Maritime Economics, Second Edition

3.513.613.7xivLiner pricing case 2: fixed pricingLiner company organizationContainer movements (lifts) 1973–94Typical liner route: UK-West AfricaLiner fleet by ship typeContainer ship fleet 1980–96Container ship fleets by capacity 1996The merchant cargo fleet by ship typeAnalysis of flexibilityContainer shipMulti-purpose vesselsa Multi-purpose vesselb Sophisticated multi-purpose vesselGeneral purpose bulk carriersa 35,000 dwt bulk carrierb 45,000 dwt open hatch bulk carrierc 66,000 dwt Panamax bulk carrierTanker designa 38,000 products tankerb 300,000 dwt double hull crude tankerSmall parcel marketParcel tankera 40,000 dwt chemical parcel tankerb Refrigerated cargo shipMaritime zonesWorld merchant fleet by flagShipping company structurePrincipal merchant fleets using open-registry flagsShipbuilding market sharesThe link between shipping and shipbuilding marketshares by regiona Great Britainb Japanc Continental Europed Scandinaviae United States (excluding reserve fleet)f Other countriesWorld shipbuilding launches 1902–95World shipbuilding prices 1964–96Shipbuilding supply functionSupply and demand functionEffect on price of a movement in shipbuilding supplyand demand 0412429435439439458461465469471472473

TABLESa A shift in the supply functionb An upward shift in demand13.8 Shipyard layout plan13.9 Cost structure of merchant ship13.10 Cross-section of bulk carrier hull13.11 Influences on shipbuilding competitiveness14.1 Comparison of forecasts of world shipbuildingcompletions14.2 Differences between maritime market forecasting andmarket research14.3 Seaborne trade models (calculated by taking regressionof trade on OECD industrial production 1963–80, withprediction for trade 1981–96)a Seaborne tradeb Seaborne dry cargo tradec Seaborne oil 2.52.63.13.23.34.14.25.15.25.35.45.55.65.75.8Cost changes 1960–90Seaborne trade 1987–94Kondratieff cyclesDry cargo freight cycles 1873–1989Dry cargo freight market year-by-year volatility1869–1993Transition from sail to steamReturn on capital in dry cargo shippingVolatility of bulk shipping and other types of investmentWorldscale basis tankerExample of BIFFEX trading reportExample of residual value calculationTen variables in the shipping market modelThe world fleet (m.dwt)Economies of scale in bulk shippingOperating costs of Capesize bulk carriersCrew cost 160,000 dwt bulk carrier (1993)Standard Capesize, lifetime periodic maintenance costsHow speed affects fuel consumption for a Panamaxbulk carrierExample of profit (loss) account and cashflow forshipping company purchasing vessel for cash (equity)( million)Example of profit (loss) and cashflow for shippingcompany purchasing vessel on five-year loan ( million)The effect of speed on operating 0173174178xv

TABLES5.9 The effect of the backhaul on cashflow5.10 Voyage cashflow analysis5.11 Example of annual cashflow analysis for 280,000 dwttanker built 1976 scrapped at fourth survey.5.12 Example of annual cashflow analysis for 280,000 dwttanker built 1976 traded through fourth survey5.13 Example of discounted cashflow (DGF) analysis fortanker charter options ( million)6.1 Companies raising high yield debt7.1 Analysis of trade relationships7.2 Changes in the structure of GDP 1965–89 for S. Korea,Japan and USA7.3 Pattern of manufacturing production changes in thepattern of manufacturing production per head at 1955prices and percentages7.4 Seaborne trade of 100 countries, ranked by trade volume8.1 International seaborne imports and exports, by region8.2 Distances between selected ports (miles)8.3 Seaborne trade and economic infrastructure of the Atlanticand maritime area 19918.4 Seaborne trade and economic infrastructure of the Pacificand Indian Oceans 19919.1 Seaborne trade by commodity, 1985, 19959.2 The five ‘major’ bulk commodities shipped by sea (mt)10.1 World container fleet 1960–9510.2 World container stock by principal type10.3 The six building blocks of liner costs10.4 The liner service cash flow model10.5 The container and break bulk trades 1980–9410.6 Major liner routes and trade imbalances, 199610.7 World container port traffic (1994)11.1 Value per ton of OECD imports by commodity11.2 Stowage factor for various commodity trades11.3 Cargo units in which commodities are shipped by sea11.4 Principal dimensions of flat roof steel containers11.5 The container ship fleet, by size and hull characteristics11.6 Bulk carrier fleet, January 1996 by size and hullcharacteristics11.7 Economies of scale in bulk shipping (per cent cost perton mile)11.8 Bulk carriers: the relationship between ship size, draughtand port access11.9 The tanker fleet, January 1996 by size and 394396401404405407

