MARITIME MARKET STRUCTURE Marina Zanne Marina.Zanne@fpp.uni-lj.si

Introduction Provision of maritime transport services involves 4 markets: freight market liner shipping market dry bulk market shipowners, charterers, tanker market brokers… freight derivatives market newbuildings market second hand ships market (sale & purchase market) demolition (scrap) market

The concept of 4 markets Stopford M. (2009): Maritime economics, p. 179

The freight market - Introduction Name Size in DWT Ships Traffic[19] Handysize 10.000 to 35.000 34% 18% Handymax 35.000 to 59.000 37% Panamax 60.000 to 80.000 19% 20% Capesize 80.000 and over 10% 62% Class Length Beam Draft Typical Min DWT Typical Max DWT Seawaymax 226 m 24 m 7,92 m 10.000 DWT 60.000 DWT Panamax 228,6 m 32,3 m 12,6 m 80.000 DWT Aframax 253 m 44,2m 11,6m 120.000 DWT Suezmax 16 m 200.000 DWT VLCC (Malaccamax) 470 m 60 m 20 m 315.000 DWT ULCC 320.000 DWT 550.000 DWT

The freight market – The liner market scheduled service at publically known tariffs  shippers can easily plan delivery times and costs many loading and unloading ports on the round trip; high speed & high regularity small quantity of high valued cargo contract for freight transport – bill of lading (Hague/Hague-Visby & Hamburg Rules) routes: from developed to developed countries

The freight market – The liner market 30% (in 2000) of cargo transported by sea is general cargo  mainly it is transported in containers with liner services  value of this cargo is cca 80% of all cargo tr. cargo: manufactures, semi-manufactures, minor bulk evolution from cargo liners to containerized transport scheduled services started from 1870s (steamships) until 1960s multi-deck ships with own cargo handling eq. were used (cargo liners)  these ships were able to carry general cargo and bulks (reason: unbalanced trade routes)

The freight market – The liner market liner and tramp ships (twin deckers) were similar and thus it was able to use them interchangeably  the construction of specialized ships  to improve productivity & make the service more efficient (ro-ro, reefer ships etc.). labour and capital intensive service  lack of cargo  cost, complexity and poor delivery of liner service  ships were spending cca 50% of time in ports (in the 1960s)  unification of cargo  paletization, containerization (integrated transport system)  higher productivity

The freight market – The liner market Example: Productivity comparison Priam class cargo liner (22.000 DWT) vs. Liverpool Bay container ship (47.000 DWT, 2.961 TEU) The cargo liner spent 149 days (in a year) in ports = 40% The container ship spent 64 days (in a year) in ports = 17% 9 cont ship = 74 classic cargo liners In 1975: 14,1 million TEU In 2010: 543 million TEU Growth: 10% per year

The freight market – Dry bulk market tramp shipping; no fixed or published schedule; ships are employed on spot or chartered bulk commodity can be transported as bulk cargo or general cargo usual way: one cargo, one ship, one one loading and one unloading port certain amount of empty trips low value cargos low speed ships perfectly competitve market economy of scale Stopford M. (2009): Maritime economics, p. 429

The freight market – Dry bulk market- Parcel size distribution Mix of cargoes – mix of routes – mix of needs in dry bulk market  different ship sizes Stopford M. (2009): Maritime economics, p. 59

The freight market – Dry bulk market Costs included in the charter fee/freight rate $/day $/t Stopford M. (2009): Maritime economics, p. 182

The freight market – Tanker market crude oil, oil products, chemicals, liquid gases & specialist cargoes main customers: energy, chemical and agricultural business economies of scale subcontracting; fleet is owned by oil companies or long time chartered by the same companies; seasonal requirements are fulfilled on spot market in a way similar to liner shipping (constant routes), in a way to tramp shipping (empty rides) Worldscale – the instrument for setting the freight rates in tanker market

The freight market – Tanker market Total capacity 75.000 t Average service speed 14,5 knots Bunker consumption Steaming 55 t/day Other 100 t per round voyage In port 5 t per port Grade of fuel oil 380 centistokes Port time 4 days for a voyage from one loading to another discharging port Fixed hire element 12.000 $/day Bunker price 116,75 $/t Port costs Most recent available Canal transit time 30 h per Suez transit The concept of Worldscale

The freight market – Summary (PSD) Stopford M. (1997): Maritime economics, p. 16

The freight market – Summary (PSD) Stopford M. (1997): Maritime economics, p. 393

The freight market – Freight derivatives market derivatives contract – legally binding agreement in which two parties agree to compensate each other, with the compensation depending on the outcome of a future event  to share the risk of a volatile market and remove the “all or nothing” situation  the playing safe option making derivatives work in practice is not easy: a reliable base index is required, assurance that on settlement date the parties will meet their obligations, lack of counterparties. Cargo owners and ship owners/operators face opposite risks; when rates go up shippers loose and owners gain, when they go down the revers happens.

Newbuildings market highly competitive market cca 30 countries have significant merchant shipbuilding industry  changeable history it takes several years to deliver a ship shipbuilding market cycles  volatility of supply & demand for ships the prices of ships fluctuate significantly  difficulties in planning (in 1960s Europe’s share was 66%, now it’s less than 10%, Asia’s share grew from 22 to 84%) (risk of filling the order book with ships contracted at low prices  until these ships are delivered their market price can double)

Stopford M. (2009): Maritime economics, p. 630 Newbuildings market Price of new ships depends on demand for new ships and the available shipyard capacity and is influenced with freight rates, second-hand prices, market expectations and credit availability. Stopford M. (2009): Maritime economics, p. 630

Sale & purchase market cca 1.500 ships change the owner every year; price mostly depends on the freight market situation, age of ship etc. ships for sale need to be free of any mortgages and are usually out of charter why selling? replacement of vessels at certain age the ship became unsuitable for his business expectation of falling prices “distress sale” - sale needed to meet the day-to-day commitments why buying? need for a specific ship/capacity, feeling that it is the right time to acquire a ship

Sale & purchase market shipbrokers; often the ship is offered to sveral broking companies full details of ship are mandatory; hull, machinery, equipment, class, survey status etc. put the ship on the market, negotiation of price/conditions, memorandum of agreement; price, deposit, where, when at what terms etc.; rights and obligations inspections; physical ins. (drydocking/underwater), classification society records, closing; simultaneous delivery of ship and transfer of funds

Stopford M. (2009): Maritime economics, p. 204, 205 Sale & purchase market Stopford M. (2009): Maritime economics, p. 204, 205

Sale & purchase market Disusion: What is the relation between the prices of newbuild and second-hand ships when the freight rates are good (high freight rates) ? What are the advantages of second-hand ship over a new ship and viceversa?

The demolition (scrap) market recycling industry ship is usually scraped when operating costs are higher than ship’s value ship owners – brokers – (intermediaries) - demolition yards (China, Pakistan, India, Bangladesh) scrap metal is used as a raw material for mills or it is used in construction the price depends on the demand of the local steel markets  when the shipping (freight) market is in depression a lot of ships is scrapped  low price of scrap metal

Sources & further reading Stopford M.: Maritime economics, London, Routledge (2009), Chapter 5 The tramp shipping market, Clarkson Research Studies, 2004 Freight derivatives market – FAQ, http://www.exchange.imarex.com/ffa-trading/freight-derivatives-market-faq/ The End of Break Bulk Liner Shipping, http://www.merchantnavyofficers.com/brakebulkliners2.html