Articles in Category: Logistics

Is nothing safe from being made into a financial instrument? Well it seems not in the business world. An Economist article reports that Clarksons, the world’s biggest ship broker, who pioneered derivatives for dry-bulk cargoes like iron ore and coal in the early 1990s, made its first container-derivative trade in January of this year. Since then, two other London-based brokers, ICAP and Freight Investor Services, have also started to offer derivatives products. Although tiny at the moment, Alex Gray of Clarksons believes, container derivatives may be worth 5-10% of the physical market by the end of 2011.

Some 140 million containers now carry around half the world’s seaborne trade as the graph shows, and it should be said the dry-bulk market was also tiny ten years ago before Chinese demand made rates take off. That prompted shippers and producers to use derivatives to hedge against rate volatility such that now forward freight agreements are worth 40% of the physical market.

Simply put, the new Container Freight Swap Agreement CFSA is a forward dated swap allowing users to hedge against volatility in freight rates by off-setting a physical position (a movement of goods by container) against a paper one (the swap agreement) and thereby lock in a guaranteed freight cost. The swap is priced in US$ per TEU/FEU and settled against a freight Index, the SCFI. The SCFI is published by the Shanghai Shipping Exchange and uses a panel system of Carriers and Non-Carriers (NVOCC’s/Forwarders/Shippers) to provide weekly spot assessments in US$ per TEU/FEU from Shanghai to eventually 15 major trade destinations – the four principle routes being to Northern Europe, the Mediterranean, US West Coast and US East Coast; as well as a number of other trade-lanes including the intra-Asia trades. To begin with, only the four principal routes will be used to set the swaps. The weekly spot assessments are based on a general cargo container and include surcharges related to the “Vessel” side of the transaction – BAF/CAF/PSS/WRS etc and exclude costs related to the “Shore” side – THC, South China Origin Surcharge etc.

So who is likely to use the new contract? Well there are three main user groups who may be interested. Ship owners or operators, who are “net long of space, shippers or freight forwarders, who are “net short of space and traders or investors who may seek to profit from playing the forward market, speculators if you like, who help provide the liquidity such that a buyer and seller can always be matched up on like terms.

As with just about every futures market that has ever been launched, there is initial reluctance from the “producers in this case the shipping lines, who see this as a dissolution of their power or control and a commoditization of the service. But in reality it needn’t be, a shipper can still choose to use a premium line for the physical shipment of their cargo in the interests of superior service, speed, sailing dates or any one of a host of reasons that can become key drivers for a particular sailing or product trade. To pretend that all shipping lines don’t move rates up or down in some form of unison is to ignore reality, all lines on specific routes are driven by the same fundamentals of demand, supply, availability, etc. For frequent shippers with regular requirements there is always the option of a long term contract with the shipping line to fix costs, providing the line is willing to do that. But that ties the shipper into using that line, whereas a financial swap allows the shipper to use any line as vessel availability or spot rate advantage dictates secure in the knowledge the financial swap will anchor rates to no more than the swap price. How closely the swaps mirror the actual market will be a deciding factor and in part will be a function of how quickly the market develops a sufficient level of liquidity to efficiently match buyers and sellers. It is certainly an interesting development for importers and exporters to hedge their shipping cost risks but may yet be a year or two away from offering a truly market reflecting price.

Glossary:

TEU Twenty Foot Equivalent Unit standard container

FEU Forty Foot Equivalent Unit double length standard container

NVOCC Non Vessel Operating Common Carrier an organization or company that sells container space but doesn’t own the vessels the containers are shipped on.

BAF Bunker Adjustment Factor added by the line to cover fluctuations in fuel costs

CAF Currency Adjustment Factor added by the line to cover Fluctuations between the USD and local costs

PSS Peak Season Surcharge added when demand for container space is seasonally high

WRS War Risk Surcharge self explanatory!

THC Terminal Handling Charge cost of loading the container onto or off the vessel.

–Stuart Burns

Never mind what the economists tell you, what is the global economy really doing? Well look no further than the fortunes of the container shipping industry, what the Baltic Dry Index is to the bulk ore/coal/agricultural commodities markets what the container traffic industry is to manufacturers and the global consumer markets. Of course profitability can be distorted by too much or too little capacity so utilization rates make a better measure of activity than profitability.