1.1A1.2A1.3A2.1A2.2The major classification societies, January 1997Limits of territorial seaHistory of open registryWorld merchant fleet by ownership and registration,December 1995 (gross tonnage)Major IMO conventions relating to maritime safetyand pollution prevention for merchant shipping, as atMarch 1997Major ILO conventions relating to working and livingconditions at seaMerchant ships completed during years 1977–95Shipbuilding cycles 1902–81Merchant shipbuilding productivity by countryShipbuilding unit labour cost by countryShipbreaking (by country) (1985–95)Supply/demand model—tanker fleetSupply/demand model—dry cargo fleetSupply/demand model—combined carrier fleetAverage cgt coefficientsConversion factors: Average conversion factors for dwt,grt and cgt (based on all ships delivered in 112.213.114.1International transport zones and available transport modes. 8Examples of typical shipping company structures33Stages in the shipping market cycle43Glossary of chartering terms82Sale and purchase Memorandum of Agreement (MOA):example: Norwegian sales form 198798Second-hand price correlation in tankers and bulk carriers 100Typical pattern of shipyard stage payments108Articles in the AWES shipbuilding contract109Institutions providing or arranging ship finance204Eleven key points in a commercial ‘term loan’ facility212Rostow’s five stages of economic development241Principal oceans and seas of the Atlantic maritime area266Major rivers of the Atlantic268Maritime zones recognized by the UN Convention on theLaw of the Sea, 1982430Four steps in making a maritime convention442Nine stages in the shipbuilding production process478Suggested procedure for a market research study506xvii

PrefacexviiiPreface to the secondeditionThis book is an introduction to shipping market economics. It aims to explainhow the shipping market is organized and to answer some basic questionsabout how it works: How are prices and freight rates determined? Are theremarket cycles? What determines a shipping company’s ability to survivedepressions? How are ships financed? What factors influence ship design? Isit possible to make reliable forecasts?Although mainly a textbook, I hope it will also be useful to practicalpeople in the shipping business. The first edition started life as a series oflectures I gave at Cambridge Academy of Transport and the City UniversityBusiness School while working for British Shipbuilders. Work on the secondedition, a major revision of the first, started when I was at Chase ManhattanBank and was finished at H.Clarkson & Co. the shipbroking company. Thesetwo new perspectives led to extra chapters on ship finance, the operation ofshipping markets and sea trade. As a result Maritime Economics now hasfourteen chapters, as summarized on the following pages.In producing the two editions I received help from many people. For thefirst edition I would like to repeat my thanks to Ian Buxton of NewcastleUniversity, Professor Costas Grammenos of City University Business Schooland Peter Douglas of Chase Manhattan Bank, Professor Harry Benford ofMichigan University and Professor Rigas Doganis, John Evans, Brian Yolland,the Rt Hon. Gerald Cooper, Dr John Doviak of Cambridge Academy ofTransport, Professor Henk Molenaar, Mona Kristiansen of Leif Hoegh &Company, Phillip Wood of Transport and Trading, Jim Battersby, J.GrahamDay, and Alan Adams of Shell, all of whom provided admirable comments,suggestions and criticisms.

PREFACE TO THE SECOND EDITIONFor help with the second edition, thanks are due to Richard Hext of ChinaNavigation Co., Rogan McLellan of P&OCL, Mark Page of Drewry ShippingConsultants, Professor Mary Brooks of Dalhousie University, Bob Crawley andBetsy Nelson of Chase Manhattan Bank, Peter Stokes; Merrick Raynor, JonathanTully and Robert Bennett of H.Clarkson & Co; Michael Tamvakis (Chapters 7–8),John Ferguson of Lloyds Register, Rear Admiral Mitropoulos of IMO, and PaulStott. Finally, thanks to my wife Anne for putting up with it again!Martin StopfordLondon, May 1997xix

SynopsisSynopsisChapter 1: The economic organization of the shippingmarketWe start with an overview of the market covering the transport system, thedemand for sea transport, the merchant fleet, how transport is provided, therole of ports, shipping company organization and political influences.Chapter 2: The shipping market cycleShipping market cycles dominate the industry’s economic thinking. Adiscussion of ‘shipping risk’ leads on to a review of how, over the last century,experts have defined the shipping cycle. The thirteen cycles since 1869 areidentified from statistical series and contemporary market reports. A briefaccount is provided of each cycle, drawing attention to the economicmechanism which drove the market up or down and the underlying seculartrend. The chapter ends with some thoughts on the return on capital in shippingand the prediction of shipping cycles.xx

SYNOPSISChapter 3: The four shipping marketsNow it is time to see how the markets actually work. Shipping business is conductedthrough four related markets dealing in different commodities, freight, secondhand ships, new ships and ships for demolition. We discuss the practicalities ofeach market and the dynamics of how they are connected by cash-flow. As cashflows in and out of shipowners’ balance sheets it influences their behaviour inthese markets.Chapter 4: Supply, demand and freight ratesWe take a more detailed look at the economic model of the shipping market whichunderlies the cyclical nature of the business. The model consists of three components,supply, demand and the freight rate mechanism. The first half of the chapterdiscusses the ten key variables which influence the supply and demand functionsfor the shipping industry. The second half examines how freight rates link supplyand demand. Emphasis is placed on market dynamics.Chapter 5: Costs, revenue and financial performanceTurning to the microeconomic side of the business, this chapter discusses the costsand revenues of operating merchant ships. Costs are divided into voyage costs andoperating costs. Capital costs are also discussed, though the main review of financingis contained in the next chapter. The final section focuses on techniques for cashflow analysis.Chapter 6: Financing ships and shipping companiesFinance is the most important item in the shipowner’s cashflow budget. The chapterstarts with a review of the many ways ships have been financed in the past, followedby a brief explanation of the world capital markets, showing where the moneycomes from. Finally, the chapter discusses the four main ways of financing ships,equity, debt, newbuilding finance, and leasing.Chapter 7: The economic principles of maritime tradeShipping depends on trade, so we must understand why countries trade and whytrading patterns change. We start with a short summary of trade theory, identifyingthe various explanations for trade. This is followed by a discussion of the supply/demand model used to analyse natural resource-based commodity trades. Turningto the actual sea trade of 105 countries, we review the evidence for a relationshipbetween trade and land area, population, natural resources and economic activity.xxi

