Maritime economics exam
Exchange/currencyrisks
(Changing currency rates are problematic e.g., when revenues are made in USD and costs paid in other currencies) Currency hedging - most made in usd
Counter party risks
(aka credit risks, when the counter party defaults on payments; occur in particular during times of depressed freight markets)
Interest rate risk
(in case of shipping company debt financing: An increase in interest rates might put pressure on shipping company. Low debt to equity ratio can be used to manage this risk)
When is the contract of affreightment preferable
- It is easy for big companies to rely on one shipowner and they create a bond where they have to trust each other. - It is easier for the shipowner to plan the use of his ships - It is connected to the voyage charterer but if you have a lot of the same cargoes going in the same way it is better to make a contract
Bulk shipping porters five forces Bargaining power of buyers
- The buyers can have some bargaining powers, as the cargo is quite standardized and the costs for switching vendors is low. - The bargaining power of the buyers is very high o There is a large number of companies which fight over nothing else than price o Their power is even stronger by their fairly easy access to information § Ensuring information with buyers ensures competitiveness
What is Danish shipping?
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hat are supply and demand factors driving behind the freight rate fluctuations?
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How to forecast freight markets?
1. Relevance2. Rationale3. Research
Biggest alliances in shipping
2M alliance - Mærsk and Msc Ocean alliance Cosco - evergreen - cma cgm and oocl THE alliance Hapag Lloyd Yang Ming One
Where is the most ships build?
93% of ships delivered in 2018 China, south Korea and Japan (Japan is getting expensive labour wise) Moved away from Europe, lower labour cost South Korea currently top 1, good technology
?How covid effected:
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Demand supply
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What do ship managers do?
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o How are ships managed?
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Different segments dynamics
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The shipping matrix
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Where belongs the segments in the matrix
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Why do cycles occur in the freight markets?
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Exit focus milk niche
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How could companies in declining segments respond effectively?
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PLC
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Why can small shipping companies compete effectively in commodity shipping?
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Why can small shipping companies compete effectively in industrial shipping?
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o The invisible or visible hand???
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What are the key clauses in voyage and time charters?
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Have national shipping policies lost relevance in a global shipping industry?
A lot is now regristreting under a foreign flag
Market reports
A written study that provides the answer to e.g how does the business work and how fast is it growing. o How does the business work? o What are the future trends and risks? o How is the competitive structure? o Involve some statistical analysis and forecast tables, but not necessarily with an integrated model
Biggest shipping companies
APM-Maersk. MSC - Mediterranean Shipping Company. COSCO - China Ocean Shipping Company. CMA-CGM. Hapag-Lloyd. ONE - Ocean Network Express. Evergreen Line. PIL Pacific International Line.
Comparative advantages vs. Absolute advantages
Absolute advantages means that a country benefits from specializing in specific products, and trading them for other goods, because specialization makes higher quality products. Ex. instead of producing both wine and beer of lower quality, specialize in one of them and trade for the other. Comparative advantages is when a country can produce the same quality of a product as another country, but is able to produce it with a lower cost.
Cost for charterer and shipowner when bare boat
Bare boat Shipowner: Capital Charter: Operational, port and bunker cost
Why are freight rates so volatile?
Because it reflects on a lot of things like: o The world economy o International relations o Influential shocks -Economic downturns -Natural disasters -Political events -War -Trade war -"Pandemics" o Supply and demand
Why does the open ship register system exist and persist?
Because the major nations and their consumers benefit from it US invented the modern version of open registers(alcohol ban) Maybe not good for the enviornment
Biggest routes in container shipping
Biggest routes from east asia to northern america Next biggest east asia to europe Asia production center
What is capital costs?
Capital costs: Capital, brokerage
What is freight market risk
Commercial risks by engaging in the freight market (Commercial risk is defined as the risk a company takes by offering credit with no collateral.) Unemployment risk ( Can not find job for the ship Bigger ships higher volatility o The small ships are more flexible o Exposed to bigger range of market Handytize o Smaller ports - broader range of cargos Also tankers o Not a lot of different markets o Middle east to western europe or Asia Flexibility is an advantage Spot rates more volatile than time charter rates
What happens if freight market collapses?
Company with high ratio of debt Vulnerable Second hand value falls What will creditors do if ship-owners default on loan replacements? - Will they accept negotiate - They look at how good they normally have payed back - Can declare them bankrupts - How the bank expect the freight market in the future Port can say they wont have ship in, if they dont think they will pay port dues
What is private debt: Corporate loan
Corporate credit rating The better credit rating the lower risk - Cheaper loan for ship-owner Long term charter contracts with credible counterparties are good for credit ratings Oil majors Shipping is seen as high risk
What is deficit, competitive and cyclial trade
Deficit trade, when there is a shortage of a product in one area and a surplus in another, which leads to a trade flow and fills out a gap in the leading country. Very common in the raw material trade-market The competitive trade. This happens when an area is able to produce a product, but maybe the materials are cheaper in other areas. This is also run by the consumer choice, meaning that you are searching for diversity and wants something better that can't be bought domestic. Cyclical trade. Occurs in times of shortages, for example bad harvestes.
