Speed optimisation
Petter Haugen, Equity Research, Shipping, DNB Markets
Bunker is now about 70% of the total cost
Division between bunkers and hire
Nicolay Dyvik
+47 22 94 85 42 | nicolay.dyvik@dnbnor.no
Øyvind Berle
+47 22 94 94 55 | oyvind.berle@dnbnor.no
Petter Haugen
+47 22 94 89 15 | petter.haugen@dnbnor.no
40%
30%
20%
10%
Assumptions/sources: VLCC, 92t/day at 15.9 knot (average in Clarksons
World Fleet Register); 1 year TC-rates until year 2000 (Clarksons); Spot
rates from 2001 until April 2012 (Poten&Partners)
2
2012
2010
2008
2004
0%
2002
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
0
50%
2000
20,000
60%
1998
40,000
70%
1996
60,000
80%
1994
80,000
90%
1992
100,000
1988
USD/day
120,000
90,897
108,357
140,000
1990
TC-hire
TC-hire
100%
1988
Bunker
Bunker
Relative divition between vesel hire and
bunkers
160,000
2006
140,199
Historic freight cost
The basis for any speed optimisation model is the relationship
between bunker consumption and vessel speed
 Theory (MAN) says
that:
120
DNB new
MAN
100
 𝐶 = 𝑘𝑣 3.2
Consumption (tonne/day)
10% speed reduction
= 30% consumption
reduction
 Based on collected
data we believe
this is too generic
and assume a
higher fuel
consumption for
the same speed in
our modelling
82
80
60
10% speed reduction
= 20% consumption
reduction
40
41
20
0
5
7
9
11
Speed (knot)
Nicolay Dyvik
+47 22 94 85 42 | nicolay.dyvik@dnbnor.no
Øyvind Berle
+47 22 94 94 55 | oyvind.berle@dnbnor.no
Petter Haugen
+47 22 94 89 15 | petter.haugen@dnbnor.no
13
15
17
Assumptions: VLCC consuming 92 tonne/day on
15.9 knot.
3
Speed optimisation = common sense
 Idea is simple:
Reduce speed until
the point of which
the additional
savings from
bunker is equal to
the additional cost
of using extra days
in sea
1.8
Bunker cost
TC cost
Optimal speed
1.4
10 knot
Ballasting cost on TD3 (mUSD)
1.6
1.2
1.0
0.8
0.6
0.4
0.2
16
15
14
13
12
11
10
9
8
7
6
5
0.0
Vessel speed (knot)
Nicolay Dyvik
+47 22 94 85 42 | nicolay.dyvik@dnbnor.no
Øyvind Berle
+47 22 94 94 55 | oyvind.berle@dnbnor.no
Petter Haugen
+47 22 94 89 15 | petter.haugen@dnbnor.no
Assumptions: Route is TD3, this is the ballast
leg. VLCC consuming 92 tonne/day on 15.9 knot,
TC-rate USD20,000/day, bunkers USD700/tonne
4
The third speed-dependent cost is cargo financing
Nicolay Dyvik
+47 22 94 85 42 | nicolay.dyvik@dnbnor.no
Øyvind Berle
+47 22 94 94 55 | oyvind.berle@dnbnor.no
Petter Haugen
+47 22 94 89 15 | petter.haugen@dnbnor.no
6.1 %
1.4 %
Assumptions/sources: VLCC, 92t/day at 15.9 knot (average in Clarksons
World Fleet Register); 1 year TC-rates until year 2000 (Clarksons); Spot
rates from 2001 until April 2012 (Poten&Partners); LIBOR 3 month,
Bloomberg
5
2012
0%
2010
0
2008
0%
1%
2006
1%
50
2004
2%
2%
2002
3%
3%
1996
100
1994
4%
4%
1992
150
% hire cost
5%
1990
5%
6%
1988
6%
Transportation cost as % of total
delivered cost
200
% bunker cost
7%
Value of cargo (mUSD)
7%
% financing cost
250
8%
8%
Value of cargo (rhs)
1988 30
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
1%
2012
3 mth LIBOR (yearly average)
9%
2000
300
Interest rate (3 mth LIBOR, lhs)
240
10%
Assuming no interest margin above LIBOR
makes the financing cost go away
1998
The value of the cargo on a VLCC is record high,
but interest rates are record low
The charterer likes it fast, owner prefers it slow
Neglecting the finance cost aligns charterer’s and
owner’s incentives
Charterer's optimal speed
Owner's optimal speed
7.5
25
7.0
20
10
6.5
15
6.0
10
5.5
5
5.0
0
4.5
10
-5
4.0
3.5
-10
3.0
-15
Owner’s income (TCE, kUSD/day)
Charterer's cost (USD/ton)
Charterer's cost (USD/tonne)
Owners income (TCE)
The inclusion of finance cost, say 5%, results in
different speed preferanses
5 6 7 8 9 10 11 12 13 14 15 16 17 18
Vessel speed (knot)
Nicolay Dyvik
+47 22 94 85 42 | nicolay.dyvik@dnbnor.no
Øyvind Berle
+47 22 94 94 55 | oyvind.berle@dnbnor.no
Petter Haugen
+47 22 94 89 15 | petter.haugen@dnbnor.no
Assumptions: Route is TD3, this is the laden leg. VLCC consuming 92 tonne/day on 15.4
knot, TC-rate USD20,000/day, bunkers USD700/tonne. Idea is that the owners receive
payment in USD/tonne equivalent of the charterer’s cost, hence owner use this USD/tonne
in this maximisation of the TC-equivalent (which then will be above kUSD20/day). Note that
the TC-eqv. is the same as assumed TC-rate on charterer’s optimal speed.
