NAME 457 Maritime Economics and Management Elements of shipping

1. NAME 457 Maritime Economics and Management Part 2: Elements of shipping Cdre M Muzibur Rahman, (E), psc, PhD, BN Cdre Muzib, psc, PhD

2. Freight Freight is the reward payable to the carrier for the carriage and arrival of goods in a mercantile or recognized condition, ready to be delivered to the merchant. Types of freight 1. Advance freight is payable in advance, before delivery of the actual goods. 2. Lump sum freight is the amount payable for the use of the whole or portion of a ship. This form of freight is calculated on the actual cubic capacity of the ship offered 3. Dead freight is the name given to a damage claim for breach of contract. It is the amount paid by or recoverable from a charterer of a ship for such part of the ship's capacity as the charterer has contracted for but fails to occupy or the unoccupied space in such a ship. 4. Pro-rata freight arises when the cargo has been carried only part of the way and circumstances make it impossible to continue the voyage further. 5. Back freight arises when the transportation of goods extends beyond the contracted destination port due to circumstances beyond the shipper's control. or when goods have been despatched to a certain port, and on arrival are refused. The freight charged for the return of the goods constitutes back freight. 6. Ad valorem freight arises when a cargo is assessed for rate purposes on a percentage of its value. For example a 2% ad valorem rate on a consignment value at £10,000 would raise £200. Cdre Muzib, psc, PhD

3. Methods For Freight Pricing  The freight price depends on the form of cargo, the mode of transport, the weight of the cargo, and the distance to the delivery destination.  Many shipping services, use dimensional weight for calculating the price, which takes into account both weight and volume of the cargo.  Containerized cargo is charged per container or by weight, and sometimes different rates are charged depending on the Commodity Containerized cargo is often medium to high value, with many additional services provided. Service is one issue too, not just price.  Bulk cargo is charged per weight  Break bulk cargo is charged in a variety of convenient ways.  Charter a ship, paying for the entire ship Cdre Muzib, psc, PhD

4. Factors that influence the formulation of freight rates: 1. Competition - Keen competition 2. The nature of the commodity, its quantity, period of shipment(s) and overall cubic measurements/dimensions/value. 3. The origin and destination of the cargo. 4. The overall transit cost. 5. The nature of packaging and convenience of handling. 6. The susceptibility of the cargo to damage and pilferage. 7. The general loadability of the transport unit. 8. Provision of additional facilities to accommodate the cargo, namely heavy lifts, strong room, livestock facilities, etc. 9. The mode(s) of transport. 10. Actual routeing of cargo consignment. Alternative routes tend to exist in some trades – particularly with multi-modalism/containerization – with a differing rate structure and overall transport cost. 11. Logistics – the supply chain ‘value added benefit. 12. Security cost. Cdre Muzib, psc, PhD

5. Maritime freight is usually considered in two categories: •  Refers to general cargo that has been packaged in some way with the use of bags, boxes or drums.  This cargo tends to have numerous origins, destinations and clients.  Before containerization, economies of scale were difficult to achieve with break-bulk cargo. Break-bulk cargo – •  Refers to freight, both dry or liquid, that is not packaged such as minerals (oil, coal, iron ore) and grains.  It often requires specialized ships such as oil tankers as well transshipment facilities.  Conventionally, this cargo has a single origin, destination and client.  It is also prone to economies of scale. Bulk cargo – the use of as specialized storage and Maritime shipping is dominated by bulk cargo, which roughly accounted for 70% of all the ton-miles shipped in a year. But the share of break-bulk cargo is increasing steadily, mainly because of containerization. Cdre Muzib, psc, PhD

6. The maritime shipping industry offers two major types of services: Tramp and Liner • Charter services (known as Tramp):  A maritime company rents a ship for a specific purpose, commonly between a specific port of origin and destination.  Notably used in the case of bulk cargo, mainly petroleum, iron ore, grain or coal, often requiring specialized cargo ships. • The Charter services are also of following types: – Single voyage charter – Consecutive voyage charter – Time charter – Bareboat charter – Contract of affreightment Cdre Muzib, psc, PhD