A series of Financial Times articles covering both the shipping markets and the fortunes of the principal players AP Moller Mearsk, DP World dock operators, Neptune Orient Lines and so on show a robust return to near full capacity. From the depths of the dip last year when shipping lines were parking 12% of the world’s container ships in lochs and fjords nearly all have now been returned to service, and most over just the last few months. According to AXS-Alphaliner only 1.7% of the world’s container ships are still laid up.

The return to health is due to two factors. On the one hand, container demand has picked up dramatically with traffic to and from developing markets. Container volumes this year are said to be up 35%, driven initially by supply chain re-stocking. Dubai’s DP World, one of the biggest container terminal operators, said volumes grew by 7% in the first half of the year. According to port statistics quoted in the Journal of Commerce, imports in Los Angeles were up 21%, 11.5% in Long Beach and 16.85% in Oakland compared to July 2009. Exports were also up 5.95% in Los Angeles, 13.1% in Long Beach and 0.4% in Oakland.

Total container volume, including imports, exports and empty containers, increased 26.8% in Los Angeles, 9.2% in Long Beach and 16.3% in Oakland. How much longer this trend will continue is uncertain. Activity in some markets is still expanding Germany, China, India, Brazil, whereas in others it is flat and short term prospects are uncertain. The second factor is in response to the dramatic slow down last year, shipping lines deliberately put their vessels onto slow running to save fuel and soak up extra ship capacity as more ships are needed to provide a service if each vessel is tied up longer on one voyage. The shortage of capacity means that, as lines carry more containers, space on ships is growing scarcer and lines can charge customers more. Neptune Orient Lines is quoted in the FT as saying the average rate it charged to move a standard container was 39% higher in July this year than in the same period in 2009.

Some shipping lines are fairing better than others though. France’s CMA CMG, the world’s third largest, is said to be struggling to fund huge orders of large expensive ships placed during the industry’s boom. Israel’s Zim Lines has needed massive bailouts but Evergreen of Taiwan declined to order during the boom and is doing well. Maersk said it expected 2010 to be its best year since 2004, when the container shipping boom was at its height.

Although comparisons with 2009’s appalling collapse of traffic can be misleading, still Maersk is quoted in an FT article as saying rates per 40-foot container were 30% higher for the first half this year than last year, while Neptune Orient Lines has seen a 15% improvement in the year to July 23. Volumes too are up on long distance routes generally by 13% in H1 2011 with Trans-Pacific routes seeing an 11% increase and Latin America an 18% improvement.

Having engineered rate increases by slowing ships and idling capacity when needed, even if there is a drop in global growth it is unlikely we will see rates fall back to where they were last year. Shipping lines say they expect rate increases to slow in the second half of the year but they will still be higher by year end. So anyone booking forward may be well advised to fix rates now, the good times in terms of low rates appears over.

–Stuart Burns

My TweetDeck was abuzz with tweets yesterday morning about a new bill that President Obama will have signed into law yesterday afternoon. Cleverly named the Manufacturing Enhancement Act of 2010, the bill while certainly helpful to US manufacturing can hardly be considered either comprehensive or complete. The bill’s actual name, the “Miscellaneous Tariff Bill commonly known as HR4380 specifically only covers the reduction of a range of import tariffs for materials and chemicals. You can view the complete text of the bill via this link. Some of the materials include flat screen plasma displays, golf club heads but also a range of chemicals and compounds such as Caprolactone-neopentylglycol copolymer, nickel carbonate and ortho nitro phinol, as examples.

But as this post from NAM (National Association of Manufacturers) points out, the legislation does not address several key aspects in order to truly “enhance manufacturing. For example, it doesn’t address any strategies for lowering trade barriers on imports of US products in foreign markets.  NAM calls for the adoption of free trade acts specifically for Panama and South Korea as examples of policies required to help double US exports, a policy plank of President Obama’s. NAM names over a dozen policy initiatives in a report entitled: Blueprint to Double Exports in Five Years that Congress would need to enact to ensure the success of the export initiative. Some of these changes involve export control changes, intellectual property protection, logistics, infrastructure investment, foreign trade compliance with WTO rules along with many others.

We have a little button that sits in our office that says “easy. When you hit it, the speaker says, “That was easy. We’d be clicking that button about this bill, though we understand that Republicans had held it up. It’s a non-controversial bill that has stood the test of time as it has been repeatedly introduced and signed into law by several previous administrations. With few controversial elements this law represents a “no-brainer. But to get US manufacturing moving again, the real work lies ahead.

–Lisa Reisman

Where one sees challenges another sees opportunities or so the saying goes, and that certainly seems to be the case in Greece according to a Telegraph article. The travails of the Greek economy are well documented in the press, being at the center of Europe’s current malaise, but the Chinese it would seem see this more as an opportunity than a problem.