What is equity finance
Definition: Equity finance is a method of raising fresh capital by selling shares of the company to public, institutional investors, or financial institutions. Investors know they take high risk Receive annual dividends from company earnings Either private or public Private: Shipowners/shipping family or private equity funds Public: Stock market
Why do countries trade?
Differences in natural resources Differences in production costs Temporary imbalances
How is international shipping related to the world economy?
Differences in natural resources Oil Comparative advantages Import things even when not needed, because of comparative advantages like better quality or cheaper products Creates wealth to export goods
Shipping policy in Philippines
Employees on ships is often Philippines Supply over 25% of the world ship crew Islands - needs shipping 4th largest shipbuilding nation Poor people - Cheap labour Good education within the maritime industry Educational policies in the country Developing country - used to be third world country
How are ships and shipping companies financed?
Equity Private dept: Bank loans Public debt: Corporate bonds
Why is equity is more risky than depts
Equity investors expect higher compensation than loan/bond investors Loan/bond holder is first to get money after bankrupt
Equity or debt pros
Equity or debt Often in reality both How big share of equity and debt Debt Debt does not dilute ownerships of the company (existing owners remain in control of the company) Tax advantages Equity: More expensive because of higher risk dividend (udbytte)
Shipping policy in Chile
Export a lot of Ores, copper and agriculture Geographically isolated Need to export through see Far away from main consumer centers
Why register a ship under a foreign flag?
Flag determine cost structure Reduce costs: - Avert or reduce tax - Reduce crewing costs - Possibility to use international crewing - More flexible crewing and safety rules - Some really low safety rules Reduce government intervention - Reduce administrative burdens - Reduce risk for new legislation Why is it possible? Just paperwork Make a firm in the country that owns the ship
Shipping policy in Mashalls island
Flag of convenience Has a lot of ships sailing under their flag It is run from a company with an office in Virginia USA Low taxes US. Naval protection Earns a fee from registration
Which arguments should shipping companies executives use to convince potential financers
For equity investors: Market forecast If it has unique competitive advantages Risk assesments for lenders Credit ratings Asset risks Pas performance
Bunker price risk
For example oil prices A way of avoiding this is for the shipowner to transform into bare boat charters and time charterers where it is the charterer who takes the risk You can also use derivatives against bunker price risks (Bunker Hedging) (Foward Bunker Agreement) Its a contract on future fuel price at certain delivery location at an agreed price
What are the typical aims and tools for national shipping policy makers?
For some is it to improve the conditions for national shipping companies, and help their competitiveness, other countries focus more on the how to benefit the countries citizen (jobs fx)
Hedging against bunker price risk /Bunker hedging
Forward bunker agreement•A contract on future fuel price at certain delivery location at an agreed price Ship-owner, ship operator and bunker providers manage the risks of bunker price volatility
Derivates - Financial risk management with FFAs
Foward Freight Agreements (FFAs) Shipowner and shippers/Cargo-owners face opposite risk in the freight market - The ship owner dont know what the future freight rate will be - concerned about furure earnings Cargo owners dont know the price of transporting in the future - concern For Shipowners and cargo owners to manage the risks they use FFAs Buys FFAs to protect against drop or increase in freight market Gap between the freight rate expectations and true rate One party compensate the other
Who are the players in each of the four shipping markets?
Freight market: Shipowner, broker, cargo owner Sale and purchase: Shipowners and brokers New building market: Shipyards, brokers The demolition market: Shipowners and demolition yards
Basis for international trade
Geographical differences
Bulk shipping porters five forces Rivalry amongst existing competitors
HIGH - Only competing on price - The competition is also heightened as there are a lot of companies working with dry bulk and most of them are roughly the same size. - The ships are specialized in the way that they can't be used for many different purposes and therefore the ship-owners don't have the opportunities to change directions. - At the same time the industry has been commoditized, which means that they carry the same cargo on the same types of ships.
1. Why should ship-owners care about air emissions?
Has effect in shipping companies investment in new building NGO demands? New regulations Port demands - ports at big cities Societies expectation - shippers demand Shaping competion in shipping Shaping operation
Spot or time charter??
