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Maritieme economie

Introduction and history

Introduction
Sea transport and the global economy Old industry History of continuous change

Role of sea trade in economic development Shipping more efficient than land transport Earlier start of trade Increased productivity => need to access wider markets Westline Theory o

o Centres of sea transport moving westwards

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Maritieme economie

History
1700 BC: Babylon first super city 1000 333 BC: Tyre becomes main port; first Suez Canal? 375 BC: Mediterranean busier; ringed by major towns Roman empire: Romans control coasts of Mediterranean, Black Sea & southern Britain; special grain ships; bill of lading 390 AD: Byzantine empire with Constantinople as centre of sea trade 1000: economy North Europe booms Hanseatic League = economic alliance of trading cities and their guilds o Established & maintained trade monopoly o Coast of Northern Europe 15th century: 4 developed areas (China, Japan, India, Europe); few links 1433: Chinese emperor forbids building ocean-going ships => European seafarers develop sea transportation system End 15th century: Europe discovers sea route to Asia; compass & astrolabe; Columbus discovers America (1492); Vasco da Gama finds sea route to Indies (1497) Early modern period o Trading triangle Europe -> Africa => manufacturers Africa -> America => slaves America -> Europe => sugar, rum, tobacco & cotton o Antwerp Bruges silting up New maritime capital Financial centre 1585: Antwerp sacked by Spanish, Scheldt blocked by Dutch o Amsterdam Shipbuilding & shipping at lower costs 1585: protestants from Antwerp -> Amsterdam East India Company (VOC) Ships with average 800 dwt 18th century: English & Dutch East India Company monopolies; Atlantic trade many small traders; roles trader & shipowner grew apart 19th century: Industrial revolution => steam engines, iron hulls, screw propellers, deep sea cable network; passenger liners; cargo liners with regular services; tramp shipping; immense growth; more efficient use of coal o 1865: first successful transatlantic cable o 1869: opening Suez Canal o 1880: first reefer o 1886: first tanker 1912: first diesel vessel 1914: few sailing ships in merchant service Today: very fast growing sea trade; special vessels; passenger liners => cruise ships; containers; growing capacity of tankers

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Maritieme economie

The organisation of the shipping market

Overview of the maritime industry
Vessel operations Shipbuilding Marine resources Marine fisheries Other Demand & supply

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Maritieme economie

International transport industry

Zones o Inter-regional: deep-sea & airfreight Airfreight High value, high speed Growth 6% per year 111 billion ton miles in 2005 0,4% interregional transport Deep-sea High volume interregional cargoes Growth 4,2% per year 28,9 trillion ton miles in 2005 o Short-sea: coastal Smaller ships Cargo flexibility Many ports Sometimes political restrictions o Land: river, canal, road, rail Pipelines

Characteristics of sea transport demand

Customers mostly multinationals o Buying raw materials where cheapest o Producing in low-cost countries o Selling manufacturers everywhere Commodities o Energy (44%) o Agricultural trade (10%) o Metal industry (18%) o Other (28%) of which 50% is containerised Parcel size distribution o Bulk cargo => whole ship same cargo o General cargo => many small consignments Other factors o Transport price o Speed o Reliability o Security

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Maritieme economie

The sea transport system

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Maritieme economie

Streams o Bulk parcels Dry bulk: steel, aluminium, fertilizers, coal, grain Liquid bulk: oil, chemical products, fruit juice Major Iron ore Grain Coal Phosphates Bauxite o Specialised parcels Specific handling different type of cargoes o General cargo parcels Any cargo too small to fill a ship Can be loosed, containerised, palletised or pre-slung Also liquid / refrigerated / heavy, awkward cargo Unitisation & standardisation for faster cargo handling

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Maritieme economie

The world merchant fleet (supply side)

1 010 million dwt or 42 900 cargo carrying vessels in 2007 39 100 non cargo carrying vessels in 1995 (mostly fishing ships) Lloyds states there are 16 main categories of ships Ownership o 54% tonnage controlled by Greece, Japan, Germany, China & Norway o 1/3 tonnage registered in Panama & Liberia o > Panama registered fleet controlled by Japan o Registry Liberia mostly used by Germany, Greece, Russia & Saudi Arabia

Cost of sea transport

Booming shipping market between 2003 & 2008 Cost transport smaller proportion of total cost Unit cost = ( capital cost + operating ships cost + cost of cargo handling ) / parcel size Differences liner & bulk o Bulk = minimizing unit costs Large companies often own fleet Chartering on long term Often single cargo trip Long term arrangement with shipowner o Liner = speed, reliability & quality of service

