The Impact of Global Recession and Europe Debt Crisis in Shipping and Ship Breaking Industries - Coursework Example

Maritime Economics () (Assignment) Student: Student ID: Lecturer: Subject: Course: Due Date Word Count Abstract Competition between maritime companies is increasing with the rise in globalization and improved information technology. This increase in competition is changing the world economy which is largely characterized by a global redistribution of capital and labor as well as integration and globalization of shipping markets. The purpose of this paper is to understand maritime economics by examining key performance indicators within the shipping industries as well as understanding why it is necessary for the shipping companies to have new ship as opposed to older once. Finally, the paper will analyze the impact of global recession and Europe debt crisis in shipping and ship breaking industries. Maritime Economics Contents Abstract ii Contents iii 1.0 Introduction 1 2.0 Key indicators within shipping industry 1 3.0 Shipping companies should only have new ships in their fleets 3 4.0 Impact of global recession and Europe debt crisis 8 4.1 shipping industry 8 4.2 ship breaking industry 10 5.0 References 12 1.0 Introduction It is quite evident that 90% of world trade is largely carried out by international shipping industry. With no shipping, today modern world would suffer especially in exporting and importing. In today world economy, shipping industry is rapidly growing assisting in decreasing freight cost while in the same time increasing shipping efficiency. With the great help in economic liberalization as well as industrialization it is expected that the shipping industry will grow. It is for this reason that this paper focuses identifying the key indicators that one can use to evaluate the performance of shipping companies. Further, the paper will discuss why shipping companies should only have new ships and finally, the paper will discuss how the declines in the world economy and trade as a result of the on-going European debt crisis would affect the sea freight market in the short term and in the long term. 2.0 Key indicators within shipping industry Heaver et al (2000) suggest that, the shipping company is considered to be subject to changes in both expectations and requirements from customers, employees, government, the public and other stakeholders. Evidently, within the shipping industry there is a drive towards more transparency and visibility in operations. According to Meersman and Vanelslander (2003), due to the constant change in information technology as well as the business operation environment, shipping industries are facing serious competition. It is for this reason that shipping companies need to have good operating performance to ensure they are engaging in successful business (Heaver et al, 2000). Lorange (2001) maintains that, the two key indicators within the shipping industry are financial and operational indicators. It is important for shipping companies should be aware of the costs generated by its operations and the revenue collected from these operations. The trend, even in those countries where shipping companies are not treated as sovereign within the national economy, is towards making them increasingly financially feasible. It is therefore important for shipping companies to provide sound financial information (Lorange, 2001). It is very important that the shipping key performance indicators largely contribute in improving effectiveness through a process that supports quality standards. Here, the shipping industry is required to enhance its governance which will ensure further development as well as standardization of “best practice”. Midoro and Pitto (2000) assert that, the world maritime policy states that the adaptation of various CSR strategies as well as performance disclosure in relation to designed objectives greatly represents an alternative to regulation. Increased transparency within the shipping industry is another key performance indicator. Shipping industry requires increased transparency especially while focusing on quality, safety as well as environmental performance (Midoro and Pitto, 2000,). It is important that this industry develop a framework for both measuring and reporting its operational performance. This framework is expected to largely consist of unambiguous key performance indicators definitions as well as metrics in a hierarchical structure. With this, it is quite evident that measurable indicators will greatly be aggregated to a level which is meaningful for all the industry stakeholders without a maritime/technical background (Matthews 2009). There is an increasing focus on various environmental issues especially in this shipping industry. For this reason three environmental key performance indicators have been identify by the industry. These three KPIs are; Operational emissions-it is very important that ships minimize any harmful emissions that result from normal ship operations. Incident-related spills- any kind of spill resulting from accidents/incidents (chemicals, solids, gas/-vapor. Lube oil and bunker) should be avoided at all cost. Ballast water handling- handing of ballast water either before or after the voyage should be in accordance with stipulated local regulations (Matthews 2009). The above sets consist of several underlying indicators that comprises of unambiguous measurable definitions which is in a close cooperation with customers. 