PATIENCE MAKUTI

CHAPTER 9 NOTES.

I have tried to link the textbook to the module .hope the way I have summarised the notes helps those who don’t have time to do both.

Supply of shipping

The supply of shipping is made up of the carrying capacity of ships to move cargo. This comprises four main factors:1 The number of ships –the number of ships which carry thingshas declined but the total tonnage of ships has greatly increased.2 The size of ships – ships have consistently grown bigger over the last century. The growth was spectacular, as owners realised the possibilities of new technologies and trade routes.3 Port time – the less time ships spend in port the more cargo they can carry, reducing port time increases the supply of ships, which is why one container vessel can replace several conventional general-cargo ships. The increase in size is also related to port speed, as port speed 4 Speed – increasing speed obviously increases the supply of ships and vice versa. This is the only way supply can be adjusted in the short-term, apart from laying ships up and reactivating them. Reducing speed by 2 or 3 knots can show significant economies, so slow steaming can be a valid strategy in the attempt to balance supply and demand.

ENSURE YOU UNDERTSAND Graph 9.2 Percentage of ships versus draft (considering v/s over 500

A brief historical reviewThree major developments which caused evolution to produce the shipping equivalent of modern shipping are

1 The development of worldwide communication. Trading in an organised way requires communication2 The development of iron ships. Iron, being much stronger than wood, enabled lighter, larger ships to be built, giving shipping and shipbuilders the edge for several generations.3 The development of a suitable, reliable power source and a method of harnessing it, ie the propeller. Steam engines had been around for some

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time but until this period they were not efficient or reliable enough for ocean passages..

Laying up

Laying up is withdrawing ship from active trading.

Vorster (1999:60) states the following with regard to the laying up of ships:

If the ship cannot be put on charter in times of surplus capacity, and if the owner does not intend to sell the ship, the alternative is to withdraw the ship from the service for a while. This withdrawal from service is known as laying up. it takes place when the income obtained from a voyage is approximately equivalent to the cost of the voyage. at this stage, the opportunity cost of undertaking the voyage is equivalent to zero, because it makes no difference to the ship owner whether or not his ship undertakes the voyage.

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However, this situation can only continue for a very brief period, because there are costs that mount up daily when the ship is not in service. As soon as the return is regularly less than the voyage costs, the ship owner should consider selling his ship rather than withdrawing it from service. the laying up of the ship for a brief period should have very little influence on the administrative costs or overheads of the enterprise. As far as operating costs are concerned, the laying up of the ship might mean saving on the maintenance of the engine and other mechanical equipment, but there is little evidence to show that the hull and other components require less attention during that period. the vessel still has to be insured, although the premium would be lower, depreciation and financing costs (or the opportunity cost of capital invested in the ship) will also continue to mount. the ship owner who lays up his ship therefore only saves the avoidable costs that would have been incurred in the lay‐up period. the cost of laying up the ship consists in the short term of all the costs that cannot be avoided, such as the administrative costs and overheads for the ship, plus the unavoidable portion of the operating costs. there is also the cost incurred in putting the ship back into operation. the decision to lay up a ship should be an economic one based on the minimisation of the costs.when the cost saving effected by laying up the ship exceeds the return that can be obtained by keeping the ship in service, the ship should be laid up. this only happens when the total costs per deadweight ton minus the return per deadweight ton exceed the laying up costs per deadweight ton. at freight tariff F1, only Oa deadweight ton is operated while Aa is laid up because the demand is not sufficiently high. The ship used to offer Oa, only Ob is run at a profit. Because the return per deadweight tonnage earned is still higher than the minimum return per dead weight tonnage required to keep the ship in service, ba remains in service. if a deadweight tonnage equal to Oc were to be offered in the market, a freight rate F2 would arise and virtually all the ships would operate at a profit. In order to bring the entire fleet OA into service,the demand curve would have to shift to the right.

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Table 9.4 The costs of laying up a ship

On reaching this point an operator will not necessarily lay-up, as laying up and reactivating can be quite expensive processes, but a decision will have to be made asto:• continue trading at a loss• lay up• reduce costs• scrap or sell the shipWhich of these options is selected depends on the operator’s expectations of the markets future ie:• will freight rates pick up soon?• will freight rates remain low for months?• will freight rates remain low for such a period that the operator cannot anticipate any future profitability for the ship? Then scrap or sell becomes the solution.

Note that as ship costs are different not all ship operators will reach the lay-up point at the same time. New ships tend to have higher fixed costs and lower voyage costs than old ships, so old ships will tend to lay up before new ships.If the operator anticipates the bad period will be short-lived he may slow steam or hang around in port or try to position himself for where he hopes a spot opportunity might occur.