The role of ports

Types o Small local ports Basic facilities Often short sea vessels In developing countries & rural areas o Large local ports High cargo Special investment o Large regional ports High volumes Deep sea vessels Specialized terminals o Regional distribution centres Very large ships Distribution to smaller ports Specialist terminals

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Maritieme economie

Shipping companies running the business

Not much similarities between bulk & liner shipping Every company own structure Shipping pool o Fleet similar vessel types o Different owners o Central administration o Owner pays capital costs, manning & maintenance

Role of governments in shipping

Regulations in maritime industry Political influences on costs, prices & free market competition

The shipping market cycle

Baltic Exchange Dry Index
BDI Check before exam

Characteristics of the shipping market cycles

Many cycles in economy as result of removing imbalances Length of cycles incidental & irregular Extreme elasticity of tramp shipping Shipping = most speculative business Shortage ships => rise freights => construction new ships => collapse freights Stages o Evidence of surplus capacity Ships queue up Slow steam Freight rates fall to operating cost Negative net cash flow o Recovery Balance in supply & demand Freight rates increase above operating costs o Peak High freight rates Second hand prices boom Order books expand o Collapse Supply overtakes demand Freight rates fall

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Maritieme economie

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Maritieme economie

Conclusions short shipping cycle o Coordinates supply & demand o Cycle has four stages o No rules on each stage o Not predictable at all

Shipping cycles and shipping risk

Volatile market Cycles present central part Uncertainty Shipper takes shipping risk Shipowners take risk Long cycles o Explanation of long cycles found in technological innovation o Increased efficiency => downward spiral of freight rates o Statistically not predictable ROI = return on investment Shipping = low return business with high risk factor

Supply, demand and freight rates

The shipping market model
Two jobs o Operating ships o Buying & selling ships

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Maritieme economie

Key influences on supply and demand

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Maritieme economie

The demand for sea transport world economy

Development world economy = main element Business cycle: fluctuations in rate of economic growth External factors o Wars o Sudden oil price changes Internal factors o Dynamic structure of world economy World trade elasticity = % growth sea trade / % growth industrial production Causes of cycle o Multiplier & accelerator: GNP spent on investment / consumption creates demand o Time lag: delay between decisions & implementation sharpen fluctuations o Stockbuilding: recovery => sudden rebuilding, recession => less stocks o Mass psychology: people act dependently

The supply of sea transport

Decision makers who control supply o Shipowners o Shippers / charterers o Bankers o Authorities Merchant fleet development o Scrapping: 4% o Escalation of ship sizes Fleet productivity o Function of Speed: average speed under design speed Port time: reduced by use of containers Deadweight utilisation: capacity lost to bunkers, stores, ballast Loaded days at sea o Unproductive periods Shipbuilding production o Takes 1 4 years o Output = variable Scrapping and losses Freight revenue o Ultimate regulator o Pricing system central to supply of transport o Supply adapted to prices with changing of speed & lay up (short term) o Scrapping / ordering of ships (long term)

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Maritieme economie

The freight rate mechanism

Mathematical relationship between speed & freight: s = ( R / ( 3 p * k * d ) o s = optimum speed per day o R = voyage freight rate o p = price of fuel o k = ships fuel constant o d = distance Short run equilibrium o

Long run equilibrium

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Maritieme economie

The four shipping markets

The freight market
Primary mechanism for shipping investors Only source of wealth Baltic Shipping Index Types of transaction o Freight contract: shipper buys transport o Time charter: ship hired Broker puts shipowner & shipper / charterer together Owners / charterers often use one or more brokers Types of contractual arrangement o Voyage charter Transport specific cargo Fixed price / ton Terms set out in charter-party o Contract of affreightment Carry series of cargo parcels Fixed price / ton o Time charter Charterer operational control of ship Single voyage / period Shipowner pays operating costs, charterer directs commercial operations & pays voyage expenses & handling costs o Bare boat charter Full operational control of ship Charter party protects position of contracting parties Worldscale Index measures freight rates per barrel

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Maritieme economie

The freight derivatives market

Baltic Freight Index Baltic International Freight Futures Exchange hedges against sudden changes in freight rate Now: Forward Freight Agreement in stead of futures Principle BIFFEX o Shipowner Price goes down Profit on BIFFEX Compensates for losses on chartering at lower freight rate Price goes up Loss on BIFFEX Compensated from additional profits by chartering at higher rate o Shipper BIFFEX higher => profit BIFFEX lower => loss, recup by chartering ship at less than anticipated rate