How much risks do the ship owner wants to take Theoretically, we would expect spot rates to trade at a premium (compared to time charter rates) in order to compensate ship-owners for the higher risks that they face when operating in the spot market Therefore we would expect that one year t/c rate would be the sum of the expected (monthly) spot rates plus a risk premium (Kavussanos and Alizadeh (2002))
Race for ship giants and its impact
Impact on ports - Huge infrastructure investment on stronger cranes - More solid mooring facilities - Deeper channels Larger storage areas - Larger transport capacities to the hinterland - Existing and often still very modern infrastructure can no longer cope with the size of the new ships - An increase of ship waiting time - An increase in port dues If the ports wants to be leaders in the market, they have to upgrade
Which forces shape competition in container shipping? Rivalry among existing competitors
In container shipping there is intense rivalry because the are all able to ship containers, which is the only product However in container shipping market share plays a major role and economies of scale plays a major role. It has become more difficult over the years to differentiate the services in container shipping due to the commoditization, but they differentiate in quality and reliability
How and why do the liquid and dry bulk shipping markets differ?
In dry bulk you can shift between commodities but for tankers it takes a lot of cleaning. More difficult to join the liquid market: Oil is dangerous business and reputation is important Oil company can buy a tanker
Restrictions of traditional risk management
Inflexible after investment in ships are made The market goes up during long term contract Counter party risk Goes bankrupt Doesnt keep to the contract
What need to be insured under operational costs
Insurance · Hull and machinery (the ship itself) o If they have record without many accidents - cheaper insurance · Protection and Indemnity (P&I) (insurance through P&I clubs/mutual insurance associations, which pool risks): o Hits something else o Another ships o Oil spill - problem for fishers · Special insurance for fx war zones
Diversification as a tool
Invest outside shipping in businesses which are not exposed to the shipping cycle Unrelated diversification to reduce risk Medicine Less common tool Shareholders don't like that - Focus on what we are good at - Want to make the choice themselves Strategic diversification Invest in related business' Shipping company's owning shipyards or container terminals to achieve synergies and reduce transaction costs
How to reduce cost in a container shipping company by fleet optimization
It is essential for a shipping company to build the "optimal ship", but in order to do this, there are many things to consider: ??
Bulk shipping porters five forces Threat of substitute
LOW The threat of substitutes is almost non-existing because there isn't an alternative to transport that huge amount of dry material. There are no substituting products to this.
Shipping policy in South Korea
Largest shipbuilding nation Hyundai STX Group DSME Shipbuilding industry threaten by China and Philippines 2,6% of export is ships Want cleaner, safer and more productive oceans State financial shipbuilding program Building better ports Tax exemption
Difference between liner and tramp shipping
Liner shipping Regular demand Fixed routes, port rotation and schedules Need for fast transportation Mainly manufactured Tramp shipping. Scattered demand No fixed routing or schedule Available at short notice to load any cargo from A to B at a time of your own choosing High volume but low value cargoes (Iron ore, coal, grain
What is linershipping
Liner shipping is based on fixed routes and schedules with a regular demand.
When choosing debt
Loan vs bonds(Bonds public) Bond market hard to renegotiate Public debt requires public information of the company Issuing bond is rime consuming Bonds principal normally only needs to be payed back in the end - Cash flow during bond is low until the end
What is public debt: Bond finance
Long term security issued by a shipping company Differs from loan because it is public Bonds can be sold on the bond market, but the conditions in the agreement remain the same
Bulk shipping porters five forces Bargaining power of suppliers
Low The shipyards Their bargaining power is very low due to the fact that every shipyard in the world builds these "easy" types of ships.
Forecasting process in shipping
Macro economy -> Global seaborne trade -> Fleet requirement -> Demand/Supply balance
Shipping policy in Singapore
Maritime 7% of GCP BIG shipping port, think it is the second biggest after shanghai Home to a lot of shipping companies International maritime centre IMC The Singaporean government is trying to make it more tax "friendly"
How to reduce cost in a container shipping company by network optimization
Minimize capital, fuel and port costs Economies of scale onboard vs. diseconomies of scale in port Port choice Port efficiencies (TEUs lifted per hour) Hinterland connections Shipping company
How can container lines maximize revenue
Minimize transit time Provide higher frequency Port choice Port efficiencies (TEUs lifted per hour)
Bulk shipping porters five forces Threat of new entrants
Moderate As the upfront capital requirements are low, you can charter Increase world trade - invites new entrants The incumbents does not have advantages for having been and therefore they have the same prices as the new firms · The cargo owners have the possibility of integrating backwards o They can take the role of ship-owners, where they can ship their own goods. o This is a major threat to the dry bulk shipping companies.
Alliances in shipping
Most container shipping companies have vessel sharing agreements, which means that they help to transport each others cargoes to be able to fill up these massive sized ships. - They do this to achieve the highest amount of economies of scale. However in the agreements there are no commercial information involved - No information about freight rates or customers However there are also disadvantages of being in such an alliance The companies entering an alliance together rely on each other due to the fact that they carry each others cargo. So if one company is facing difficulties or even bankruptcy, the effect spills over to all the other companies
Why have a national shipping policy to support shipping?