Bolstered with vast financial reserves, vaulting ambition and a keen eye on further developing export markets in Europe, the Chinese have bought the lease to Greece’s largest container port in Piraeus for the next 35 years. There are currently two container terminals Pier One and Pier Two. The older smaller and shallower Pier One remains in Greek control but the larger and deeper Pier Two has been taken over by China’s state-owned shipping giant Cosco in a £2.8 billion ($4bn) deal to lease the pier for the next 35 years, investing £470 million ($680m) in upgrading the port facilities, building a new Pier Three and almost tripling the volume of cargo it can handle. The container port, Greece’s largest and already a major hub for east/west shipping, can currently load and unload 1.8 million containers a year – meaning 5,000 come and go each day.

The Chinese are quite candid that they see their investment in Piraeus as a gateway into the European market. With the strategic position of Piraeus near the Bosphorus, the port also provides a way into the Black Sea region, central Asia and Russia. By the end of the year, China is expected to make a joint bid with a Greek company to create a 200 million euro ( £165 million) logistics hub at Attica, near the port, to distribute goods from China into the Balkans and the rest of the continent. The Chinese are also in talks to buy a share in the struggling state-owned railway. These are only part of 14 projects that were signed last month when Vice Premier Zhang Dejiang visited the Mediterranean state.

Nor is Greece alone in receiving such attention. Other struggling European economies have been either the target of predatory attention or the beneficiaries of Chinese largesse depending on how you look at it. This month a group of Chinese manufacturers hope to be given approval to develop a £40million (US$ 60m) plot in Athlone, central Ireland, and begin construction of a hub of schools, apartments, railways and factories to create Chinese products. The Chinese plan to ship in 2,000 Chinese workers to construct the site, and eventually employ 8,000 Irish staff in what has been dubbed “Beijing-on-Shannon”.

Some liken the Chinese investments as the Japanese car and electronics businesses of the 1980’s and 90’s, and indeed we may look back on this in the future in the same way. Better to have goods made here and workers employed here than in China if we are going to buy them anyway. Such a mind set has a certain logic to it where both economic areas operate similar standards and operate equitably in terms of access but the problem with China is they do not. The EU has been engaged in a guerrilla war over trade barriers faced by European firms looking to sell into or invest into China that threatens to break out into out right trade war according to this article. Although China is keen to invest in overseas markets, as in this case to provide a strategic foothold for developing the market further in the future, they are unwilling to allow the same unfettered access to their domestic market. To what extent China will be allowed to continue to buy into European assets without allowing reciprocal access remains to be seen.   Judging by the glacial pace of European legislators actions in this regard they have probably got a good decade of freedom still ahead of them.

–Stuart Burns

Although it is not unheard of, it is a little bizarre that freight rates for bulk cargoes have been on a yearlong downward trend while container rates are rising strongly. True they cater to different sectors of the market, the first to raw materials like iron ore, coal and agricultural products, whereas the container market is more sensitive to semi or finished goods but shipping rates in general are often taken as a measure of the global economy so what’s going on?

Dry bulk rates rebounded from record lows seen in late 2008 at the height of the economic crisis. Average earnings at that time for the larger capsize vessels plummeted to just over US$2,000 per day according to a Reuters article. Last week, those same size vessels were earning over US$24,000 a day but the peak was reached last year (since then the rates have declined). The Baltic Dry Freight Index illustrates the point well. In May of 2008, BDI hit its record high ever, 11,700 points. From there it began its steep fall starting in mid-July. By Dec.5, 2008 it had slumped to 663 pts, a record low. But by November, 2009 the BDI had recovered to 4661 pts. As of July 1 this year, the Baltic Dry Freight Index had settled to 2351 pts, 55 down from June 30.   So what caused the collapse over a period in which all we have heard is the strength of China’s growth and the country sucking in raw materials? Well the reason the BDI is taken as such a bell-weather of the global economy is because it reflects rates being paid for cargoes shipped. There are fears that demand in China is showing early signs of cooling and mills, well stocked with raw material, are slowing purchases reducing the demand for imports. Coal and iron ore alone make up 54% of all dry goods shipped and China is the largest seaborne trade destination so the country is crucial in driving the Index. At the same time, like the super tankers they run the shipping industry has a backlog of new vessels commissioned years ago which have been coming off the slipways and into service just as the recovery appears to falter. The resulting over capacity was described in a Business Week article as freight demand increasing by the equivalent of 634 vessels this year while supply has expanded by 1,110 ships. What we are seeing is an over supply of shipping space rather than a dramatically slowing global economy.