The sale and purchase market

Trades second hand ships Annually 1000 deep sea merchant ships being sold Most transactions through shipbrokers Immense volatility Sale procedure o Putting ship on market o Negotiation of price & condition o Memorandum of agreement o Inspections o Closing Price dynamics o Freight rates: primary influence o Age: depreciation down to scrap value o Inflation o Expectations

The new building market

Worldwide 250 shipyards Shipbuilding contract: letter of intent Prices volatile & correlated to second hand prices

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Maritieme economie

The demolition market

Resource of cash during recession Usually by broker Most demolition yards in Far East Demand depends on local steel market

Costs, revenue and financial performance

Financial performance and investment safety
By individual company Based on o Revenue received o Cost of running ship o Financing the business

Costs concerning ships

Operating costs: crew, maintenance, stores, consumables Periodic maintenance & surveys Voyage costs: fuel, port charges Capital costs: financing, dividends, interests Cargo handling costs

Revenue
Elements o Optimising speed At low freight rates => reduce speed Optimum speed for any level of freight rate & fuel cost o Maximizing loaded days at sea Ships time = productive loaded days at sea & days in ballast / port LD = 365 OH DP BAL o Deadweight utilisation Extend to which vessel travels with full payload Bigger ship => more time in ballast Combined carrier = high utilisation

Computing the cashflow

Voyage cashflow: used to make operational chartering decisions Annual cashflow: of ship or fleet, evaluating business as a whole Required freight rate analysis: needed revenue to cover costs Discounted cashflow: inclusive time value of money (NVP & IRR!!)

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Maritieme economie

Valuing merchant ships

Ship type Ship size Age Year of build Specification Scrap value

Financing ships and shipping companies

Ship finance and shipping economics
Capital cost = important cost

How ships have been financed in the past

Before 1850 owned by one person 1862: Limited Liability Act 1950s & 1960s: chartering 1970: asset 1980s: financing asset Shipbuilding credit by shipyard / government

The world financial system and types of finance

Comes from private or corporate savings Money that needs to be invested

Financing ships with private funds

Owner equity & cashflow finance Public offering of equity, listing on stock exchange Partnership structures Ship funds

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Financing ships with bank loans

Term loans o Most common o Interest rate = mostly floating + spread o Repayment schedule with balloon payment at end o Syndication Debt finance for new buildings o Pre-delivery finance can be problem o Government guarantee o Interest rate subsidy o Moratorium

Financing ships and shipping companies in the capital markets

Public offering of equity Raising finance by issuing bonds o Credit rating o Placement by bank

Financing ships with special purpose companies

Leasing of ships

Analysing risk in ship finance

Standard deviation of return is high Economic risk Operating risk Shipping market risk

The geography of maritime trade

The value added by sea borne transport
Central role in globalisation More than 3000 major ports

World sea borne trade by region 2005

Distribution 7 billion ton North Atlantic 50% mature economies with slow growth rate Pacific & Indian Oceans rapid growth to 50% Logistics deals with complex transport problems

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Maritieme economie

The maritime trading network

Link Atlantic => Pacific & Indian Oceans o Cape Horn o Cape of Good Hope o Suez Canal o Panama Canal Pacific maritime area o 2x Atlantic area => greater distances o West Coast America: little heavy industry => little bulk trade o Industry concentrated in Asia o Oceania main supplier of raw materials & energy Indian Ocean maritime area o East African coast: few deep sea ports, no strong economies, not much raw materials o Red Sea = busy highway o Pakistan, India : import crude oil, export iron ore

Europes sea borne trade

One of worlds biggest trading regions Import 2,1 billion ton, export 1,2 billion ton Main areas o Western Europe o Baltic Sea o Mediterranean Sea Developed economy with large population Water on almost all sides Originally endowed with almost all major raw materials Owns 42% of world fleet

North Americas sea borne trade

Worlds largest economic region Sea borne trade only 12% of world Areas o Hilly eastern: heavy industry o Flat central: farming o Mountainous West St Lawrence Seaway to Great Lakes Mississippi-Missouri Export grain & coal

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South America
Export 974 million ton o Oil o Coal o Iron ore Import 368 million ton