National safety: For national defense - WW2 - value of having access to a big fleet Nursey for seafarers: Support for national maritime infrastructure (Pilots, ports, ferry services) Support for national exports: Provider of infrastructure for manufacturing industries (Shipping promotes trade through low cost transportation) Some countries rely on cheap import Contribution to balance of payments: Foreign exchange earnings in cross trades Cluster arguments: Onshore, maritime industries depend on shipping - Shipping is not important for the employment in Denmark, but it helps other businesses Through trade(Companies trade ( Companies within the cluster trade with each other) Gain a voice in international, maritime policy: Increase with fleet size Protect "infant industry" (in the case of developing countries after 1950s decolonization)
Shipping policy in China
New to the maritime market Strong port performance 39% New build in china USA vs. China Government strongly involved Conflict with Singapore, more free Claims to south china sea - military present China imports a lot of transport services
Which forces shape competition in container shipping? Bargaining power of suppliers
Not strong at all - These ships can be build in many yards around the world
Which forces shape competition in container shipping? Threat of new entrants
Not strong, because it is possible to enter this market with charters and so on, but to achieve maximum profit and provide a real threat, market share is needed It's easy to enter but it's hard to become a threat
Tools for forecasting
Opinion surveys. Here you ask the experts what they expect will happen. Trend analysis. You look at the past trends and data from before. Mathematical models. Here you estimate equations by looking at previous trends and building models with them by using different variables Probability analysis. Here you estimate the chance of a particular outcome occurring
Typical arguments against favoring shipping
Opportunity costs - Shipping profits are very volatile and generally low (unattractive compared to onshore industries) - Why not focus on more profitable businesses? - Why not benefit from the fact that other countries subsidies their shipping industry and hence offer cheap international transportation options to national manufacturing companies? Fairness In Northern Europe: Against the "Nordic welfare model" Why favor shipping and not other sectors Risk that other sectors will start lobbying, if shipping is supported
How do shipping companies compete in dry bulk and liquid bulk/tanker shipping?
Perfect competitive market - because the supply and demand correlates perfectly. there are low entry barriers. Easy and "cheap" to charter a ship
Alliance formation
Pick solid companies Pick companies like yourself with the same type of cargo
What is private debt: Mortgage-backed loan
Private debt: Mortgage-backed loan Shipowner secure loan from bank and provide secure from a mortgage on a vessel Lender appreciate time-charter to a credible charter (oil major) To decrease risk of default If they don't hold their end of the deal with bank, bank can take ship
Pros and cons with container shipping
Pros Standardization Flexibility Costs Velocity Warehousing Security and safety Cons Site constraints Capital intensiveness Stacking
Pros and cons for hub and spoke
Pros: Few ships Cost saving Flexibility - react to oppurtunity by removing hub Cons: Complex scheduling More transshipment Additional handling cost Low reliability
How have different shipping nations responded to global competition?
Protectionism vs free trade How did TMNs respond to growth of open registers: - Denmark and Sweden same history and country, but tackled it differently Reject: Main argument: Avoid a race to the bottom Demanding a genuine link between flag and owner National ban on out-flagging tonnage Accept and adapt: Adaptation within the existing system Main argument: Alternative is loss of national fleet Stop out-flagging Work to improve safety and environmental protection standard
What types of cycles exist
Seasonal cycles. Depends on peak seasons for the different markets. Container shipping peaks in Christmas and dry bulk depends on the harvest. Long cycles/Secular trends. It sets the tone for the other cycles. 50-60 år Short business cycles. In general, it follows the long-term cycle in small fluctuations around it. 3-10/12 years
Shipping policy in USA
Second largest export economy Protectionism: American maritime industry is an important part of the economy and national security Not high DWT/P. C. USA won world two because of the fleet(Or nuclear) Their fleet is therefore a part of the americans way of thinking security Relays on Panama, Marshall islands and liberia
How can container lines differentiate their services?
Service differentiaters: · Low transit time · High frequency · On-time delivery · Transparency (Cargo tracking) · Ease of doing business · Space capacity for booking shortly · Network coverage · Environmental performance
Politicalrisks
Ship-owner lobbyism is often used to mitigate such risks Conflict and violence Terrorism and kidnapping Property seizure Policy changes Local content requirements
Cost for charterer and shipowner when time charter
Shipowner: Capital and operational cost Charter: Port and bunkers cost
How do shipping companies make money?
