SHIPPING COMPANY EONOMICS Costs and revenues from running a ship Marina Zanne, M.Sc.

Ship’s costs capital costs –loan repayment –depreciation operating costs –crew costs –stores –repair & maintenance –insurance –administration

Ship’s costs voyage costs –fuel costs –port / canal charges –service charges (tugging, pilotage,cargo handling etc)

Costs’ structure Costs included in the charter fee/freght rate $/t $/day Stopford M. (2009): Maritime economics, p. 182

Capital costs: Cost of loan Capital costs (depend on how the ship is financed): Financed by a loan: size of loan source of loan interest rate terms of loan

Capital costs: Cost of loan where r – interest rate (for adeqaute period of time) n – number of instalments

Example Cash price = $. Terms of loan: down payment 1/3 of the cash price interest rate: 4% (per 6 months) paying period: 4 years, repayments twice a year, fixed instalment What’s the ship’s final price?

Capital costs: Depreciation Depreciation refers to two very different but related concepts: decline in value of assets, and allocation of the cost of tangible assets to periods in which the assets are used. Depreciation costs depend on: cost of the asset, expected salvage value of the asset, estimated useful life of the asset, and a method of apportioning the cost over such life.

Capital costs: Depreciation There are plenty of depreciation methods, e.g.: straight-line depreciation declining-balance method sum-of-years' digits method activity depreciation

Straight line depreciation

According to accounting standards, the useful life of ship is 20 years, with 350 days of exploitation per year. If a company buys an used ship, the amortization period (utilization life) is shorter for this ship’s age.

Straight line depreciation

Example What is the annual and daily depreciation expense for a newly bought 14 years old ship at the price of $. The ship’s displacement is tons and the scrap metal value is 220 $/t. Prepare the depreciation plan!

Operating costs crew costs stores repairs maintenance insurance administration

Operating costs: Crew costs - wage costs - travel costs - on board victualling - training - (union fees) - recruitment/selection and processing - medical tests - social dues - communication/bank charges - crew accident insurance payment - sick pay - (standby pay) - port expenses - agency fees There are several direct and indirect costs incurring when crewing of the vessel:

Operating costs: Crew costs Depend on: size of the crew, employment policy of the owner/operator, ship’s flag  Flag of convenience  ITF  minimal wages for ranks on board

Crew costs: Wages Bulk carriers MasterCheif engineer Chief officer, 2 nd (1 st asst) engineer 2 nd officer, 3 rd (2 nd asst) engineer UK Italy Croatia Poland Romania Ukraine India Philipines Drewry; Ship management (2006), p. 112

Crew costs: Wages Tankers MasterCheif engineerChief officer, 2 nd (1 st asst) engineer 2 nd officer, 3 rd (2 nd asst) engineer UK Italy Croatia Poland Romania Ukraine India Philipines Drewry; Ship management (2006), p. 113

Crew costs – depending on nationality Indian crew (8+10)Filipino crew(8+10) Wages $/month $/month Victualling3.720 $/month Miscellaneous4.300 $/month3.830 $/month SKUPAJ $/month $/month Tours of duty – Officers Tours of duty – Ratings Normal working week - Ratings Guaranteed overtime per month – Ratings Leave per month served - Officers Leave per month served - Officers76-10 Drewry; Ship management (2006), p. 118

Crew costs – depending on ship’s age Stopford M. (2009): Maritime economics, p. 228

Operating costs: Repairs & maintenance routine maintenance; maintenance of engine and equipment, painting jobs, renewal at the hold… while the ship is at sea breakdowns; mecanical failures resolved in repair yards  loss of trading time spares; replacement parts periodic maintenance; regular maintenance at repair yards in order to maintain sea worthiness (class) and obtain certifications (necessary for insurance)  classifcation societies (dry dock every 2 year, special survey every 4 years)

Repairs & maintenance  regular maintenance  less breakdowns  these costs increase with ships’s age and in average accumulate for 14% of operating costs

Operating costs: Insurance vary from ship to ship –2/3 insurance of the hull and machinery  protection of owner against physical loss or damage  depend on claimed value of the vessel and previous claim records  obtained from marine insurance company –1/3 third party insurance  covers against third party liabilities (injury of death of crew members or passengers, damage to cargo, collision damage, pollution etc.)  obtained from P&I club

