Maritime Economics & Logistics - Assignment Example

Question Dry bulk market includes the five major commodities, bauxite, coal, iron ore, alumina and grain; and minor products such as forest products, steel products, manganese, cement, sugar, fertilizers, soya meal, scrap, rice and iron. (Korsfur, 2009) Coal, iron ore, bauxite, grain and alumina are those products for which there is not much competition. The products are extracted in countries which have comparative advantage over other countries. This enables them to export to other countries. Coal and iron ore are the most traded commodities. They form 26% and 27% of the total dry bulk market respectively. Iron ore is shipped from Brazil and Australia to China, Europe and Japan. Coal is shipped to Europe and Far East from Australia and Canada. Grain is shipped to Far East and Europe from Gulf countries, US, Argentina and Brazil. (Bornozis, 2006) (Anon., 2009) The classic Maritime economic theory suggests that the freight charges by shipping companies are decided in perfect competition. Shipping companies are regarded to operate in perfectly competitive market because there are a large number of firms offering shipping service. Some companies are small others are large. There are so many insignificant shipping companies and they cannot collude because of the number of firms and if one will go against the agreement, all the others will have to bear the loss. Thus, they cannot collude. There are large number of shippers and ship owners. Each shipping company has perfect information. The shipbrokers provide perfect information to the shipping companies regarding the demand and they provide perfect information to the clients. Thus, no one company can fool other customers or companies. Each producer sells and buys homogeneous product at the same cost. Thus, there is no differentiation and if one company tries to differentiate its service, then it will face a loss. Thus, it is better for companies to follow the market freight and policies. Also, there is perfect freedom of entry and exit. There is no sunk cost charged. The companies can easily invest in ships and can enter the shipping industry. The types of boats bought by companies are also similar. Thus, there is no point of differentiation. New entrants can easily enter by investing in second hand boats. Thus, there are no barriers. Also, if any one wants to exit it can easily exit the market by selling or demolishing the ships. (Gratsos, et al., 2012) A study was made on the coal trade from South Africa to Europe in capsize market, a fleet of vessels. It was found that the technical specification of all the vessels was similar and spot freight rate were same leading to a horizontal market supply curve. This shows that the market of coal, iron ore, rice, bauxite and other major and minor products is homogeneous and is operating under perfect competition. (Adland, n.d.) Question 2 The marginal cost concept is applied in the shipping management in determining the spot freight price. The price is determined by the marginal cost incurred by the marginal vessel to transport the commodities. The amount of freight which is transported by a vessel at a particular rate is depicted by a short run supply curve. If all the vessels are utilized but are not working at full capacity, then marginal cost will be higher than the marginal revenue. This implies that the cost incurred by each vessel to transport the goods will be higher, than the revenue it is getting to transport the commodities. Thus, in order to increase revenue, the vessel or all the vessels in the fleet will have to utilize at their optimum capacity. Furthermore, in order to increase the supply of the vessels, sometime the port waiting time is reduced, vessel speed is increased and the maintenance is delayed to earn more revenue by transporting more and more commodities. However, the shipping management ignores the fact that by over utilizing the vessels, they are reducing their productivity and increasing wear and tear. This will increase the marginal cost of transporting any further quantity of commodity. Thus, the profit will decline even though the revenue will increase. The optimum quantity of units transported is the intersection point of the marginal revenue and marginal cost. (Micco & Pérez, 2002) (Adland, n.d.) If the fleet will decrease its marginal cost then in the long run economies of scale can be achieved as the aggregate supply curve will keep on decreasing. When the fleet will achieve optimum utilization which a point where marginal revenue and marginal cost are equal at that point the aggregate cost will be minimum. However, due to perfect competition market structure the aggregate supply curve will become perfectly elastic at the optimum utilization point. (Jin & Kite-Powell, 1999) (Swahn, 2002) Question 3a National fleet means the merchant vessels that are owned by the nation and are operated under the national flag. National fleet does not imply that these fleets are government owned. These fleets belong to companies of a particular nation and are run by nationals. Thus, are called national fleet. (Behnam, 2006) Till Second World War, international shipping was in the hands of few developed countries. However, after that the trend has changed. Now the developing countries are leading the international shipping. Many countries have emerged who are now providing international shipping service of commodities. Latin America and India are one of the two major developing countries who have emerged and are leading in international shipping. (Nguyen, 2011) National Fleet can contribute significantly to the economy; it can improve the economic condition by saving foreign exchange, making economy independent on its own resources, contributing to national defense and facilitating in trade. In some countries, national