6
With a record high oil price, your interest rate is record important
Interest rate: 5%, bunkerprice: USD700/tonne, oil
price: USD117/bbl, TC-rate: kUSD20/day
Financing cost
Port cost
16
Bunker cost
Optimal speed
Interest rate: 10%, bunkerprice: USD700/tonne, oil
price: USD117/bbl, TC-rate: kUSD20/day
TC cost
12 knot
Charterer’s cost (USD/tonne)
14
12
10
8
6
4
2
16.0
15.0
14.0
13.0
12.0
11.0
10.0
9.0
8.0
7.0
6.0
5.0
0
Vessel speed (knot)
Nicolay Dyvik
+47 22 94 85 42 | nicolay.dyvik@dnbnor.no
Øyvind Berle
+47 22 94 94 55 | oyvind.berle@dnbnor.no
Petter Haugen
+47 22 94 89 15 | petter.haugen@dnbnor.no
Assumptions: Route is TD3, this is the laden leg. VLCC consuming 92 tonne/day
on 15.4 knot, TC-rate USD20,000/day, bunkers USD700/tonne.
7
Optimal speed will depend on:
1) Interest rate, 2) TC rate and 3) bunker/oil price
1) Higher interest rate incentivise higher speed
(bunker price: USD700/tonne)
2) Higher TC rate incentivise higher speed
(interest rate: 5%)
16
16
15
15
Optimal speed (knot)
Optimal speed (knot)
14
13
12
11
10
9
TC: USD5000/day
8
14
13
12
Bunker price
USD100/tonne
11
Bunker price
USD700/tonne
TC: USD20000/day
7
10
6
0%
5%
10% 15% 20%
Interest rates (%)
Nicolay Dyvik
+47 22 94 85 42 | nicolay.dyvik@dnbnor.no
Øyvind Berle
+47 22 94 94 55 | oyvind.berle@dnbnor.no
Petter Haugen
+47 22 94 89 15 | petter.haugen@dnbnor.no
25%
30%
0
10,000
20,000 30,000 40,000 50,000
TC rates (USD/day)
Assumptions: VLCC consuming 92 tonne/day on 15.4 knot,
oil price = bunker price/6
8
3) Bunker and oil prices correlate very well, but have opposite
implications for speed optimisation. Bunker wins!
Ballast, only impact from oil price is on bunker cost
Laden; higher oil price incentivise higher speed, but
higher bunker price incentivise lower speed
17
17
TC rate
USD10,000/day
15
16
TC rate
USD50,000/day
14
Optimal speed (knot)
Optimal speed (knot)
16
13
12
11
15
14
13
12
11
10
10
9
9
8
8
0
250
500
750
Bunker price (USD/tonne)
Nicolay Dyvik
+47 22 94 85 42 | nicolay.dyvik@dnbnor.no
Øyvind Berle
+47 22 94 94 55 | oyvind.berle@dnbnor.no
Petter Haugen
+47 22 94 89 15 | petter.haugen@dnbnor.no
1,000
TC rate
USD10,000/day
TC rate
USD50,000/day
0
250
500
750
Bunker price (USD/tonne)
Assumptions: Route is TD3, this is the laden leg. VLCC consuming 92 tonne/day
on 15.4 knot, interest rate 5%, oil price = bunker price/6
9
1,000
Bunker prices (USD/ton); Oil price (USD/bbl)
How to operationalise the speed optimisation opportunity?