Operating costs: General costs / Administration shore-based administrative and management charges communication costs agents in ports flag state fee marketing

Voyage costs fuel costs port charges –port dues –service charges (e.g. tugs, pilotage, cargo handling) canal charges

Voyage costs: Fuel costs Depend on: –fuel price –engine power and efficiency  only cca 23% of energy consumed is applied to propelling the vessel (the rest is lost for cooling the engine, lost as exhaust emissions, lost at the propeller and hull friction) –design and state of the hull  hydrodynamics –ship’s speed

Voyage costs: Fuel costs Consumption for a Panamax bulk carrier Speed [knots]Main engine consumption [t/day] Stopford M. (2009): Maritime economics, p iceshttp:// ices,

Fuel prices

Voyage costs: Port charges Fees for the use of facilities and services provided by the port port duesservice charges (pilotage, towage, cargo handling) general use of port facilities (e.g. docking, wharfage for provision of the basic infrastructure), based on: –volume of cargo –weight of cargo –gross tonnage fo the vessel –net tonnage fo the vessel

Port charges: Cargo handling costs costs of loading and discharging cargo (shipowners are concerned about this costs especially in liner service operations) CHC – cargo-handling costs L – loading charges DIS – cargo discharge costs CL – cargo claims

Voyage costs: Canal charges Suez & Panama canal –Suez; charges are calculated in terms of the Suez Canal net ton (roughly corresponds to cargo-carrying space below the deck)and Special Drawing rights (not commonlyused measures)  charges vary for different types and sizes of ships –Panama; flat rate per Panama Canal net ton is used

Bulk carrier’s costs depending on ship’s age Stopford M. (2009): Maritime economics, p. 222

Revenues Shiponwers earn revenues in several different ways  different distribution of risk and apportionment of costs between shipowner and charterer.

Revenues: Voyage charter Shipowner pays all costs (except maybe cargo handling) and is responsable for managing and running the ship, as well as of planning and execution of voyage. Calculation involves: –determining how much cargo the vessel can carry –establishing what price of freight rate can be charged per unit transported

Ship’s productivity P – productivity in ton miles of cargo per year S – average operating speed per hour LD – number of loaded daysat sea per year DWU – deadweight utilization t – time period m – ship type R – revenue per dwt per annum FR – freight rate per ton mile of cargo transported

Revenues: Time charter fixed daily or monthly payment for hiring the vessel the owner still takes the operational risk and the charterer takes the market risk; the charterer pays the fuel, port charges, stevadoring and other cargo related costs

Revenues: Bare boat charter the owner (e.g. a bank) finances (interests, depreciation) the ship and receives a charter payment to cover the expenses (and desired profits) charterer covers all operating costs, voyage costs and cargo related costs charterer takes operational and market risk

Profit / loss account Profit / loss: revenues – costs Stopford M. (2009): Maritime economics, p. 248

Example: Optimizing the ship’s speed Calculate the optimal ships’s speed for the following voyage: Distance: miles Bunker costs (IFO): 500 $/t Bunker costs (MDO): 790 $/t Consumption (MDO) at sea and in ports: 1,5 t/day Port days: 5 days Penalities (per day): $/day if cargo is not delivered within 23 days Fixed daily costs: $ DWT: t Freight rate: 22 $/t Port charges: $ (cargo handling costs excluded)

Example: Optimizing the ship’s speed Consumption at sea is as follows: What is the profit at optimal speed? Speed [knots]Main engine consumption [t/day]

Costs & revenues: Summary Stopford M. (2009): Maritime economics, p. 220

Distinction between profit and cash Profit is a concept used to measure financial return from business. The cashflow of a company represents the difference between cash payments and receipts. Some costs are not paid in cash at the time of occurance (for example the purchase of the ship; cash transaction takes place when the ship is built, whilst the ship loses a proportion of its value by the each passing year – this is represented as depreciation in a profit / loss account).

Sources & further reading Stopford M.: Maritime economics, London, Routledge (2009), Chapter 6