Shipowners - makes money by: o Transporting cargoes from A-B (Freight market) o Buying and selling old wessels at attractive prices (S&P market) o Selling ships for recycling (Demolition market) o Buying and selling new building contracts at attractive prices (NB market)
Cost for charterer and shipowner when voyage charter
Shipowners cost: Capital, operational, port and bunkers cost Charter: None
Other types of finance schemes
Shipyard credits Yards offering credit schemes to convince shipowners do order ships - Often supported by governments Limited partnership - Known as Kommanditselskab (KS), - Popular in the 80's - Private investors, could deduct from tax
Tools for freight market risks (traditional risk management)
Short term charter comes with higher risk If you dont like risks Long term charter Long contracts Guarantee employment for the ships Not all ships come out at the same time after charter Invest in different ship types Markets that are not perfectly correlated Invest in smaller ships
Which forces shape competition in container shipping? Threat of substitute
Some cargoes in this industry can be transported in other segments such as plane and rail - However the economies of scale in shipping is so significant, that this is rarely done - For example is it cheaper for China to transport iron from Brazil to China by ship, than it is transport iron from one place in China to another by rail.
What are the sources of competitiveness for shipping nations?
Some countries want the best competitiveness for their shipping companies, by supporting them in having a flag of convenience
What is the position of the US with regard to shipping?
The US as a global hegemonic power - but where is the US in shipping? Major shipping market Jones Act still apply to coastal trades (protectionism) Created and endorses open ship register systems - US established Panama in interwar period and Liberia post in 1945 - Cost reduction, but access to fleets in times of hostility - They enjoy US military protection - US flag not price competitive - US is home to several shipping registers Major ship-owning country under foreign flags Ship finance center Naval power remains
Which forces shape competition in container shipping? Bargaining power of buyers
The buyers in this industry is all the importers, such as retail stores and so on - They play a moderate role because the service has been commoditized and are able to seek other companies to ship their goods.
What is the freight market
The freight market is the market in the shipping industry which covers the transport of cargo
When is time charters preferable
The shipper doesn't want to own a ship, but he needs a ship to do his job Sometimes it is cheaper than buying a ship especially when the freight rate is low. When the charterer is insecure about the state of the market and doesn't want to buy a ship.
How does finance influence shipping company competitiveness?
The smaller companies can be bigger and stronger, by getting financial help Finance help lower the entry barrier A company strives after being market competitive. This is plausible by getting more financne to become more flexible in a volatile market
Economics of specialized and industrial shipping
The specialized shipping segment have a very small amount of the world fleet, however in value terms they account for a greater share of the world fleet.
Which factors are causing uncertainties in forecasting models?
There are different factors causing these uncertainties such as problems with behavioral variables, problems with model pacifications/assumptions and the problem of monitoring results all of these factors pushing us to question the data and conclusions drawn from it. o Waste a lot of time looking too much into specifics o Unchallenged preconceptions o Attempting to predict the unpredictable o Random demand shocks o You need to have to look at the datasets of forecasting with critical eyes. - Consider the interest of the author. They may have interest, which guide them in a certain direction. - Sometimes ship-orders are kept secret from the public and can be modified.
What is a shipping market?
There are several freight markets, which are distinguished by o Cargo types o Parcel size o Geography (trade area) o Time (duration of contracts)
Why lay up?
There are some reasons to consider when you need to lay-up, two of the main reasons are: To reposition the vessel to a more attractive port (to increase the chances of finding new, more attractive cargoes) To maintain 'license to operate' in tanker shipping (oil major vetting, oil majors have preference for ships which are in constant service, not inactive ones)
How can shipping companies manage or mitigate risks?
They can buy derivates Bunker Hedging(Foward Bunker Agreement) Its a contract on future fuel price at certain delivery location at an agreed price FFA Currency hedgin
Shipping policy in UK
Used to be really big - colonies - No longer big shipowner or builder They are an island = Shipping is important 95% of all UK trade was seaborne Want zero co2 emission by 2050 High qualified labour The government wants free ports
What is the optimal container ship design?
What kind of cargoes are you transporting? Hub and spoke (One big route linked to smaller routes) Line bunding: Sail in a line with different stops along the way Round trip:
How is the world economy related to international shipping?
When the economy is bad, we will not ship as much High effect on supply / demand
How do the four shipping markets relate and interact?
When the freight market booms: o Secondhand prices go up o Demands for new ships - prices go up - Couple years later the ships comes to the market = Bigger world fleet · High supply · Market go down: more ships will be scrapped or sold cheap on SH o Freight market go down o Second hand prices go down § High supply compared to demand o A lot will demolish ships, that will not make profit in the future
What to think when selecting port
Which ports to visit in what order Port efficiencies (Teus lifted per hour) Hinterland connections Shipping company bargaining position versus terminal operator Vertical integration of line terminal
Costs?