SYNOPSISFinally we review the ‘Trade Development Cycle’ and the relationship betweensea trade and economic development.Chapter 8: The global pattern of maritime tradeThere is a physical dimension to shipping economics, so we must be aware of thegeography of the world in which trade takes place. Today’s trading world hasevolved over many centuries and history demonstrates that the regional centre ofsea trade is constantly on the move—we call its path the ‘Westline’. By examiningthe trade of the Atlantic and Pacific Oceans we can see where the ‘Westline’ istoday.Chapter 9: Bulk cargo and the economics of bulk shippingThe widespread use of bulk transport systems to reduce the cost of shipping rawmaterials has reshaped the global economy in the twentieth century. The first partof the chapter analyses the principles of bulk transport and bulk handling. It coversthe transport system, the transport characteristics of commodities and thedevelopment of transport systems for bulk handling. This is followed by a briefaccount of the various commodities shipped in bulk, their economic characteristicsand the transport systems employed.Chapter 10: The general cargo and the economics of linershippingContainerization of liner services is one of the great commercial innovations ofthe twentieth century. Faster transport and lower costs have made it possible forbusinesses to source materials and market their products almost anywhere in theworld. This chapter discusses the organization of the liner system, the characteristicsof demand and the way the liner business deals with the complex economicframework within which it operates.Chapter 11: The economics of ships and ship designsIn this chapter we discuss the design of merchant ships. The aim is to focus on theway designs have evolved to meet technical and economic objectives. The chapterstarts from the three objectives of ship design, efficient cargo containment,operational efficiency, and cost. There follows a discussion of each of the maincategories of ship design: liner vessels, liquid bulk, dry bulk, specialist bulk, servicevessels.xxii

SYNOPSISChapter 12: The regulatory framework of maritimeeconomicsThis chapter examines the impact of regulation on shipping economics. We identifythree key regulatory institutions, the classification societies, the flag states and thecoastal states. Each plays a part in making the rules which govern the economicactivities of shipowners. The classification societies, through the authority of the‘class certificate’, supervise the technical safety of the merchant ships. The flagstates make the laws which govern the technical, and commercial activities ofshipowners registered with them. Finally, the coastal states police the ‘good conduct’of ships in their waters, notably on environmental issues.Chapter 13: The economics of shipbuilding and scrappingThe shipbuilding and ship scrapping industries play a central part in the shippingmarket model. This chapter starts with a regional review of the location ofshipbuilding capacity. This is followed by a discussion of shipping marketproduction and prices cycles. A section on the economic principles is followed bya discussion of the technology of the business. Finally, there is a section on theship scrapping business.Chapter 14: Maritime forecasting and market researchThe ‘forecasting paradox’ is that businessmen do not really expect forecasts to becorrect, yet they continue to use them. There are two different types of ‘forecasts’used in the shipping industry, market forecasts and market research. Market forecastscover the market in general, while market research applies to a specific decision.Different techniques are discussed covering each type of study. We conclude witha review of common forecasting errors.Appendix 1: An introduction to ship market modellingAppendix 2: Tonnage measurement and conversion factorsxxiii

PGNPGRIgrtAmerican Bureau of Shippingannual cashflow analysisAssociation of Western European Shipbuildersbillion cubic metresbarge carrying vesselbillion tonsbarrels per daybillion ton milesCompagnie General Maritimecompensated gross registered tonnagecompensated gross tonnagecost, insurance, freightContract of Affreightmentdiscounted cashflow analysisdeadweight tonnageExport Credit Guarantee DepartmentEast Coast North AmericaEuropean Economic Communityfreight all kindsFar East Freight ConferenceGeneral Agreement on Trade and Tariffsgross domestic productgross national productgeneral rate increasegross registered tonnage

ATACATDCTEUTHCgross tonnagehectaresInternational Association of Classification SocietiesInternational Labour OrganizationInter-governmental Maritime Consultative OrganizationInternational Maritime OrganizationInternational Standard Industrial ClassificationInternational Standards OrganizationInternational Transport Workers’ Organizationthousand tonslateral cargo mobilityliquefied natural gaslift on, lift offliquefied petroleum gasLloyd’s Register of ShippinglightweightMaritime Saf

Now in its second edition, Maritime Economics has established itself as the most valuable introduction to the organization and workings of the global shipping industry available today. The book combines a sophisti