Tramp price fixing and tonnage stabilisation schemes

There have been various attempts among tramp ship owners to regulate prices, eg One of the more successful was in 1935 when British owners, along with owners from other major tramp shipping nations, were able to establish a price-fixing scheme. Minimum freight rates were fixed on a limited number of routes. International Tonnage Stabilisation was formed The idea, as with most tonnage stabilisation schemes, is that member owners pay into a common fund to create resources with which to compensate members whoagree to lay their ships up.

During the low-freight-rate periods following the fuel price rise ,efforts in both the tanker and dry-cargo markets have been made to find a solution to this problem.

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Problems

1 To be successful the majority of owners must co-operate. T2 The large variety of types and sizes of ships makes the mechanics of any modernsuch scheme very complicated compared with any pre-war scheme.3 Owners operating modern ships with large depreciation costs and low operating costs stand to lose more by laying up than owners operating old tonnage with little or no depreciation costs and high operating costs.

Reasons for encouraging and sustaining national fleets1 It is a traditional occupation that the nation does well and for a profit, 2 To earn foreign currency, eg developing countries.3 To save foreign currency, eg countries with very large overseas trade such as Japan.4 To avoid dependence on others, eg the USA.5 For military and prestige reasons.For many countries, such as the UK, it could be a mixture of all the above.The growth and development of the world’s merchant fleets is the result of the interplay of many constraints which can be loosely classified into technical, economic and political, and these need to be understood if one hopes to understand the mechanics of supply.

TechnicalThe growth of the British fleet was very much dependent

on her being the first to develop large iron steam-driven ships. change in the design of ships the advent of the container ship, bulk carriers and very large tankers

could become a reality only after changes and improvements in shipbuilding technology

a whole range of technical changes in hull design for safety reasons. The importance of policy technical changes on supply is that they can, by changing the legal requirements, make many ships obsolete. The same can be said for propulsion units and much of the ancillary equipment that is now essential for the safe and efficient operation of ships.

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Economic constraintsMaking moneyShipowners can make money in two principal ways:1 By buying ships cheaply when the freight rate is low and selling for a profit when the rates are high. A ship’s ‘value has been known to increase two or three times on a rising market and therefore profits can be made by speculating in this way.2 By carrying cargoes in ships or, as in the case of time charters,.Many different marketsThe world of shipping is an enterprise made up of many different markets and in most cases each market is made up of two or more subgroups.

The contribution of shipping to the balance of paymentsIf a national shipowner has to buy his ships abroad with foreign currency and also maintain, store, crew and bunker them all using foreign currency the chances are that there will be a net outflow of foreign currency, even if the shipping line itself makes a profit.

Note: There is a difference between foreign currency earned and foreign currency saved:a) Foreign currency earned is the net inflow/outflow of forex into the state due to the ship being a national carrier.b) Foreign currency saved is to consider what extra forex would have been spent if there were no national carrier.

Contribution to balance of paymentsEarning foreign exchange has been one of the most cogent reasons for developing countries wanting to own their own fleets.

Does this improve the balance of payments? Yes/NoNote: The forex saved should also be calculated; that is, you should consider how much forex would be saved by not having to employ a foreign ship to carry the cargo, and this might bring a positive bottom line to the balance of payment contribution.Container and passenger ships will usually make a significantly greater contribution to the balance of payments, though often making less profit than tankers and bulk carriers.

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PoliticalWars cause losses of ships and the need for rapid rebuilding, and produce a considerable stimulus to research and shipbuilding capacity.

Blacklisting can occur and ships trading to one country may not be allowed to visit another,

Because of the possibility of war, nations do not like to be dependent on the ships of other nations for the delivery of essential supplies.

Changes of government, political ideology, colonialism, political alignments and international agreements cause changes in trading patterns.

Forms of taxation and government restrictions (eg manning scales) can have their effect, as with the growth of flags of convenience.

Governments can protect their own fleets and thus exert influence.These points are of considerable importance and are normally considered as policy.

‘Whosoever commands the sea commands the trade; whosoever commands the trade of the world commands the riches of

the world and consequently the world itself.’

Maritime policyShipping policy can be understood as the totality of economic, legal and administrative measures by means of which the state influences the position of its national fleet; that is, its place and role in the national economy and in international freight markets. The attitude of the state toits own merchant marine as a rule reflects indirectly its attitude to the fleets of other countries.

Shipping policy has, then, two aspects: foreign, expressing the attitude to other fleets, and domestic, to own merchant marine..

Vision, goal and objectives

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Once the policy maker has identified the problem the solution lies in a variety of

Important points to note on policyVirtually all policies, no matter how good, will have bad effects.

Dangers in changing policy – should it be implemented quickly or slowly?

Are internationally agreed policies better than national unilateral policies?

