Costs in shipping - just the tip of the iceberg
12th January 2010 07:45 GMT

2009 will be remembered as the year the shipping industry was besieged by an onslaught of crises, with declining world trade and plunging freight rates, survival rather than profit has been the primary driving force.

Shipping companies have made huge capacity cutbacks in response to falling demand. With more than 10 per cent of the global fleet reported to be idle, ship owners have had to take drastic measures and many have undergone a tremendous amount of restructuring, refinancing and rescheduling or cancelling of orders. Even so, profitability has continued to fall.

While ship owners may have little means to affect world markets and trade and so increase revenue, profitability, or even survival, often depends wholly on cost-efficiency.

However, in the quest to cut costs, ship owners run the risk of overlooking below the line or hidden costs.

A good analogy for the different costs faced by ship owners is an iceberg. Above the line costs, or the visible part of the iceberg, are usually the most obvious and easiest to manage. These include every day operating costs. Below the line costs, or the part of the iceberg beneath the surface, include amongst others maintenance costs, fuel/cylinder lube consumption costs  and “unplanned offhires” – an euphemism for breakdowns, port state control or other incident that takes the vessel off-line that was not planned by the owner, charterer or ship manager. Like an iceberg, the obvious costs are a fraction of the hidden costs and if not properly examined, these hidden costs can have a significant impact on a ship owner’s bottom line.

Too often shipping companies with a myopic view on cost control have a tendency to scale back on capital expenditure or not engaging third party service providers that in the medium term can actually help them tackle hidden costs of operation such as maintenance and improving fleet reliability. Avoiding the immediate cost of technology or service provision may be viewed by shipping companies as an opportunity to cut costs. But in reality, this short-term view could actually increase costs in the medium to long term.

Effective rationalisation of costs is the balance between stripping out costs and investment to realise efficiencies.

An often overlooked area of hidden savings is engine measurement and management. Frequent laboratory checks and expert analysis of performance, fuel, and cylinder lubricating and drain oils require no capital investment and minimal ongoing costs, but yields significant savings in lubrication and maintenance costs, as well as reducing environmental impact.  Condition monitoring provides technical staff with early warning of wear, excessive deposits, combustion instability issues and fuel or oil contamination which would otherwise go undetected. They say that prevention is better than the cure and regular oil analysis is certainly cheaper than the cure when it averts the breakdown of critical engine components. A preventative rather than remedial maintenance strategy helps to avoid costly downtime or the necessary replacement of expensive machinery, shifting engine performance measurement programmes from a perceived cost to a sound investment.

The turbulence of the last year should not rob ship owners of their foresight. Even as costs are a concern, ship owners should bear in mind that much of the costs incurred are unseen and the right investments in performance monitoring can enable them to avoid being burdened by greater costs in the long run.

Douglas Raitt,
12th January 2010 07:45 GMT