Write down costs
When is bare boat preferable
a shipping company doesn't tie up its capital and the nominal owner of the ship may obtain a tax benefit
Major dry cargoes
ex o Iron o Coal o Grain
How freight market correlates
o All freight markets reflect the global economic development ( high GDP growth translates into high demand for shipping) Negative correlation o Crude oil tankers vs. dry bulk carriers for coal, o Because coal is a substitute for oil Not perfectly correlated o Shipowners needs to manage risk by having ships in different markets o Ship that can transport different cargos o Combination carriers able to switch between dry bulk and tanker markets o Conversion of existing tonnage (changing your ship to another market) o Conversion of tonnage on order (changing new-building specification)
Goals for forecasting for shipowners
o Buy or scrap ships o Second hand or new building o Operate on spot chartering or time chartering o FFA
How to reduce shipping costs
o Capital costs o If you are a large shipping company, have a large market value or a good wrap sheet; you can be able to reduce the capital cost or even the rates per year, thus making the ship cheaper. o Wages o Wages are a large expense and can be decreased by hiring seafarers from developing countries such as the Philippines. However not all flags support this, so it is necessary to switch to a flag with this regulation to achieve this benefit o Maintenance o If freight rates are low, it is possible to reduce costs in maintenance by only maintaining your ship when it is absolutely necessary. o Bunkers/fuel o It is possible to save fuel in many ways, the most popular is simply to decrease speed. o Outsourcing
Goals for forecasting for bankers
o Demand for different vessel types o Reduce risk of lenders defaulting their payment
When to recycle? (demolish)
o Depressed market - no expectation the ship will profit again o Vessel is significantly less efficient or fit for purpose than other ships in the market - Technological obsolescence (old and worn - when maintenance and repair costs are exhibitable high) o Ship cannot comply with new environmental or safety regulation o Ship cannot supply the services needed o High recycling prices o Opportunity costs exceed expected future earnings - better places to invest the money earned from recycling
Vessel size influences shipping costs
o Economies of scale can be applied to shipping costs o Larger ships are cheaper in cost per cargo ton. o At the same time things such as, operating cost, voyage cost and capital cost does not increase in proportion to the deadweight of the vessel
Reasons for governments to intervene in the new building market
o Employment issues o Regional issues (Ship building centers) o Shipbuilding as national industry (The country's economy rely on this industry) o Subsidies in developing countries and traditional maritime nations
Under which circumstances are different charters preferable for ship-owners and charterers, respectively?
o For the shipowner - > The preference order is the voyage charter -> The time charter -> ((Bareboat charter)), when the market is good. § The order is reversed when the market demand is low. o Charter with a good freight rate: § Bareboat § Time § Voyage § Og omvendt med dårlig rate
Goals for forecasting for port
o Future vessel size o Open new ports o Evolve infrastructure
Problems with model specifications and assumption:
o Incorrect or superficial model specification o Too much detail o Unchallenged preconceptions o Attempting to predict the unpredictable
How do shipping companies make money in specialized and industrial shipping markets?
o It attracts customers that are looking to ship something specific that can't be shipped on an ordinary ship. o Markets often resemble local monopolies (small ferries are tailor-made for particular ferry routes (the route is the market)) o The fleets in industrial shipping segments are often relatively small. The number of competitors is very lowstrial shipping markets often resemble local monopolies (small ferries are tailor-made for particular ferry routes (the route is the market))
Why do scenario analysis
o Look forward and figure out what the future's big problem is o Different visions for possible major trends o Often starts with the base case scenarios, which continues much as the past. o Followed by the positive and negative scenarios, normally covering long periods. o Work your way back through different scenarios o This is a more accurate method but also very time-consuming
What happens in the collapse stage (Short term cycle)
o Market collapses § Supply > demand § FRs fall § Contracting high? § SH/NB prices fall § Increasing demolition § Liquidity remains high? § Mixed sentiment?
What happens in the recovery stage (Short term cycle)
o Market is increasing § Supply = Demand § FR > OPEX § Contracting increases § SH price increases § Fewer demolition § Liquidity increasing § Growing confidence
What happens in the trough stage (Short term cycle)
o Market is very low § Supply > demand § FR = OPEX (Operational cost) § Contracting low? § SH price (15-20 yrs) = Scrap price? § Many domlition § Financial pressures § Pessimist sentiment § Buy big in a trough A good rule is to buy big in a trough and take a break when there is a peak because the market gets too unstable.
What happens in the peak stage (Short term cycle)
o Market peaks § Supply < Demand § FR > 2*OPEX § Contracting high § SH Price (5yrs) = NB price § Few demolition § Liquidity increases § Take a break because market gets unstable A good rule is to buy big in a trough and take a break when there is a peak because the market gets too unstable.
