Star Online reports that the falling price of crude oil to about US$82.54 per barrel on Friday compared with the record high of US$147 per barrel in July is welcomed by all international transportation companies. But will this drop cushion the effects of crashing freight rates and lower demand due to the looming global financial crisis?
WHEN crude oil prices surged to record highs about three months ago, many transportation companies’ operational costs swelled, compounded by the hike in the price of raw materials.
But now, as the price of crude oil decreases which leads to a corresponding drop in the price of petrol, diesel, bunker oil and jet fuel prices, transport operators face greater challenges due to a global economic slowdown that affects trade.
According to Aseambankers (M) Bhd senior analyst of equity markets Liaw Thong Jung, the softening price of crude oil was a result of the global economic slowdown, which has affected demand for crude oil.
“The world now has excess inventory of oil,” he said.
Even the Organisation of the Petroleum Exporting Countries is concerned about the effects of the global financial crisis and its impact on world economic growth and the price of oil.
Notwithstanding that, Liaw said, the reduction in oil speculation also led to weakness in the price of oil.
“We take a view that the price of oil would stay at US$100 per barrel in the near mid-term level of 18 months,’’ he said.
Maersk Line, the world’s largest container shipping firm, sees no significant impact on its operational cost due to the weak oil price.
Managing director for Malaysia and Singapore cluster Omar Shamsie said while the price of oil had dipped slightly, bunker fuel increased more than 70% last year and has experienced a ten-fold increase over the last decade.
“Bunker costs now constitutes nearly half of a vessel’s total operating costs. It was only 20% ten years ago.
“We aim to run our business even more efficiently to lessen the impact,” he said.
He said Maersk Line would continue to employ more fuel-efficient solutions in its operations such as slow steaming journeys and improved vessel designs.
“Other solutions range from waste heat recovery systems on board vessels to a new software solution, QUEST, in Maersk Line’s refrigerated containers that can cut energy consumption (used for cooling) by up to 50%.
“In addition, Maersk Line recently introduced a new formula, the bunker adjustment factor (BAF). Our aim with the new formula is to provide a simple, fair and transparent BAF for our customers.
“BAF also allows us to share and recover the extraordinary costs caused by increasing bunker prices,” he said.
On freight rates, Omar said, in the Asia-Europe trade, the spot freight rate had decreased by as much as 50% in the last 12 months.
“Maersk Line’s strategy is to keep its position in the Asia-Europe trade by matching the market levels.
“Besides, we will continue to take the necessary measures to adjust the capacity according to the drop in demand,” he said.
Wilhelmsen Ships Service Malaysia, a renowned shipping agency, sees the current economic downturn having an adverse effect on business.
Managing director Winston Loo said shipping had always been a vital supporting service in the world’s trade growth.
“With 95% of the world goods being transported via the oceans, the shipping industry will always be one of the first to get hit in an economic downturn.
“Quite a large number of carriers have either suspended some of their services or re-jigged their services to minimize the negative impact on their bottomline due to the slowing demand for vessel space.
“It was reported that in the first seven months of this year, Asia-Europe westbound cargo volume only increased by 6% compared with 20% in the same period last year,” he said.
Loo said the flood of newbuildings of vessels would also compound the situation.
“Between now and the end of 2010, there will be 81 newbuildings of more than 10,000 TEUs (twenty-foot equivalent units) vessels to be delivered.
“Vessels of this size can only go to the Asia-Europe trade, which means the current fleet within this trade, with capacity ranging from 5,000 TEUs to 7,000 TEUs, will be displaced to the smaller trades.
“In a time of global economic slowdown, there is just not enough cargo to fill up all these ships,” he said.
Thus, Loo said, freight rates would be under more pressure.
Malaysia Airlines Cargo Sdn Bhd (MASkargo) managing director Shahari Sulaiman said the reduction in the price of crude oil had brought down the price of jet fuel.
"But the cost of jet fuel is still US$25 to US$35 higher than the crude oil price,” he said.
He said the recent reduction in jet fuel price had certainly reduced MASkargo’s operating costs.
“MASkargo has recently revised downwards its fuel surcharges based on the formula posted on our website. The cost of jet fuel for our freighters can be as high as 65% of the operating cost.
“With the drop in the price of jet fuel, we hope that fuel cost in relation to total operating cost can be brought down to 55%,” he said, adding that the current jet fuel price was still considered expensive.
On the challenges facing the industry, Shahari admitted it was the world economic downturn.
“Air freight is dependent on a robust global economy that increases trade and we anticipate that the next 12 months will be very tough for the players in the industry.
“If this is true, the current overcapacity situation will also get worse and put more pressure on the already declining yields,” he said.
In such challenging times, Shahari said, MASkargo had to ensure it had a high standard of service while keeping mishandling, pilferage and other discrepancies to a minimum.
“Our mishandling rate has seen some encouraging improvements recently. The rate has dropped to 0.06% compared with 0.12 % last year,” he said.
Going forward, Shahari predicted it would be even more challenging next year.
“Steps to counteract will include deciding on the right size of capacity to operate more effectively.
“Taking the first half of this year as an example, although we reduced our capacity by 5%, we recorded much higher revenue due to greater yields and load factors.
“This was possible due to the implementation of our revenue management system, revised selling strategies, improve processes and teamwork within the organisation,” he said.