SHIPPING COMPANY EONOMICS

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

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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 $/day Stopford M. (2009): Maritime economics, p. 182 $/t

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 Final price  Cash price  Interests  Cash price  n  Instalment

Capital costs: Cost of loan

Loan  Cash price  Down payment Capital recovery factor  CRF   r  1    1 r   n r  n  1 Instalment  CRF  Loan Final price  Cash price  Interests  Cash price  n  Instalment where r – interest rate (for adeqaute period of time) n – number of instalments

Example

Cash price = 75.000.000 $. 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

Book value at beginning of year

Original value

Depreciation expense Accumulated depreciation Book value at end of year

Book value = Original value Accumulate d depreciati on Scrap value

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

Annual depreciati on expense  ADE   Cost of ship Useful life  of Salvable ship value  years  Daily depreciati on expense  DDE   ADE 350 days Salvable value  Displaceme nt  Price of scrap metal

Example

What is the annual and daily depreciation expense for a newly bought 14 years old ship at the price of 24.000.000$. The ship’s displacement is 15.200 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

There are several direct and indirect costs incurring when crewing of the vessel: - 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

Operating costs: Crew costs

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

UK Italy Croatia Poland Romania Ukraine India Philipines

Crew costs: Wages

Master 9.000-13.000

7.000-9.000

4.900-5.500

4.600-8.000

3.800-4.120

3.500-5.000

4.300-6.000

3.700-6.000

Bulk carriers

Cheif engineer 9.000-13.000

6.500-8.500

4.800-5.400

Chief officer, 2 nd (1 st asst) engineer 7.000-10.000

6.000-8.000

3.400-3.800

4.400-7.000

3.600-3.910

3.300-4.500

4.000-5.700

3.300-4.800

3.470-5.000

2.880-3.180

2.560-3.700

3.200-4.200

2.300-3.700

Drewry; Ship management (2006), p. 112 2 nd 3 rd officer, (2 nd asst) engineer 5.500-7.000

4.500-6.000

2.150-2.350

2.750-4.000

2.060-2.340

1.850-2.400

2.000-2.400

1.950-2.600

Crew costs: Wages

UK Italy Croatia Poland Romania Ukraine India Philipines Master 11.000 16.000

8.000-10.000

7.500-8.900

7.000-10.000

5.500-7.500

5.000-7.000

6.000-8.000

4.500-6.500

Tankers

Cheif engineer Chief officer, 2 nd (1 asst) st engineer 10.000-15.000

8.000-11.000

7.500-9.500

7.400-8.800

7.000-9.000

5.500-7.200

4.300-6.900

6.000-7.800

3.700-4.800

6.500-8.500

6.000-6.500

3.900-4.900

4.200-5.700

3.500-5.500

4.800-5.800

2.580-3.700

Drewry; Ship management (2006), p. 113 2 nd 3 rd officer, (2 nd asst) engineer 6.000-8.000

5.000-6.500

2.500-2.800

3.200-3.800

2.500-3.100

2.450-2.850

2.400-3.000

2.250-2.600

Crew costs – depending on nationality

Indian crew (8+10) 43.000 $/month Filipino crew(8+10) 38.300 $/month Wages Victualling Miscellaneous

SKUPAJ

Tours of duty – Officers Tours of duty – Ratings Normal working week - Ratings 3.720 $/month 4.300 $/month

51.020 $/month

4-6 9-10 40-44 3.720 $/month 3.830 $/month

45.850 $/month

8-10 9-12 44 Guaranteed overtime per month – Ratings 103-109 Leave per month served - Officers 15-22 85 6-10 Leave per month served - Officers 7 6-10 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]

16 44

Main engine consumption [t/day]

55 Stopford M. (2009): Maritime economics, p. 235 15 36 45 14 30 37 13 24 29 12 19 23 11 14 18 http://www.bunkerworld.com/pr ices , 30.10.2010

Singapore Rotterdam Houston Fujairah Los Angeles

IFO380 IFO180 MDO MGO

468.50 477.50 681.00 689.50

453.50 471.50

460.50 473.50 738.50

- 706.50

474.50 493.00

- 732.50

476.50 493.50 757.50 757.50

Fuel prices

http://www.bunkerworld.com/prices , 30.10.2010

Voyage costs: Port charges

Fees for the use of facilities and services provided by the port port dues service 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 tm



L tm



DIS tm



CL tm

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

100% 90% 80% 70% 47% 39% 11% 5% 60% 50% 40% 2% 3% 35% 40% capital maintenance voyage costs operating costs 33% 30% 20% 31% 10% 22% 18% 0% 5 years 10 years 20 years 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 tm

 24 

S tm



LD tm



DWU tm

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 tm



P tm



FR tm DWT tm

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: 6.200 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): 31.000 $/day if cargo is not delivered within 23 days Fixed daily costs: 15.000 $ DWT: 67.000 t Freight rate: 22 $/t Port charges: 64.000 $ (cargo handling costs excluded)

Example: Optimizing the ship’s speed

Consumption at sea is as follows:

Speed [knots] Main engine consumption [t/day]

16 15 14 13 12 11 44 36 30 24 19 14 What is the profit at optimal speed?

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