The forecasting time scale
o Momentary - Days or hours - Not existing in Liner/container shipping, because they are scheduled and their route is online. And for the shipyard and down they need to have large orderings because they have so much capacity. o Short-term - Current year or next year o Medium-term - 5-10 years o Long-term - 25 years, the age of a merchant ship
Where are ships demolished
o Mostly done in Bangladesh, India, Turkey or Pakistan o 75% of scrabbing § Cheap labor § Low environmental standards § Low labor protection standards o EU flag ships needs to be demolished in Hongkong o To protect environment
When is a new building preferable to a second hand ship?
o NB price vs SH price o Time: It takes time to get a NB ship o Shipowners preferences and expectations o Expect boom in some years = NB ship o Specific ship or unique style o Environment regulations (Ship outdated?)
Disecnomies of scale
o On the water then economy of scale applies, § First the unit cost will fall percentagewise more, and in the end they will not decrease so much as the ship gets better o Port it is more expensive to have a bigger ship, because more needs to be loaded and unloaded, it takes longer time, the ship needs more space, and not all ports can take big ships. o Inland transportation will also eventually increase o You use more fuel the faster you sail, so more expenses, but you can make more money - slow steaming
Goals for forecasting for charters
o Price of cargo o Which ship they should get o What kind of contract o FFA or deriavates?
Why to outsource ship management to a third party - or why not?
o Pros § Expertise § Flexible and makes the company less complex (it's easier to fire a department from another company than a part of your own) § Cost reduction. The third party has a broader network and can make cheaper deals. (economies of scale) o Cons § No communiccatio between departments § Some big and advanced ships as oil majors won't accept third parties because they rely so much on trust and therefore want their own experts on the case.
How can ship-owners respond to a freight market collapse?
o Scratch old ships that is not going to profit (because of time) o Slow steaming for saving fuel o Be patient and wait/hope for better times o Reduce costs o Lay-up ship (Ship is temporarily usually anchored or moored) o It is rational for a ship-owner to lay up ships when freight cannot cover variable costs (Fuel and crew) o Instead of selling expensive assets (to bad prices bc of freight market collapse) lock them down and wait for profitable conditions. o Sell ships at depressed secondhand price
New building costs
o Second hand, price depend on market, new buildling is supply and demand o Material costs (steel and machinery) o Labour costs o Shipyard subsidies
Second hand prices
o Second hand, price depend on market, new buildling is supply and demand o Second hand prices not linearly o When market booms - SH ship more expensive than a new one, because of time o Buy cheap ship in bad times and hope for better o Not big risk, not big margin to scrabbing price o What determines SH price o Expectations (Freight rate) § Present value of the vessel's expected future cash flows o Vessel age (proxy for vessel maintenance) o Steel prices - recycling (vessel light weight) o New building price
How does competition in specialized and industrial shipping differ from commoditized shipping?
o Specialized and industrial shipping segments compete not only on low costs, but also on the quality of their services. o Provide unique value propositions (service quality) to cargo-owners in order to gain competitive advantages (companies belong on the right hand side of the shipping strategy matrix)
Forecast purposes:
o Spot chartering ships o Time chartering ships o Sale and purchase and newbuilding o Budgeting (cash flows and profits) o Strategic and corporate planning o Product development o International negotiations o Government policy-making o Bank credit analysis
What determines demolition price
o Steel prices (Demand for recycled steel) o Vessel light weight (Steel weight)
Forecasting modelling
o Structured way of using mathematical models to describe the market o by describing the entire shipping market but also go into the specifics e.g oil trade, dry bulk trade or shipbuilding market o Model a segment of the maritime business mathematically o Sensitivity analysis based on changes in key assumptions Disadvantages: o Numbers into a model to forecast can only be used for assumptions
Minor dry cargoes
o Sugar o Steel products o Forest products o Metals and minerals
How to differentiate in specialized and industrial shipping
o Tailor-made cargo handling service o Short transit times o High safety standards → No damage to cargo o Ability to call at ports with physical constraints → ex. ice conditions etc. o Onboard services for passenger ships → food, entertainment, sport, etc. o Maximizing the time window for installation of offshore wind turbines → the more up-time, the lower the costs o Frequent departures o Extensive route network → Global coverage
o How does commoditization affect specialized and industrial shipping?
o The process of commoditization is reducing opportunities for service differentiation and it heightens the focus on price competition. § During the recent years many industries have faced commoditization, which means that an industry such as container shipping has moved from "industrial shipping" to "contract shipping". o Technological obsolescence § refrigerated containers has replaced the demand for specialized reefer vessels. § Dedicated ro/ro car carriers, with fast turn-around-time and low cargo damage rates, to replace the combined bulk/vehicle carriers § Onshore holiday opportunities and low cost air lines taking over some of the demand for overnight car ferry services the combined bulk/vehicle carriers
Which three markets consists the freight market of?
o The voyage market - Which trades transport for a single voyage o The time charter market - Which hires a ship for a defined period o Freight derivates market (FFAs) - Which deals in forward contracts settes against an index - A derivate contract is a legally binding agreement, the two parties agree to compensate each other when changes in the freight rate (FFAs)
How are charters negotiated?