The container market on the other hand is going in the other direction. The major Taiwanese shipping line Evergreen Marine Corp. said late last week it is raising its shipping rates on its European routes and will add surcharges during the current peak season amid strong demand. Announcing rate increases on its Europe-Mediterranean westward routes from July 1 of US$250 per twenty-foot equivalent unit (TEU), and a peak season surcharge of US$300 per TEU with effect from July 18. The shipping line is taking a bullish tone explaining the increases on strong demand for container space but Nils Smedegaard Andersen the chief executive of A.P. Moeller-Maersk is quoted in a Reuters article as saying the increase in container freight rates is the result of a shortage of shipping containers, not a booming global economy. The level of demand and the availability of space are absolutely two distinct matters he said. During the last 19 months, container shipping companies didn’t order any containers. “Now the economy has picked up and that leaves us with a shortage of the containers. We hope at best for a slow recovery. We are not optimistic.”

So all is not as it first seems. Bulk cargo rates are falling more because of vessel supply than a sharp decline in trade while container traffic rates are rising more because of a shortage of containers than a booming finished goods market. Not surprisingly the recovery continues to be a rocky road even if so far it appears to be heading more or less in the right direction.

–Stuart Burns

We have mentioned the Baltic Dry Index in past articles and some  sources claim it is the purest leading indicator of economic activity. But is it and how much faith should we put in the trends it appears to show?

Well of course we are now all muttering to ourselves we take all indicators with a pinch of salt and every measure of economic activity should be weighed against other sources of data to reach a balanced opinion, quite right, and here’s an example why.

First, what is the Baltic Dry Index and why is it so popular as an indicator of global trade? Well the Baltic Exchange from which the Index is produced is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The exchange is owned and operated by the member buyers and sellers, and maintains prices on many key routes for different cargoes and then publishes its own index, the BDI, as a summary of the entire dry bulk shipping market. There is no opportunity for speculators to influence the price, all contracts are between parties with cargoes to move or ships with space. As such it is an accurate reflection of the rates being charged and the demand for space across a number of vessel sizes and routes a global measure of international trade.

The most commonly quoted of the exchanges indexes is the Baltic Exchange Dry Index (BDI), a daily index made up of 20 key dry bulk routes including iron ore, coal, cement, grains, fertilizer etc. So when the world is coming out of recession, and Asian markets in particular are showing strong growth why has the BDI been falling since the early winter?

The reason is the BDI is a measure of supply and demand, if prices rise we assume it is because demand is rising but it can be because supply is reducing, likewise in the reverse. As the Financial Times explains, capesize vessels, the largest oceanic vessels, are a case in point. Between 1980 and 2008 shipyards delivered on average one capesize every two or three weeks, slowly increasing the fleet, meeting the rising demand in a balanced fashion. But now shipyards are launching capesizes at an unprecedented rate on the back of massive orders placed when freight rates were high. Like the super carriers they build the worlds shipyards and that takes a long time turning. Orders placed one, two and three years ago are only just coming off the slipway today. Last year, they built 112 vessels, almost one every three days. This year, shipyards plan to deliver 335 capesizes, almost one every 26 hours. That figure will be reduced by cancellations and delayed builds but even so the number of new vessels is still far exceeding the still rising demand resulting in falling rates.

As the FT points out, any sudden turnaround in the BDI may have more to do with canceled ship orders, scrappage and port congestion than a major above trend increase in real demand. The BDI has its place but as all canny observers know, it is only one of many sources of information.

–Stuart Burns

As we have all read many times, China’s economy is highly dependent on exports and the country’s balance of payments surplus results from China exporting considerably more than it imports. Exports were badly hit on the 2008/9 global recession and China is estimated to have lost some 20 million manufacturing jobs in the downturn. So it is interesting to see that container freight rates on the Asia-Pacific and Asia-Europe routes are picking up and that container TEU’s have increased through Shanghai, Hong Kong and Shenzhen in December after months of declines. According to a Reuters article, The China Containerized Freight Index (CCFI), which takes data from most of the leading lines with operations in China, hit 1,168.31 points for the week ending Feb 26. The index has gained about 45 points from Feb 12. At the end of February, it was as high as 1,200 points and its record high was 1,255 points set in October 2004. The index started in 1998.