fleet is required to expand the economy and in some countries, it is a separate shipping industry. (Anon., n.d.) The developing countries are expanding their own national fleet at a significant rate and are using them for international shipping; thus, the traditional national fleets owned by developed countries are no longer in need. Because the developing countries are providing the same service at a cheaper due to cheap raw materials, labor and vessels. The developed countries’ fleets are going out of business and the government has also restricted them because the material and maintenance is expensive which leads to higher freight charges. Thus, the government is not supporting them. (Behnam, 2006) International shipping means that the national fleet of a country is providing services of other countries and is carrying more tonnage of other countries compared to its own country. The concept of international shipping is derived from the concept of comparative advantage. The country which has the advantage produces the product or service. Here in this case, the developing countries have advantage over developed countries; thus, more countries are relying on them for transportation of commodities. Hence, the national fleets have gone out of the market. The concept of national fleet is gradually dying out and is no longer considered as feasible. National fleets are now considered as a burden on the country’s resources; thus, they are discontinued. (Nguyen, 2011) Question 3b The ability of government to support national fleet is affected because of international shipping. The government can provide subsidies and tax waiver to the national fleet as it enables to save foreign exchange and improve the economy. However, Government can use the same resources spend on national fleet, which will ultimately improve the economy, on other useful purposes such as providing health care, pensions, helping poor or investing in the economy which will directly improve the economy rather than indirectly. Also, if the government spends on national fleet to protect it then other international shipping companies might reduce their freight charges. This will start price war between national fleet and international shipping companies. Ultimately, the national fleets will have to close down and the government resources will be wasted. Thus, it is better for the economy not to invest in national fleet if there is no comparative advantage. Rather than investing in national fleet, the government can invest for useful purposes. Furthermore, international shipping companies have comparative advantage over other fleets; thus, they can provide better quality services at a cheaper rate. Thus, the government, even if it has the ability to protect the fleet should not do so as it will be considered as wasting economy’s resources or the tax payers’ money. The countries in which national fleets do not have comparative advantage, the government has restricted their use. The reason being the resources used to make those fleet profitable and worthy enough to be continued are useless as other international fleets are very powerful and strong. Thus, the government is encouraging them to invest in other business or find other jobs instead of investing in national fleet. The only contribution government can make is to give national fleet’s employees job opportunities so that they can serve the economy. This will motivate them to move away from unprofitable national fleet business and contribute economy in a meaningful way. Question 4 Many brokerage and investment firms have given the outlook that the shipping and ship financing market has shown a considerable slump with this slump to continue in the near future. Therefore, it is known that the ship financing market is showing lower financing because the rates for financing are quite high. Despite the fact that the rates for ordering larger container ships is quite low and some organizations are actually purchasing such ships as well, tight financing has led to lower financing in the shipping industry, which subsequently is creating issues such as aged ships running into the sea. This problem is arising only because shipping organizations are not able to finance procurement of vessels and individual investment on such large vessels is not entirely possible without financing. As a result, it is critical to identify the right mix of investment tools that organizations can use in order to fund purchasing of vessels through ship financing. At the current pace of the market, and the depression in the local economy, many countries are facing this trouble where ship financing is difficult to obtain and is extremely expensive. As a result, many shipping firms are not purchasing new ships to replace their old fleet; neither are they building new ships in order to cover this issue. There are a number of options that a shipping company could use in order to finance purchase of new ships. The first and foremost method that most shipping companies utilize is financing ship purchase from banks where banks keep the new ship under mortgage till payment of the loan. Other methods include debt or equity financing for purchase of ships. In debt financing, the organization would have to focus on issuing a debt instrument or borrowing from external sources. In equity financing, the shipping company will issue ordinary share or preference shares according to its need and requirement. The first method is to obtain funds from the bank. The bank will ask for collateral security. The shipping company can mortgage the papers of newly purchased vessels in return for the money. The bank will give the loan on certain terms and condition and will possess the vessels’ papers till the loan is repaid. In case of default, the bank can sell the new vessels to obtain the money. Another is