3.0 Shipping companies should only have new ships in their fleets The cost of running a shipping company largely depends on a combination of three factors namely fuel consumption, number of crew required to operate the ship and its physical conditions which largely dictates the requirements for maintenance and repairs. Grammenos (2010) suggest that, within any given fleet of same sized ships, it is quite often to find that old ships have a different cost structure as compared to new ones. In fact, the relationship between cost and age is considered to be one of the fundamental issues in any shipping company market economies since it defines the slope of the short run supply curve. The graph below defines the slope of the short run supply curve observed between the years 1996-2002. Source: Perth Now Business Newsletter. It is quite evident that when a ship grows older its capital cost greatly reduces whereas its voyage and operating costs increases compared to new ships. This is because newer ships are more efficient due to a combination of effective technicality and less negative impact associated to ageing (Grammenos 2010). A good example of the age impact in shipping is comparing three ships one 5 year old, ten year old and 20 year old, these ships are trading under an Australia flag suing the same arrangements as well as changing capital at 8% per year. Through considering operating cost and excluding both periodic maintenance and capital costs, the five and ten year old ships are cheaper to run as compared to the ten year old operating at 18% compared to 31% of the old ship. This is because old ships have larger operating costs, low fuel efficiency, more routine maintenance and larger crew. This is explained in figure 1. Figure 1: Capesize bulk carrier cost against age The difference is because old ships have larger operating costs, low fuel efficiency, more routine maintenance and larger crew. It is therefore important for shipping companies to acquire new ships in their fleets because these ships can survive at freights considered to be way below the lay point for older ships (Grammenos 2010). This difference is what largely determines the slopes of a given supply curve. Since spot earning need to cover fuel charge as well operating costs, older ships tend to generate less cash compared to the new and modern ships compared to be cost effective. With today shipping market segmentation defined in the image below, it is important for shipping companies to have new ships so as to cut the operational cost that is incurred by companies using old ship in world seaborne trade. It is quite evident that old ships are subject to high operational costs and they are considered to be less competitive compared to new ships. According to Jansson and Shneerson (1987), the cost of maintaining and operating old ship creates budgetary crisis in various shipping companies across the world. It is argued that aging ships accounts for increases in cumulative operating and maintenance spending (as opposed to increased cost for specific system) which largely depends on two assumptions namely; spending on operating and maintenance for equipment has risen and the average age of equipment has increased especially due to the recent experienced global financial crisis (Australian Maritime College 1994). According to Australian Ship-owners Association, spending on old ship maintenance increased from 9.0 million in 1999 to 15.3 million per ship in 1984. This increase could have resulted from accumulated old ship in the Australian fleet which required more maintenance (Jansson and Shneerson 1987). Shipping companies need to have new ships in their fleets so as to reduce both operational and maintenance costs that result from old ship usage. New ships are perceived to be more competitive compared to old ships in that they positively affects the capacity of ship companies to provide various shipping services. It is quite evident that the acquisition cost of a ship is a fundamental element of any shipping company capital structure (Lloyd’s Shipping Economist 1993). Nevertheless, it is argued that it is necessary for operators to often replace their fleets at various reasonable intervals with technically modern ships at given international competitive prices. Today, new ship highly allows ship operators to keep up with abreast of new designs and one driven by technology so as to avoid high operating and maintenance cost that are usually incurred by older ship (Ramsay 2005). Due to the fact that new ships are technology driven as well as fast, they assist service operators to achieve necessary efficiencies in charging reasonable rates as well as providing adequate service levels (Ramsay 2005). Shipping companies that specializes in new, sophisticated and modern ships give maximum revenue earning potential by way of high ability as well as flexibility to carry special cargoes hence meeting customers’ specifications. However, it is quite evident that investing on new ships by shipping companies is capital intensive thus involve high degree of debt financing with a definable result where ships are required to be operated continuously throughout defined depressions (Lloyd’s Shipping Economist 1993). Getting value for the shipping investment greatly involves strong management skills so as to develop strong customers’ relationships. It is therefore important that while purchasing new ships to consider quality management as well as organization corporate structure. These approaches are known to greatly focus on reducing unit costs on a given continuous basis whereas the use of older ship is more concern in cost minimization (Lloyd’s Shipping Economist 1993). 