Graph from www.statsweeper.com

A spike in demand for goods made in China at the end of last year added an additional impetus and certainly freight rates were boosted by a cargo rush before the Chinese New Year. Yet even so this seems part of a longer running trend. China saw its exports grow 17.7% in December and 21% in January and this is creating both a shortage of containers in China in which to load materials and rapid rate increases in the spot markets as agents scramble to get space for their cargoes. The slow sail policy of shipping lines on which we wrote last week has only exacerbated the problem as vessels and containers are tied up longer on voyages than previously the case. The biggest cause of the shortage of space and hence rate rises is undoubtedly that some 10% of the world’s container vessels are mothballed and idle in river estuaries or fjords awaiting a sustained come back in demand.

It would seem shipping lines are not in any hurry to bring capacity on-stream – the rise in rates has reversed the position of losses sustained in the first half of 2009. Neptune Orient Lines of Singapore says it carried 63% more containers in January than a year earlier, mirroring comments from other lines. OOCL has said it will impose a general rate increase, a restoration rate program and a peak season surcharge on various routes within 2 months. CMA, the French line has announced similar increases effective from March.

About 75% of container freight rates for trans-Pacific routes are under contracts that probably would not be subject to the increase in spot rates until the contracts expire, usually in May, analysts said. But spot rates have already seen massive rises as this article in the Telegraph explains. Last February 2009, the cost of shipping a 20ft container from China to Europe was around US$300, the lowest freight rate for a decade. Last week, by comparison, mainland China’s largest shipping company, Coscon, said that rates for a 20ft TEU had risen to $1,400, plus a $510 bunker adjustment surcharge, an increase of more than six times.

It is possible now that the pressure of the Chinese New Year deadline is out of the way rates may ease a little but anyone on a contract due for renewal this spring should budget for higher rates and those who thought the recent spike was a temporary phenomena should budget for rates being well above 2009 averages going forward. Having gained higher rates from the market, shipping lines will not be inclined to rush capacity back too quickly and risk seeing premiums slip away.

–Stuart Burns

A couple of weeks ago, Stuart and I both posted pieces on Maersk’s recently announced “go-slow strategy. Admittedly, I took a rather and received this thoughtful reply from Soren Stig, Senior Director Head of Sustanability for Maersk Lines:

Dear Lisa,

Thank you for your comments and perspectives on our slow steaming initiative. Being a supply chain professional myself – and having worked with a significant number of our customers buyers – I recognize your arguments around WIP and working capital.

You are of course fundamentally right in that a prolonged transit has an adverse effect on cost of inventory. What the NYT article did not cover was the fact that end to end lead time impact is significantly lower than the additional steaming time on the ocean. The discussion we are having with stakeholders – and most importantly our customers – are not necessarily isolated to the ocean leg but a broader discussion about how we jointly remove ‘waste’ from international supply chains that are often 150-200 days long. In many cases we do ‘find’ or off-set the additional ocean transit elsewhere – either on our side (we can do a lot more to increase efficiencies in connection with port arrivals as an example) or on our customers side. I think you will be surprised to learn how few have done an ABC analysis – at SKU level – and consequently how few designed and optimized their inbound supply chains accordingly. There’s a lot of garden furniture moving from China to US in March¦

A significant number of our customers have also stressed that reliability is often of equal or greater value than speed. Maersk Line is today amongst the most reliable carriers in terms of on-time performance. The ability to plan around – and synchronize import supply chains – thereby more effectively manage exceptions related to e.g. the weather or operational breakdowns – are aspects that we are attributing as much weight to as our ability to run an efficient network of 500 ships with 40.000 annual port calls.

But as you state, at the end of the day we must add value and provide a service that there is demand for. We intend to do so – which of course require us to take a long term view and both listen to our customers and the communities we serve – and generate a return to our shareholders, thereby allowing us to invest for the future and continue to reduce the foot-prints we leave behind.

Thank you once again for your views and perspectives. They greatly help outline the trade-off’s and complexities involved in this discussion.

Kind regards,

Søren Stig

Senior Director

Head of Sustainability

Maersk Line

One of our readers commented on the piece I wrote by forwarding this link about new emissions rules proposed to the International Maritime Organization of the United Nations.

What do you think? Leave a comment.

