.S. commerce is served by more than 125 weekly container
services.

The annual fuel cost for the services is tens of billions of dollars and
continues to rise substantially.

How carriers seek to obtain recovery of these rapidly rising fuel costs in
the current market is a matter for commercial negotiations, but the significance
and the magnitude and the consequences of the challenge continue to grow.


Operational Changes

Carriers have been responding to the high cost of fuel by utilizing a range
of operational adjustments. Beginning in early 2007, most container lines began
restructuring their operations to address fuel price trends. They have:

• redeployed ships among global trade lanes to optimize utilization
• consolidated services through multi-carrier alliances
• consolidated routes to serve more locations with fewer ships
• slowed sailing speeds to conserve fuel where possible within schedule
• improved monitoring of hull and propeller conditions to reduce resistance
and improve efficiency
• adopted container transloading, street turns and other strategies to cut
inland fuel costs

Considering that these steps have generally already been taken by
shipping lines, there are limited additional operational measures that vessels can
take to further reduce fuel consumption.