4.0 Impact of global recession and Europe debt crisis 4.1 shipping industry Brodie (1999) suggest that, the slump in the world economic growth which occurred in the second half of 2008 as well as the recent debts by Europe has severely impacted on the transport and logistics industry which is not exceptional to the shipping industry. According to Brodie (1999), world economy is considered as an important factor affecting shipping demand. After the recent global recession as well as European debt crisis, the shipping industry has greatly been affected in that there have been reductions of global import and export reducing the use of vessels for transportation. Evidently, world economy and the demand for sea transport are correlated in that world economy generates demand for sea transport through import and export of various commodities. Fluctuation in world economy like experienced recently creates a pattern which is cyclical of sea transport demand. The relationship between the Europe debt crisis and recent global recession can be described as a “trade elasticity” relationship. Trade elasticity is defined as the percentage growth in sea trade divided by the percentage of world output growth (Brodie 1999). In Australia, global economic crisis greatly impacted on the shipping industry in that the volume of output in Australian ports in 2009 decreased by 22%. Drewry Shipping Consultants (1993) maintain that, due to lack of consumer confidence, there was less demand for imported goods. Global recession and European debts crisis has also been a challenge for Australian exporters although decline in export has not been as much as in imports. This therefore resulted to a dramatic fall of break bulk cargo volumes which was largely fueled by the fall of construction industry. Based on long term effect of the decline in world economy and trade, shipping which is considered to be a global economic endeavor has neither been spared. Being a transport activity that largely depends on oil, the shipping industry has been affected due to increased fuel prices. Although fuel prices have narrowed off sharply reaching a high of US$147 per barrel in July 2008, crude oil prices has rebounded reaching above US$90 per barrel in December 2010. This increase in prices has made shipping companies incur higher operating and bunker costs in running their business (Drewry Shipping Consultants 1993). Retrieved from; WTO Secretariat Farthing and Brownrigg (1997) maintain that, global financial crisis and Europe debts crisis has caused massive fall in GDPs in Australia as indicated by the above graph from the year 1990 to 2011. This has greatly resulted to decline in trade. The decline in trade was contributed to the reverse growth of the engine which further contributed to the fall of demand for shipping services. A good example of fall of shipping demand is from Bloomberg reports in which a cape-size dry built vessel fell from $23, 400/day in June ’08 to $23,160/day in December 08 and rose to $93, 197/day in June 09. Research indicates that container ships are considered to be the biggest victim of the recent financial crisis (Farthing and Brownrigg 1997). The ship market suffered from the recent financial crisis because the recent shipping boom greatly produced a major spike in the container tonnage with the delivery of many large vessels (Stopford 1997). Big dry bulk carriers are greatly experiencing lot difficulties following the collapse in demand raw materials which have been attributed to the recent global recession. In addition, the shipping industry has had lay off due to the recent recessionary environment as described in the graph below; Retrieved from; http://www.wto.org/english/news_e/pres11_e/pr628_e.htm 4.2 ship breaking industry While global recession and Europe debt crisis have affected the shipping industry it is turning out to be an advantage for the ship breaking industry. The ship breaking industry is enjoying high demand in providing cheapest steel which has been as a result of dismantling ships which have been affected by the slowdown in global trade (Stopford 1997). It is quite evident that due to global financial crisis and Europe crisis, international ship companies as well as ship owners are retiring the ships into the ship breaking industry for dismantling since imports and export have gone down globally and there is no cargo to transport. The recession has resulted to unavailability of cargo which has in turn resulted to vessels being idle forcing shipping companies into ship breaking industry due to high costs involved in maintenance as well as operation in the shipping industry. Raw materials available in ship breaking are exclusive quality and are considered to be economical for both small and medium engineering enterprises to acquire the same from ship breaking vendors (Sjostrom 2002). While the shipping industry complains on the negative impact of economic down turn and Europe debt crisis, this situation has positively affected the ship breaking industry as well as the engineering workshop because of supply matching demands. 5.0 References Australian Maritime College 1994, The History of the Australian Maritime College, by A. Alexander, Foot & Playsted, Launceston. Brodie, P. 1999, Commercial Shipping Handbook, Lloyd’s of London Press, London Drewry Shipping Consultants 1993, Freight Rates and Bulk Shipping Costs: Market Analysis and Forecast to 2000, Drewry, London. Farthing, B. & Brownrigg, M. 1997, Farthing on International Shipping, 3rd edn, Lloyd’s of London Press, London. Grammenos, C. T. 2010, The Handbook of Maritime Economics and Business, Lloyd’s of London Press, London. Heaver, T., Meersman, H., & Moglia, F. 2000, Do mergers and alliances influence European shipping and port competition? Maritime policy and management, vol. 27, no 1, pp. 363-373 Jansson, J. O. &Shneerson, D. 1987, Liner Shipping Economics, Chapman and Hall, Bristol. Lloyd’s Shipping Economist 1993, Costs: Pressures on Profit, Lloyd’s Shipping Economist, London. Lorange, P. 2001, Strategic re-thinking in shipping companies, Maritime policy and management, Vol. 28, no 1, pp. 23-32 Matthews, S. 2009, Laying up the odds, Lloyds shipping economist, vol. Jul, pp.24-26 Meersman, H., & Vanelslander, T. 2003, Analyzing the maritime sector of the next decades, De Boeck Ltd, Antwerp Midoro, R,. & Pitto, A. 2000, A critical evaluation of strategic alliances in linear shipping, Maritime policy and management, vol. 27, no 1, pp.31-40 Ramsay, J. 2005, The real meaning of value in trading relationships’, international journal of management, Vol.25, no.5, pp.33-38 Sjostrom, W. 2002, ‘Liner shipping: modelling competition and collusion’, in Handbook of Maritime Economics and Business, ed. C.T. Grammenos, Lloyd’s of London Press, London, pp. 307-326. Stopford, M. 1997, Maritime Economics, 2nd edn, Routledge, London Read More