o Through a broker § Type of cargo § Ships available § Expectations about price · Reasonable? § Charter parties "Control everything happens correctly"
What are the common chartering types?
o Voyage charter § "Taxi" § Always spot market § Voyage charters contact the shipowner to carry a specific cargo with a specific ship for a negotiated price that covers all the costs. § The shipowner manages the ship and carries all the costs and bears all risks. He is motivated to finish the voyage quickly and efficiently and find the backhaul o The Contract of Affreightment (long term contracts) / way of voyage § The shipowner agrees to carry a series of cargo parcels for a fixed price per ton o Time charters § The charterer employs the ship for a specific period against payment of hire. He has the operational control (NOT costs) of the ship and bears the market risks. · The shipowner provides the ship and has the ownership and management and therefore pays the operational costs. Bareboat charters (you hire an empty ship) § The charterer has full control of the ships and the shipowner jut bears the capital and financial costs of the ships
What is the role of ship chartering:
o to allow the flexibility or adjustment in scheduling o to reduce capital liability o to diversify the risks o to meet the fluctuant demand (seasonal, shipping cycle) o to use others' expertise
o Why transport cargoes on open hatch vessels rather than conventional bulk carriers?
§ Cargo stowage factors (i.e. the weight to volume ratio) for open hatch cargoes(such as forestry products) differ from the typical dry bulk cargoes(such as grain, coal, fertilizer) § Cargo sizes(such as wind turbines) differ from the typical dry bulk cargoes
What is the environmental footprint of shipping?
§ Greenhouse gasses § Shipping counts for almost 3% § Increased (will get more attention for the people) § Sulphur and nitrogen oxides § Particulate matter Shipping is lagging in terms of environmental protection Evidence of lagging status · Timing: Later responses from shipping than others industries (The discussion on air emission from ships is only a very recent date, in contrast to power plants and cars) · Specific protection standards: Lower than onshore standards - also later response · Trends in emissions: Shipping GHG on the rise, where a lot of onshore is declining
What determines the environmental protection standards of shipping? § Why is shipping lagging?
§ Multi-jurisdictional nature of shipping and mobility of assets challenge regulation § Issue visibility: § Environmental damages are not immediately visible (Except oil spills) § Consumers doesn't know how the consumer goods come to the stores § Don't know about the GHG emmision § Shipping has a B - 2 - B nature (Out of sight for consumers) § Interest alignment: § Historically shipping lobbyist have successfully promoted a green image § Lobbyist shows how shipping is the least co2 emission transport § Issue scope: § Diverse, complex issue challenges regulators and private initiatives § Regulatory fragmentation and uncertainty § Uncertainty for key questions: Who? Where? What? When? How? § Regulatory uncertainty challenges "green" first-movers
Government tools in the new building market
§ Ship finance schemes § Direct subsidies § Innovation support § Government support orders § Direct ownership
Which benefits do third-party managers offer to ship-owners?
· Increased performance (and cost reduction) o Cost reduction § Economies of scale § Lower transaction costs § Access to cheaper crews § Higher bargaining power o Benchmark of in-house vs. outsourced vessels to improve overall performance and incentivize improvements. · Increased organizational flexibility o Easier for owners to quickly up or down scale fleet o Possibility to quickly enter new segments with help of third party managers · Focus on core competences o Reducing complexity in shipping company organization o Ship-owners without maritime competences (Banks)
Possible solutions to lower emission Technological measures (Invest in new technologies to save fuel and reduce emission)
· Incremental improvements: End of pipeline technologies (Exhaust gas cleaning devices, such as scrubbers) Remove Sox from the exhaust gas in the vessel funnel § Remove some of the problems and is easy to do § Increases fuel consumption GHG vs fuel consumption o Test what kind of hull form leads to smallest fuel consumption before making the ship o LNG = Liquid fired natural gas § Lack of that in ports · Radical innovation: Fuel switch to low carbon fuel o Technologies with a lot of uncertainties o Costly o Big implementation challenges o New fuel infrastructure is often unavailable § Batteries only on small ships § Biofuels § Methanol
Who are the main actors in international shipping?
· Shippers/charters · Shipowners · Shipbuilders · Seamen's organizations · Banks · Investors · Insurance companies · Brokers · Regulators · Classification societies · Governments · Ports/Port authorities
Possible solutions to lower emission Operational measures (work smarter to save fuel)
· Slow steaming, reduction of fuel by reducing speed o A lot of ships are anyway waiting outside a port § Inefficiency · Hull and propeller cleaning o If the hull an propeller is clean there is less resistance § Lower fuel consumption · Trim optimization o Some save fuel by trim by boat and others by trim by stern o Ship is more upwards or downwards
What are the operational risk
· Weather conditions · Sinking ships · Value and human lives at stake o Hacking (IT) o Piracy
