Skyrocketing Oil Prices: A Stealth Threat to the Shipping Industry

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Sky Rocketing Oil Prices - a ‘Stealth Threat’ to Shipping Industry

The extraordinary rise in oil prices has an indelible impact on many industries. Being an activity that depends greatly on oil, shipping has not escaped this development.

Shipping is a crucial facilitator of much of the world’s trade; hence, the rising cost of shipping as a result of the rise in oil prices is naturally a matter of great concern to the industry and beyond.

Shipping companies are decidedly edgy to market trends, particularly rising crude prices point to a more challenging year in 2012. Overcapacity across all shipping segments has put pressure on freight rates, with this being further compounded by the relentless rise in bunker prices since the beginning of 2011.

The Economist Rubin & Benjamin, argued that “the cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today”

Shipping companies are facing volatile situation with regards to the high bunker fuel costs, lower demand for shipping services, depressed freight rates as well as more seriously, declining asset values of ships,”

The bunker fuel prices have risen steadily from a range around US$500 per MT in late 2010 to early 2011 to above US$700 per MT and are now hovering around US$600 per MT in 2012. Bunker prices are not expected to ease well into middle of next year and higher bunker prices would eat into any improvements in freight earnings.

“Shipping companies are being backed into a corner by rising input costs and falling freight rates,” moving even larger shipping companies towards operating losses”

The spike in bunker prices has “drastically eroded” the already slim profits experienced by shipping companies, which were already saddled with the rise of other costs. They are already paying more for vessel purchase, for onboard equipment, and for repair & maintenance of their fleet. All these add pressure to the operating costs of shipping companies.

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