–Lisa Reisman

Here was the original title of that article from the New York Times:

Slow Trip Across Sea Aids Profit and Environment

As a quick follow-up to Stuart’s latest post on Maersk purposely slowing down its shipping fleet to create energy cost savings and better “green mindshare among its customer base, I thought I would offer another point of view which sourcing professionals may wish to consider.   From a sourcing manager’s point of view, this move by Maersk makes no sense from a supply chain management standpoint. Sure, haste makes waste, and personally, I have no problem buying fuel efficient vehicles or driving 55 instead of 65, but longer commercial transit times lead to nothing but waste. Is Maersk trying to guilt its customer base with the eco-stewardship argument that in reality turns out to be a direct cost pass-through straight to that customer base? I would argue this move will cost corporations millions of dollars in decreased supply chain efficiency.

Let’s start with the obvious increased costs you the buying organization will bear in the name of Maersk’s energy efficiency plans for you. First, you may lengthen your ocean lead-time by 25%. The NY Times article in the original post cites a 4-week journey from Germany to China (the route normally takes 3 weeks). Now that you have an extra week to account/plan for what will you do? You’ll likely order a bit more and create that bullwhip effect as you and your suppliers try and manage your longer lead times. And we all know that when we add time to order cycles we are less productive with our cash, we add to our inventory and we run the risk of not meeting demand.

But there are subtle losses to you the buying organization as well. Every day your material is on the water you add to your financing costs (thank you Maersk!) You decrease your throughput, you increase your WIP, and you offset those working capital improvements you made last year. Look, I don’t mean to rain on the green parade. If your company chooses to make environmental stewardship a priority, that’s great, so long as the costs have been weighed against the benefits.

A wise client once told me if your customer is not willing to pay more for a particular benefit then it may not represent a big enough benefit. In this case, you may intentionally [or unintentionally] pay a whole lot more but my question to you is this is your customer going to pay you more for that benefit?

–Lisa Reisman

Container Ships on Go Slow

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Global Trade, Green, Logistics

We wrote recently about the potential for manufacturers to differentiate their products on little more than the products’ carbon footprint. The thrust of the argument was that there is an evolving market in which faced with equal price and delivery terms a buying organization would opt for the supplier with a lower carbon footprint, perhaps out of a sense of environmental stewardship, perhaps in the expectation that in time they could incur costs or create marketing opportunities for themselves by reducing their supply chain carbon and wider emissions footprint.

So it was interesting to read in a NY Times article that the shipping industry is, for its own reasons, already taking positive steps to reduce the carbon footprint of every ton they transport. The lead shipping line in this development appears to be the Danish giant Maersk and they make great play of the reduced fuel consumption and carbon emissions that they have achieved simply by going slower. Call us cynics but we suspect the primary driver is it saves them a lot of money and has allowed them to compete more effectively on price in a market where buyers of shipping services focus more on cost than transit times. The reality is halving the top cruising speed can reduce fuel consumption by 30% and coincidentally have a similar impact on carbon emissions. The reason? – a slower speed reduces drag. For those of us that can dimly recall our physics classes, drag increases with the square of the speed, so the rise in drag is exponential all others factors remaining equal.

That principle holds true in the air and on land. Planes could easily reduce emissions by slowing down 10%, for example, adding just five or six minutes to a flight between New York and Boston according to the article. And simply driving at 55 instead of 65 miles per hour supposedly cuts carbon dioxide emissions of American cars by about 20%. Of course as the article points out, mile per mile, shipping even at conventional speeds is far more efficient than road travel. Shipping a ton of toys from Shanghai to Long Beach produces lower emissions than trucking them on to San Francisco afterwards but as container trade from Asia has risen 8 fold since 1985 and with zero tax on shipping, bunker fuels lines have sought ever faster transit times as a means of differentiating themselves in the market.

Never one to miss a tax raising opportunity, the European Union has suggested a tax be introduced on fuels used in shipping with the proceeds being used to help poor countries adapt to rising temperatures (after the EU has siphoned a large proportion off for themselves no doubt). China and India promptly objected as it would impact their exports to western markets and raise their import costs. Which raises the obvious solution to carbon emissions created by ocean shipping, move manufacturing closer to the markets in which the products are being consumed, a trend that we saw happening even before the credit crunch and was likely accelerated as volumes dropped.

The concept of slow running is not a total win-win though. Shipping lines have to balance fuel savings against greater labor costs as crews are kept at sea for longer and the possible impact on engines designed to run at high output being run at lower output for extended periods. However so popular have the savings been that some 220 vessels are practicing slow steaming, cruising at 20 knots instead of 24 or 25. Few take it to Maersk’s extreme of 12 knots but nevertheless the trend of a slow boat from China looks like it has caught on.

–Stuart Burns

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