Also, as regards planning, a centrally planned economy can have a plan and enforce its plan, but a liberal democracy can have a plan but will have greater difficulties in enforcing it. It can introduce penalties, financial incentives eg tax incentives. Enforcing it through various agencies, whoseinterpretation of its various points may differ widely, is another, eg port state control.

Why do governments need a policy? To protect some aspect of national interest, eg jobs or foreign

currency investment.Therefore, such action is usually only necessary during periods of low freight rates.

To increase efficiency, eg privatisation. To put pressure on another country For political or ideological reasons.

Policy makers must know what is happening and why – they need data. They must also pursue the right goals.

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How can they achieve this policy?A government really has only one of two options: it can either help its own national industry or make things difficult for its foreign competitors.1 Helping one’s own nationals by subsidies or some form of financial assistance. Such help can take many forms such asOperating subsidies. This is where direct financial assistance is given to help the nation’s ships compete on the international shipping markets. Construction subsidies or some form of financial help to meet the high capital cost of building the ship. This can take several forms, such as building grants, long-term loans with easy terms, custom duty exemption or rebates on imported material or parts, or financial help with expensive research.Indirect subsidies, such as various forms of tax concessions like free depreciation. This type of subsidy has the merit that it encourages successful and resourceful management. With direct operating subsidies there is the danger of encouraging inefficient management. The indirect subsidy can also be used to stimulate new growth in the industry by having the profits reinvested rather than just dispersed to the shareholder. The arguments against subsidies are that they encourage inept management and upset the rules of ‘fair play’ in the cut and thrust of international competition..One of the most comprehensive analyses of maritime subsidies throughout the world is made annually by the Transportation Maritime Administration. They list the subsidy measures publicly known throughout the world as:

Operating and construction subsidies. Financing programmes whereby governments allow cheap loans for

ships built in national shipyards. Export credits. Tax benefits. Social or economic programmes, such as government-paid training.

The publication also considers:2 Protection offered to a nation’s home shipping industry (protectionism)Major trading nations have reduced the barriers to trade in goods, however, an increasing number of countries have introduced various forms of protection for their own national fleets. Protectionism will almost certainly increase during periods of low freight rates.

Types of protection

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Unilateral action taken by a nation to protect its shipping:Cabotage, or the reservation of the coastal trade either to ships flying that nations flag or to also include ships owned by nationals but perhaps operating under a flag of convenience

Reduced customs dues on goods imported on own-flag ships. Restriction of credit if goods are not carried in national ships. Various forms of import/export licence control. Priority in loading and discharging for nationally owned ships and the

reduction in harbour dues, light dues etc. Preference on inland transport charges. Reservation of types of cargo, eg government-sponsored, or a

percentage of the amount of cargo to national ships Encouraging or insisting that exporters sell CIF (cost, insurance and

freight) and that importers buy FOB (free on board). The result of this is the control of transport of goods entering or leaving the country.

Bilateral or multilateral agreements between countries

Many countries enter into an agreement with one or more others to mutually protect the shipping engaged in trade between the two countries. How to enforce the policyThis can be a problem: many policies such as quota systems increase the level of bureaucracy and reduce efficiency.

What are flags of convenience?All ships must be registered somewhere and the ship acquires the nationality of the state in which it is registered. It flies the flag of that state and is governed by its laws.Under the Geneva Convention

Each state shall fix the conditions for the granting of its nationality to ships, for the registration of ships in its territory and for the right to fly its flag.’ The same convention

also states that there must be a genuine link between the state and the ship, A flag of convenience can therefore be defined as the flag of a country whose laws allow and, in fact, make it easy for ships owned by foreign nationals to fly their flag.

This is as opposed to countries where the right to fly the national flag is subject to stringent conditions and involves responsibilities –

In addition, a flag of convenience country may possess some or all of the following features:

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It may be a small country which is poor and has few resources with which to raise foreign currency. The revenue raised by registration may be quite small

Manning by non-nationals may be permitted and no strongly developed trade unions may exist.

There may be a very low tax levy. No adequate administrative machinery may exist to enforce

international safety regulations.

Why do some nations go into the business of open registry?For developed countries, setting up an open registry may be considered as a means of keeping some level of control over its own ships.

Why do ship-owners use flags of convenience?1 Freedom from taxation. This is a major advantage only during profitable periods.2 Greater operational freedom, ie few government-imposed restrictions.3 Possible reduction in operating costs4 Avoidance of disadvantages, restrictions and the possibility of being discriminated against if operating under one’s own flag.

How could the worst aspects of flags of convenience be curtailed?1 Ensure that the crew does not have too many different language groups so that they can communicate with each other when under pressure.2 Establish clearly who is the‘real’ owner.3 Deposit capital or assets by owner in flag state.4 Increase port state control as regards safety standards.

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