From Broke To Billions – Risk Management, Efficiency And The Secret To Success
Why are some shipping magnates among the wealthiest individuals in the world while others spend most of their time in bankruptcy hearings?
The answer seems obvious, the income of any successful business exceeds operating costs. This is true in every business but, in this industry, even the most successful ship owners operate just above the margins of profitability. So how do a handful of shipping magnates make their billions? The answer is effective risk management.
From shipyard fees to crew payroll the costs of building and operating a ship fluctuate wildly depending on the world economic conditions and result in fluctuations that dive deeper and rise higher than the rest of the market. The wealthiest shipowners, like John Fredrickson and the Chouest family, are not afraid to take risks. They build enormous fleets while their competitors are scrapping idle vessels, they self-insure and are not afraid to send their vessels into high risk environments. Some call these people reckless, but others understand that these individuals are not daredevils willing to roll the dice on their wealth and reputation, rather they are experts in the art of risk management.
Headlines blaze with tales like that of the world’s most successful ship owner, John Fredriksen, who, at the age of 27 made his fortune sending ships into the Iran-Iraq wars to pick up oil at great risk and huge profits. It’s understandable how taking this risk could make someone a small fortune but how has he maintained and built this fortune for nearly two decades? The secret lies in risk. Fredriksen studies events, weighs the outcomes and makes calculated decisions based on risk before making big, life altering, decisions but he also pushes this strategy down to the operational level. He calculates the risk of escalating maintenance costs and crew salaries with the same strategies he uses before operating in areas of piracy and war.
Fuel is the number-one expenditure for each and every ship that spends most of her time at sea and accounts for between 30-40 percent of the cost of running a cruise ship and between 50-60 percent for most merchant vessels. With price swings exceeding $50 per barrel over the last five years, fuel is also a highly volatile commodity making it an ideal candiate for effective risk management.
Ship owners have a number of tools available to hedge their bets against fuel price inflation from the conservative approach of buying futures to assure future delivery of fuel at a set price, to high risk ventures like Fredriksen’s decision to buy an offshore oil exploration company. Each of these options however, comes with additional risk.
What if countries in Africa and the Middle East stabilize and the price of oil goes down? In the first case, future oil deliveries will come at a high cost and in the latter, exploration contracts will dry up and Fredriksen would lose millions.
Is Fredriksen worried about decreasing oil prices?
It’s unlikely because he’s done his homework and is likely prepared for that potential event. Men like Fredriksen recognize that market volatility, in either directions, is an opportunity to take the next calculated risk. The top ship owners also take a wholistic approach to their business. They look for opportunities to lower costs and improve opportunities in every aspect of their business because lower costs reduce the overall risk.
Reducing fuel consumption, for example, can lower both fuel bills and the risk of price fluctuations considerably. For example, a savings of just 1 percent can mean an annual saving of $50,000 for a mid-sized bulk carrier and $300,000 a year for a large container ship. Multiply this by 20 ships and then by 10 years, and the potential savings in fuel and emissions are astronomical. This is the reason why a few companies, including Maersk, have taken the drastic measure of reducing transit speeds .
Fuel consumption lowers risk, but unlike the chances ship owners take that make headline news, the opportunity to improve efficiency cannot be done alone, it requires cooperating with many efficiency specialists companies or partnering with a company with highly level experience in intergating multiple ship systems. ABB is one such company.
Working with Finland-based Viking Line, ABB has developed an energy management system for marine applications (EMMA) for a new ultra-energy-efficient passenger vessel that will have highly reduced greenhouse gas emissions.
“One of the top priorities at Viking Line is to lower the emissions and fuel consumption of our fleet,” said Kari Granberg, project manager at Viking Line. “We were looking for a good monitoring tool that automatically regulates power consumption and is as easy to operate as a traffic light. As a result ABB’s EMMA became our first choice.”
Energy consumption processes are present in all aspects of ship operations and include the propulsion, lighting and HVAC (heating, ventilation and air conditioning) systems on board, as well as external energy consumption factors like the wind, waves, sea current, suboptimal trim, ship maneuverability and the presence of fouling on the hull. As a result ABB is using their deep knowledge of ship performance to collect and process data via ABB software. Once the system is installed ship owners and operators know where every drop of ship fuel is consumed and whether it is used efficiently and optimally. Most importantly, this knowledge creates awareness of ship energy consumption processes and enables benchmarks to be set and best practices to be achieved.
ABB refers to this capability as Smart Marine Integration. It is made possible by ABB’s unique expertise in all three fields of marine technology – the propulsion systems that drive the vessels, the electrical systems that power them, and the automation systems that control them. This expertise enables ABB to provide vertically integrated solutions that collect and process data in real-time from all the ship components and systems, thereby providing owners and operators with full insight into how the vessel and its energy consumption processes are performing.
“With current fuel prices, the estimated payback of a system is less than a year” says Mikko LepistÃ¶, Advisory Systems manager for ABB’s Marine and Cranes business. “Through industry experience and tests on-board we are certain that our trim optimization system can help our customers save up to 5% in fuel consumption and consequently reduce emissions significantly.”
With fuel prices topping the charts of both operating expenses and price volatility, the question is not when or if the world’s most successful shipping magnates are taking measures to manage the risk of future fuel costs, they are all managing high fuel costs today. The questions is only what systems will be ordered for each fleet. Some, like Gary Chouest, are famous for ignoring partnership opportunities and developing new technologies in-house but others, like the Rickmers Group in Germany, is confident in the benefits fo an integrated approach. The company has contracted ABB to supply advisory systems for dynamic trim optimization and fleet management solutions for five multi-purpose vessels expected to be commissioned in the third quarter of 2012.
“We trust ABB as a reliable partner for energy efficiency, and chose ABB due to the benefits that the system will bring to our fleet” says Mr. Jens Lassen, Global Head of Rickmers’ business unit Maritime Services.
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