7. Voyage charter A voyage charter is a contract of carriage for one or more voyages. • The ship remains under the control of the owner including manning, maintenance and navigation. • Fuel cost is normally paid by the owner (could be other ways). • Cargo carried may also have a bill of lading; thus may be covered by the Hague-Visby Rules. • • The contract will normally have a ‘due dispatch’ clause. • There are also a number of days ‘lay days’ agreed in the contract for the loading and discharge of the cargo. For the commencement of lay-time three things are required; • – The vessel must be fit to load or unload. – She must be an ‘arrived ship’. – The ‘notice of readiness’ to load or discharge must be given to the charterer. Cdre Muzib, psc, PhD

8. Voyage charter Under a typical voyage, charter-party acts as the ship operator and decides on cruising speed so as to arrive at the port at the due date. • • For a ship to be an ‘arrived ship’ the master must tend his/her “notice of readiness”. • When arrived and once ‘lay days’ are used up, from then the ship owner is entitled to ‘demurrage’. Based on the above arrangement, the incentive is for the ship owner to sail the ship fast to be sure the become an “arrived ship” early so that the lay days start to count. • The frequent outcome of this process is that ships will steam at unnecessary high speed to arrive as early as possible. • This often results in the ship sitting at anchor or alongside for long periods. • This process works against energy efficiency. • Cdre Muzib, psc, PhD

9. Time charter • The ship is manned and navigated by the owner but her capacity is let to the charterer for a specified time. • Charterer has: – No ownership responsibility. – No ship management responsibility. – No ship maintenance responsibility. • It is normal that the charterer pays for the fuel and port costs but the ship owner must take care of the other operating costs. • Time charters will normally have a speed and fuel warranty clause stating the speed and fuel consumption of a ship. • Under time charter, the charter can exercise control on the way ship is used or operated. Cdre Muzib, psc, PhD

10. Demise charter This is a charter party in which the charterer takes control of a ship as if it is his own ship. • It is sometimes known as a ‘bare-boat’ charter party. • In such a charter-party, the master and the crew are like the charterers employees. • The demise charterer is for all practical purposes the temporary owner of the ship. • The “demise charter” arrangement is another good example of the ‘split incentive’ as the owner will not be willing to invest for energy efficiency. • However, in such cases the charterer will have more control, thus will have more incentive to achieve operational energy efficiency or press the owner to invest. • Cdre Muzib, psc, PhD

11. Charter party and split incentives • The charter party in any form (time, voyage or demise) is a good example of the ‘split incentive’ problem. • The owner: – Due to the contractual requirements, will tend to over steam during the voyage. – Normally does not pay for fuel, thus will have no incentives to save fuel. • The charterer: – Pays for the fuel but has no investment control on ship; so no incentives to invest in somebody’s else ship. – Has no significant operational speed controls especially for voyage charter due to nature of contracts. • The above act as a major barrier for energy efficiency activities. Cdre Muzib, psc, PhD

12. Contract of affreightment o It is binding agreement which sets forth the obligations and rights of the owner of a vessel (aircraft or ship) and a merchant. The vessel owner undertakes to provide cargo-space (at a specified time, and for a specified freight) to the merchant who is liable for payment whether or not the cargo is ready for shipment. This contract addresses issues associated specifically with a vessel, its crew, and the routes on which it will be plied. o Here, the ship-owner agrees to carry goods for the charterer in the ship, or to give the charterer the use of the whole or part of the ship's cargo- carrying space for the carriage of goods on a specified voyage or voyages or for a specified time. o In this type of contract, a ship-owner sometimes agrees to move a specified quantity of cargo over a specified period of time from one port to another without designating a particular ship. o The ship owner pays for the voyage costs and the vessel. Cdre Muzib, psc, PhD

13. Liner shipping services : o Involves a regular scheduled shipping service often calling several ports along a pendulum route to insure reliability, frequency and a specific level of service, where many ships can be allocated to a single route. o These shipping services are available to any freight importer or exporter, implying that the cargo being carried on any given ship belongs to different interests. o Liners are ships that ply fixed routes on published schedules. They typically charge according to published tariffs that are either unique to the ship line or are made by several lines in a particular trade route. o Freight must be moved to the liner company’s terminal at the port after the shipper has arranged for the freight booking or reservation. This freight is loaded by machine if bulk or crane if containerized and stowed in accordance with ship weight and balance requirements. Cdre Muzib, psc, PhD