to use debt financing method. In order to use this method, the shipping company will have to issue bond and will have to sell to the general public. Bonds can be secured or unsecured. Secured bonds are those that are ear-marked against a fixed property and unsecured are not earmarked against property. The shipping company will be liable to pay a fixed amount of interest to the bond holders. These holders are entitled to the interest before any other investor is paid. Thus, it is a liability on the company; otherwise, bond holders can sue the company. Third method is to issue equity. Equity can be issued in two forms: preference shares and ordinary shares. Both these shares are issued to the general public. Ordinary shareholders are part owners of the company. They are entitled to a share of profit in form of dividends. However, the percentage of dividend is not defined. It can be more or less depending on profit. Also, in case of loss, the company is not liable to pay to ordinary shareholders. They also get one vote per share which they can use in annual general meeting to select the board of directors. However, in the case of preference shareholders, they are not owners of the company; they receive fixed percentage of dividend. However, preference shares can be participating, which means shareholders will be allowed a say in the company or they can be cumulative in which dividend in arrears are paid next year. The type of financing which should be used by shipping companies is equity. The company should issue ordinary shares to the general public. This will enable it to raise enough funds to buy new vessels. The ordinary share holders will get a say in the business. They will overview the running of the company and will elect board of director which will ensure that they are working according to the interest of the shareholders. Thus, the company will be run more effectively and in a better way. Also, the shareholders are not entitled to any fixed payment. Thus, it would not be an added burden on the company that they have to pay interest or dividend. In case of ordinary shareholder, it will be on the company whether to pay dividends or to invest back the returns. Thus, there would not be any burden or liability and no fear of being sued. In case of losses, the company will not have to pay anything to the shareholders. The shareholders will bear equal loss. However, in case of bank and bonds, the interest will have to be paid at any cost. In case of preference shares, the company is responsible to pay but if it cannot pay, it would not be forced to. But bank and bond holders can sell company’s assets to recover the money. Hence, equity is the best option to raise the money. However, due to the volatility of the shipping business the company can list its stocks on more than one stock exchange. Thus, to attract more and more potential stock buyers. The company will need to list on more than one stock exchange because people are not easily willing to invest in shipping company until and unless it is a known name. Moreover, the board of directors will gain control of the company and can look in to the internal and external matters. The board will supervise the audit committee; thus, there would not be any chance of mistakes or blunders. The strategic objectives will be set by the board which will ensure that everything will be to protect the rights of the shareholders. Also, by using this option equity will increase without increasing long term debt of the shipping company which is one of the positive aspects. References Adland, D. R., n.d. Rethinking Basic MAritime theory. [Online] Available at: http://www.icms.polyu.edu.hk/ifspa2012/Papers/M36.pdf [Accessed 10 June 2012]. Anon., 2009. New Report on Global Dry Bulk Shipping Industry: An Analysis by Koncept Analytics. [Online] Available at: http://www.prlog.org/10163948-new-report-on-global-dry-bulk-shipping-industry-an-analysis-by-koncept-analytics.html [Accessed 10 June 2012]. Anon., n.d. National Shipping Fleets and Access to Shipping Markets. [Online] Available at: http://www.unescap.org/ttdw/Publications/TFS_pubs/Pub_1988/Pub_1988_Ch5.pdf [Accessed 10 June 2012]. Behnam, A., 2006. Political Factors and Evolution of National Fleet in Developing Countries. [Online] Available at: http://www.tandfonline.com/doi/abs/10.1080/03088839600000001#preview [Accessed 10 June 2012]. Bornozis, N., 2006. Dry Bulk Shipping: The Engine of Global Trade. [Online] Available at: http://dryships.irwebpage.com/press/BarronsArticleOct192006.pdf [Accessed 10 June 2012]. Gratsos, G. A., Thanopoulou, H. A. & Veenstra, A. W., 2012. Dry Bulk Shipping. [Online] Available at: http://ebooks.narotama.ac.id/files/The%20Blackwell%20Companion%20to%20Maritime%20Economics%20%28Blackwell%20Companions%20to%20Contemporary%20Economics%29/Chapter%2010%20%20Dry%20Bulk%20Shipping.pdf [Accessed 10 June 2012]. Jin, D. & Kite-Powell, H. L., 1999. Optimal fleet Utilization and resources. [Online] Available at: http://directory.umm.ac.id/Data%20Elmu/jurnal/UVW/World%20Development/Vol28.Issue11.Nov2000/85.pdf [Accessed 10 June 2012]. Korsfur, L., 2009. Speculation and Risk Management in the Shipping Industry. [Online] Available at: http://brage.bibsys.no/hia/bitstream/URN:NBN:no-bibsys_brage_10372/1/Linda%20Korsfur.pdf [Accessed 10 June 2012]. Micco, A. & Pérez, N., 2002. Determinants of Maritime Transport Cost. [Online] Available at: http://www.iadb.org/res/publications/pubfiles/pubWP-441.pdf [Accessed 10 June 2012]. Nguyen, H., 2011. Explaining Variation in National Fleet across Shipping Nations. [Online] Available at: http://www.tandfonline.com/doi/abs/10.1080/03088839.2011.615868#preview [Accessed 10 June 2012]. Swahn, H., 2002. Marginal Cost Pricing. [Online] Available at: http://www.imprint-eu.org/public/Papers/Imprint3_Swahn.pdf [Accessed 10 June 2012]. Read More