Oil price
17
25
33
42
50
58
67
75
83
92
100
108
117
125
133
142
150
158
167
100
150
200
250
300
350
400
450
500
550
600
650
700
750
800
850
900
950
1,000
2,500
12.3
12.0
11.8
11.7
11.6
11.6
11.5
11.5
11.5
11.4
11.4
11.4
11.4
11.4
11.4
11.4
11.3
11.3
11.3
5,000
13.1
12.6
12.3
12.1
12.0
11.9
11.8
11.7
11.7
11.7
11.6
11.6
11.6
11.5
11.5
11.5
11.5
11.5
11.5
TC rates (USD/day)
7,500 10,000 12,500 15,000 17,500 20,000 22,500 25,000 27,500 30,000 32,500 35,000 37,500 40,000 42,500 45,000 47,500 50,000
13.8
14.4
14.9
15.3
15.7
15.9
15.9
15.9
15.9
15.9
15.9
15.9
15.9
15.9
15.9
15.9
15.9
15.9
13.1
13.6
14.0
14.4
14.7
15.0
15.3
15.6
15.8
15.9
15.9
15.9
15.9
15.9
15.9
15.9
15.9
15.9
12.8
13.1
13.5
13.8
14.1
14.4
14.6
14.9
15.1
15.3
15.5
15.7
15.9
15.9
15.9
15.9
15.9
15.9
12.5
12.8
13.1
13.4
13.7
13.9
14.2
14.4
14.6
14.8
15.0
15.1
15.3
15.5
15.6
15.8
15.9
15.9
12.3
12.6
12.9
13.1
13.4
13.6
13.8
14.0
14.2
14.4
14.5
14.7
14.9
15.0
15.2
15.3
15.4
15.6
12.2
12.5
12.7
12.9
13.1
13.3
13.5
13.7
13.9
14.1
14.2
14.4
14.5
14.7
14.8
14.9
15.1
15.2
12.1
12.3
12.5
12.8
13.0
13.1
13.3
13.5
13.7
13.8
14.0
14.1
14.2
14.4
14.5
14.6
14.7
14.9
12.0
12.2
12.4
12.6
12.8
13.0
13.1
13.3
13.5
13.6
13.7
13.9
14.0
14.1
14.3
14.4
14.5
14.6
11.9
12.1
12.3
12.5
12.7
12.8
13.0
13.1
13.3
13.4
13.6
13.7
13.8
13.9
14.0
14.2
14.3
14.4
11.9
12.1
12.2
12.4
12.6
12.7
12.9
13.0
13.1
13.3
13.4
13.5
13.6
13.8
13.9
14.0
14.1
14.2
11.8
12.0
12.2
12.3
12.5
12.6
12.8
12.9
13.0
13.1
13.3
13.4
13.5
13.6
13.7
13.8
13.9
14.0
11.8
11.9
12.1
12.2
12.4
12.5
12.7
12.8
12.9
13.0
13.1
13.3
13.4
13.5
13.6
13.7
13.8
13.9
11.7
11.9
12.0
12.2
12.3
12.5
12.6
12.7
12.8
12.9
13.0
13.1
13.2
13.3
13.4
13.5
13.6
13.7
11.7
11.8
12.0
12.1
12.3
12.4
12.5
12.6
12.7
12.8
12.9
13.0
13.1
13.2
13.3
13.4
13.5
13.6
11.7
11.8
11.9
12.1
12.2
12.3
12.4
12.5
12.7
12.8
12.9
13.0
13.1
13.1
13.2
13.3
13.4
13.5
11.6
11.8
11.9
12.0
12.1
12.3
12.4
12.5
12.6
12.7
12.8
12.9
13.0
13.1
13.1
13.2
13.3
13.4
11.6
11.7
11.9
12.0
12.1
12.2
12.3
12.4
12.5
12.6
12.7
12.8
12.9
13.0
13.1
13.1
13.2
13.3
11.6
11.7
11.8
12.0
12.1
12.2
12.3
12.4
12.5
12.6
12.6
12.7
12.8
12.9
13.0
13.1
13.1
13.2
11.6
11.7
11.8
11.9
12.0
12.1
12.2
12.3
12.4
12.5
12.6
12.7
12.8
12.8
12.9
13.0
13.1
13.1
Assumptions: Route is TD3, this is the laden leg. VLCC consuming 92
tonne/day on 15.4 knot, interest rate 5%, oil price = bunker price/6
Nicolay Dyvik
+47 22 94 85 42 | nicolay.dyvik@dnbnor.no
Øyvind Berle
+47 22 94 94 55 | oyvind.berle@dnbnor.no
Petter Haugen
+47 22 94 89 15 | petter.haugen@dnbnor.no
10
Higher bunker prices is good for owners
275
100%
m dwt
90%
225
85%
200
80%
175
Utilisation of fleet (%)
95%
250
 Idea is simple:
Higher bunker
prices incentivise
lower speed which
reduces effective
supply which
should give higher
rates
75%
2014e
2012e
2010
2008
2006
2004
2002
2000
1998
1996
1994
70%
1992
150
Effective fleet, mid year [m dwt]
Total demand [m dwt]
Utilisation with full speed [%]
Utilisation [%]
Nicolay Dyvik
+47 22 94 85 42 | nicolay.dyvik@dnbnor.no
Øyvind Berle
+47 22 94 94 55 | oyvind.berle@dnbnor.no
Petter Haugen
+47 22 94 89 15 | petter.haugen@dnbnor.no
Source: DNB Markets
11
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Nicolay Dyvik
+47 22 94 85 42 | nicolay.dyvik@dnbnor.no
Øyvind Berle
+47 22 94 94 55 | oyvind.berle@dnbnor.no
Petter Haugen
+47 22 94 89 15 | petter.haugen@dnbnor.no