14. Governments Intervention in the Maritime Transportation Governments have intervened, often massively, in the maritime sector to fulfill different goals such as economic development, national defense, prestige, and the protection of the national industry. Cabotage is a term of maritime law. It refers to transit of a vessel along the coast of a nation for the purpose of trade from one port to another within the territorial limits of that nation. Usually, this coastal trading is regulated by the national law of the host nation. Cabotage regulations have been one of the privileged measures to protect the national maritime transportation industry. Cdre Muzib, psc, PhD

15. • A pendulum service must be specifically structured in order not to infringe national cabotage laws that prevents a foreign maritime company to carry freight between domestic ports. • For instance, in a pendulum service D-A-B-C-D, a maritime company registered in country 2 has the right to unload or load freight at ports A, B or C in country 1 as long as this freight is coming from or bound to a foreign port (port D in this case). Moving freight from port A to port B or C would not be permitted since it would be considered cabotage. That same maritime company would however be able to carry freight between ports D, E and F (cabotage) since it is registered in country 2. Cdre Muzib, psc, PhD

16. Cabotage and Pendulum Service Cdre Muzib, psc, PhD

17. Permissible Price (PP) • Represents the maximum admissible price of the ship that still guarantees a specified income tax. • With the exception of the cases where the ship is paid in a single installment, it is determined by an iterative process. • Can be used to evaluate prices in proposals of new buildings or in the acquisition of second-hand ships, and in the comparison of those prices with the current ship prices and freight values. Cdre Muzib, psc, PhD

18. Flags of Convenience • The usage of a flag of convenience refers to a national owner choosing to register one or more vessels in another nation in order to avoid higher regulatory and manning costs. • Ship registry is a source of additional income for these governments. Even the landlocked country of Mongolia is offering ship registry services. Cdre Muzib, psc, PhD

19. Flags of Convenience • Flag of convenience (FOC) is a business practice whereby a ship's owners register a merchant ship in the ship register of a country other than that of the ship's owners, and the ship flies the civil ensign of that country, called the flag state. The term is often used pejoratively, and the practice is regarded as contentious. Each merchant ship is required by international law to be registered in a registry created by a country, and a ship is subject to the laws of that country, which are used also if the ship is involved in a case under admiralty law. A ship's owners may elect to register a ship in a foreign country which enables it to avoid the regulations of the owners’ country which may, for example, have stricter safety standards. They may also select a jurisdiction to reduce operating costs, bypassing laws that protect the wages and working conditions of mariners. The term "flag of convenience" has been used since the 1950s. A registry which does not have a nationality or residency requirement for ship registration is often described as an open registry. The maritime industry is now more deregulated than before because of technical changes, mainly containerization, and open registry ships operating under flags of convenience. Cdre Muzib, psc, PhD • •

20. By 1998, about 46% of the ships and about 62% of the global tonnage was registered under a flag of convenience. In 2015, they represented 71% of the total tonnage of the merchant fleet. The world fleet operated under 152 pavilions. Three of these pavilions, Panama, Liberia and Marshall Islands accounted for 42.8% of the total capacity; either, 710 million tonnes (Mt) and 12 000 flags of some 50000 vessels navigating in the oceans. Panama dominates with 20.7% of world tonnage with 343 Mt and 6745 ships. Followed by Liberia with 1990 Mt and 2996 ships and Marshall Islands with 168.6 Mt and 2 345 ships. None of those countries are among the major owners. The real and principal owners are Greece, Japan, China and Germany, which accounted in 2015 a capacity of 864 Mt and 16752 vessels. Greece is largest owner with 308 Mt and 4252 ships, mainly of bulk carriers and oil tankers. Japan comes in second with 242 Mt and 4135 Ships and China with 190 Mt and the 4720 ships. Cdre Muzib, psc, PhD

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