Asia
Habitants > 2 billion Import 2,9 billion ton Export 1,6 billion ton Importers energy, raw material & food Exporters steel, vehicles, cement & general cargo

Africa
Import 258 million ton Export 602 million ton o Oil o Coal o Iron ore

Middle East, Central Asia & Russia

Together > 70% oil reserves Pipelines

Oceania
Export of iron ore, coal, bauxite & grain Export doubled in 10 years

The transport of bulk and specialized cargoes

Definition of bulk
Exists already 2000 years Physical definition: homogeneous character Transport economies: any cargo transported in large quantities to reduce transport cost

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Five main groups of bulk

Liquid bulk Homogeneous bulk Unit load cargo Wheeled cargo Refrigerated cargo

Transport system
Logistics Storage very important Principles to reduce costs o Economics of scale => using bigger ships o Efficient cargo handling => specialised bulk terminals o Integration transport modes o Optimising stocks acceptable for producer & consumer (size vs JIT) Specialised cargoes o Chemicals o LPG & LNG o Refrigerated cargo o Unit load cargo

Liner shipping
Definition of a liner service
Provides fixed service Regular intervals Between named ports Offer transport to any goods in catchment area served by those ports Obligation to accept cargo from all corners Obligation to sail whether filled or not on date fixed by published schedule

Major differences with bulk transport

Large administrative overhead Capacity = inflexible

The origins of liner service

From 1870s: steamships => possibility for scheduled services 1956: first container vessel 1966: first Transatlantic container service

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Containerisation
Less time in port Door-to-door service Driven by & driver of global trade growth Main trade lanes o East West o North South o Regional

Trends
In 1995: balance in trades Now imbalance Growing south south trade In containerisation o Global coverage o Shipping companies => global logistics providers o Owned terminals o Increase in ship size

The ships that provide the transport

What type of ship

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Maritieme economie

7 questions that define a design

How traded o Long-term charter: optimised o Spot market: standard ship What cargo How cargo stowed o Stowage factor o Density index How cargo handled o Cargo handling gear o Hatch design o Cell guides o Cargo access ramps o Tank segregations How big o Economies of scale vs flexibility How fast o Faster ship => more expensive o Transit times: cost of inventory o High value cargoes <-> low value cargoes How flexible

General cargo
Roro Multi-purpose Heavy lift Cargo liner Tweendecker tramps Barge-carrying vessels Ships for dry bulk o Handy: 10 000 40 000 dwt o Handymax: 40 000 60 000 dwt o Panamax: 60 000 100 000 dwt o Capsize: > 100 000 dwt o Single deck, double bottom o Vertical cargo access through hatches o Speed: 13 16 knots

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Liquid bulk
Small: < 10 000 dwt Handy: 10 000 60 000 dwt Panamax: 60 000 80 000 dwt Aframax: 80 000 120 000 dwt Suezmax: 120 000 200 000 dwt VLCC: > 200 000 dwt

Gas tankers
Fully pressurized Semi refrigerated Fully refrigerated

Externe effecten
Definitie
Sommige economische activiteiten veroorzaken nadelen / voordelen voor derden die daar niet voor vergoed worden / niet moeten betalen Negatief o Vervuiling o Roken Positief o Tuin van buurman o Ontwikkeling van nieuwe technologie

Gevolgen
Falen van marktwerking o Te grote productie o Aanbod Belasting gelijk aan sociale kosten Externe kosten internaliseren is niet gelijk aan productie stilleggen Optimale verdeling van de middelen => kost van externe effect exact bepalen o Welke & hoeveel vervuiling o Welke activiteiten zijn de oorzaak o Geldwaarde op schade Verhouding tussen productie en schade blijft niet noodzakelijk gelijk

Externe voordelen
Falen markt leidt tot productie kleiner dan sociaal werkelijk Overheid geeft subsidies gelijk aan externe effect

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Maritieme economie

Prijs die consument betaalt lager dan prijs die producent krijgt

Particuliere oplossingen
Overheidsingrepen niet altijd nodig o Sociale controle o Zelfdiscipline o Liefdadigheid o Milieubeweging o Beperkt aantal betrokkenen Theorema van Coase = particuliere economische deelnemers kunnen probleem van externe effecten onderling oplossen

Transactiekosten
Kosten verbonden aan totstandkomen van overeenkomst Dikwijls geen particuliere oplossing omdat transactiekosten te hoog zijn

Voorbeelden
Handel in vervuilingvergunningen Kyoto-protocol