8 February 2019

Ro-Ro sensitivity to fuel prices

What does the sulphur regulation of marine fuels mean for the Ro-Ro operators along the Scandria®Corridor?



Figure 1. Marine fuel prices, 2014-2017 ($/tonne).

In most cases, environmental protection comes at a cost. The reduction of the sulphur content of marine fuels in both the Baltic Sea and the North Sea of the Scandria®Corridor that took place on 1/1/2015 was no exception. Unless equipped with special exhaust-gas treatment devices (scrubbers), existing ships had to switch from burning the traditional Heavy Fuel Oil (HFO) into the more expensive Marine Gas Oil (MGO). It was feared that this substantial increase in the fuel cost would result in competitive losses of coastal ships vis-à-vis other transport modes. The Ro-Ro ships carrying trucks and trailers between ports that are also connected via land routes were expected to incur the heaviest losses. None of these fears materialised, however, as the stricter regulation coincided with a significant drop in fuel prices that nullified the anticipated freight rate increase (refer to Fig. 1).

The Ro-Ro connections constitute an important component of the Scandria®Corridor and a crucial element for the Scandria®2Act vision of advanced multimodal services. In searching for the necessary conditions for such multimodality, the Technical University of Denmark (DTU) and the University of Turku (UTU) were engaged in investigating the sensitivity of Ro-Ro services to fuel cost fluctuations, anticipating the adverse effects of a possible fuel price hike and discussing potential mitigating measures.


Figure 2. The elasticities of lorries and trailers along the Finland-Central Europe connections with respect to fuel price. © UTU

Two different approaches were examined. UTU looked at the problem from a macro-level perspective. The case examined is the Ro-Ro connections between Finland and Germany. What makes this case interesting is that these two countries are the intersection points of the Scandinavian - Mediterranean (ScanMed) and the North Sea - Baltic (NSB) TEN-T core network corridors that form two alternative options at corridor level. In addition, there are several available routes along these corridors, which include maritime legs of varying lengths. Seasonally adjusted aggregate annual port statistics were analysed through a regression model to estimate the price elasticity (% change in volume per 1% increase in fuel price) of the trailers and lorries transported over five different routes. Only the statistically significant results appear in Fig. 2. It seems that most of the flows are rather inelastic to the fuel price, meaning that a 1% increase in fuel price translates to a less than 1% change in transport volumes. Although the relationship is not simple and straightforward, the results show that an increase in fuel price penalises the volume of lorries on the long-distance Helsinki - Germany route in favour of the shorter Helsinki - Tallinn and Hanko – Germany options. The different behaviour of the trailer (unaccompanied) traffic might relate to the pricing policies of the Ro-Ro operators in relation to this market segment.


Figure 3. The nested binomial logit formulation.

On the other hand, DTU followed a micro-level approach, assessing the route selection problem from the perspective of a cargo owner/shipper. The case examined here is the one-directional trade between Lahti, Finland and Berlin, Germany. The specific regions were selected because Scandria®2Act has project partners and associated organisations, who are based in these areas and could assist with the provision of the necessary information. The investigation is based on a modal split model that estimates the market shares of available alternative options. The model, adapted from an earlier version that was developed by DTU in the context of the research project RoRoSECA, takes into consideration the transport cost, transit time, and frequency of services offered along alternative routes. The calendar year preceding the enforcement date of the new regulation (2014) was used for calibrating the model, which was then applied on 2015 input values to produce modal split estimates. The route selection was modelled as a two-stage process, where the shipper first decides on which corridor to take (ScanMed or NSB) and then selects among the available routes along the chosen corridor. The four routes examined appear in Fig. 3. The route involving the Turku-Stockholm and Trelleborg-Rostock connections was excluded from the analysis as being both longer and more expensive than the other ScanMed alternatives.

In view of the dramatic drop in fuel prices that took place in the second half of 2014, three different scenarios were examined:
Compliance: The heavy fuel oil (HFO) purchased at 2014 prices is replaced by marine gas oil (MGO) at 2015 prices;
No regulation: Operators continue using HFO, which is now purchased at 2015 prices; and
High prices: Operators comply by using MGO which, however, is now purchased at the 2014 prices (high level).


Figure 4. Estimated modal split (Year 2015).

The preliminary results of Fig. 4 show that the model functions as expected. The lower 2015 prices of the ‘compliance’ scenario (even if they concern MGO) favour the longer sea legs of ScanMed which, collectively, gain shares (1.15%) against the shorter maritime connections of the NSB corridor. The gain would have been much higher (3.79%), should operators were allowed to continue burning HFO. The situation, however, reverses when fuel prices return to their 2014 level and the expensive MGO penalises the longer Ro-Ro connections (in this case, NSB wins 5.15% shares from ScanMed). In fact, this scenario lies closer to the actual case (NSB gains 4.66%), despite the actual drop of prices in 2015. Possible explanations include: (i) the expectations of higher fuel prices that led to capacity increases along the short Helsinki-Tallinn services, and (ii) the longer-term contracts of the Finnish Ro-Ro market.

The model was subsequently used to assess the possible effects of introducing an Eco-Bonus scheme along the lines of the recent Swedish proposal. As expected, the 30% subsidy of the operating costs of the Ro-Ro ships that this proposal suggests would favour the longer maritime connections of ScanMed, which gains an additional 3.31% of the market.


Figure 5. Comparison between the two approaches.

The use of two different approaches enables the critical comparison between them. Fig. 5 shows that in this case the macro-level approach has been much more effective in forecasting the developments of 2015. This is due to the fact that: (i) the actual case reflects the aggregate port statistics of 2015, which is in line with the logic of the macro-level perspective, and (ii) the micro-level analysis has been based on a number of assumptions that limit the accuracy of the results. The validity of the methodology, however, is not questioned when it comes to decision making at the enterprise level.

It is worth noting that the drop of market shares of the Helsinki - Gdynia route has resulted in the withdrawal of this service in 2016, showing the sensitivity of the Ro-Ro connections to even moderate changes in demand.

In conclusion, it seems that the Ro-Ro flows have not been affected much by the stricter sulphur regulations, partly because of the large drop in the fuel price and thus unexpectedly low increase in costs, partly because of the ‘systematic’ nature and long term contracts of Ro-Ro-traffic, partly because Ro-Ro services pertain to a combination of sea and road transport that is affected by external influences other than the cost of marine fuel.

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Contact / Further information:

George Panagakos
Technical University of Denmark
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Tomi Solakivi
Postdoctoral Researcher
Turku School of Economics
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Thalis Zis
Technical University of Denmark
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Direct: +45 45 25 15 03

Harilaos N. Psaraftis
Technical University of Denmark
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Direct: +45 45 25 15 19



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