SHIPPING ECONOMICS AND FINANACE

NMIS
Assignment By Ravikiran Patil
First year 2020-2021
Submitted On 31 Dec. 2020

TEST PAPERS 1
1. What influence does the age of vessel have on the supply of ships in market and why?

Ans: The age of the world fleet signifies the useful availability of the fleet. Many countries have imposed restriction
on the entry of older ships in their ports. This means the availability of the ships gets affected. The development of
shipping in the late 60s and the early 70s saw rapid expansion of world fleet, especially in the larger size vessels.
These ships are now fairly old and may not be available for long.

2. Why should a state have a policy for shipping?

Ans: However a shipping policy is required so that the nation’s interest related to shipping can be protected. These
interests could include employment in shipping, foreign currency investments, cargo movement, ports and other
related infrastructure, ancillary industries and political ideology etc. The initial question is why countries have a
shipping policy. Here it must be remembered that shipping is a very important link in the chain of international
trade. Therefore the shipping policy forms a part of the economic strategy of a country. The policy is also developed
and stated keeping in mind the protection and assistance which may be made available to the merchant fleet of the
country thereby enabling it to grow and become prosperous. Most countries provide some kind of a policy wherein
they give strong support to its shipping or may be to some other related and ancillary industries. On the other hand
if it decides not to do anything for its shipping, the shipping may die. e.g. shipping in U.K. and some other developed
countries.

3. Discuss the factors influencing the manning costs of a vessel.

Ans: The manning cost is an important component of the ship’s operating costs and is grouped in the vessel related
costs. The manning costs include the wages paid to the fleet personnel, their victualing (messing charges) and their
travel costs for joining or leaving vessel.

Broadly these costs depend on the following:

 Number of personnel on board: This would depend on the flag, state requirement, type of ship, degree of
automation, nationality of the crew etc.

 Type and size of the ship: Certain ships require more and specialized category of personnel e.g. Pump

as larger ships do not need very large crew in relative comparison to smaller ships. This benefit is especially
important as crew costs form about 15 to 20% of ship owner’s total costs.

4. Describe the difference between voyage and vessel related costs.

Ans: VOYAGE RELATED COSTS:

The above costs depend on the voyage pattern of the ship.

1. Bunkers: The fuel cost is a major component of the cost structure as this keeps
fluctuating in line with the price of crude oil. The fuel costs depend on the area where

bunkers are taken; the power of the engines; size of the vessel; length of the voyage as

longer the voyage more will be the number of days etc. The cost of both heavy oil and

diesel oil is included in this cost.

2. Port Charges: The port authorities levy various charges when a ship is in its territory.

This includes pilot charges; light dues; lighthouse dues; wharf charges; tug charges;

charges for any services which is offered by the port. The charges depend on the size of

the vessel; cargo carried; location of berth in the port; services used and of course the

charges are different in different ports around the world.

3. Canal dues: These are the charges paid to the canal authorities while crossing Suez,

Panama or Kiel or any other canal. This charge depend on the size and type of the ship;

cargo type and quantity; speed of the ship; any engine problem with the ship.

Sometimes the canal authorities also offer a discount to owners who use the canal

extensively.

The cargo related and the voyage related costs are also called the direct operating costs as these are incurred and
are dependent on the actual operations of the ship. In other words they can be termed as the variable costs in a
shipping operation.

VESSEL RELATED COSTS:

The vessel related costs are attributed to a certain ship. These include the following:

1. Manning costs: These are the costs of the crew and include their wages; victualing i.e.

provisions; their travel costs while joining a ship or leaving a ship and other benefits.

Such costs depend on the size of the ship’s compliment and their nationality; flag of the

ship; type of ship as wages are different for oil tankers, gas carriers etc.; trading area of

the vessel as crew travel may be affected by this etc.

2. Repair & Maintenance costs: This includes the running repairs during the voyage,

planned layup and dry docking repairs, hull, engine and electrical repairs etc. This would

depend on the philosophy of the company regarding maintenance; type, size and age of

vessel; trading area; size of the crew; flag of the vessel etc.

3. Survey costs: It is obligatory to keep the ship maintained to a certain standard and this

requires various surveys and inspection by the classification society, flag state

authorities etc.

4. Stores and Spares costs: Many different types of stores are required for the upkeep of

the ship e.g. deck, engine, saloon, electrical stores. Further some spare parts are also

necessary for effective maintenance. These costs depend on the place of purchase,

quantity and quality of items etc.

5. Insurance costs: This includes both hull & machinery insurance and P & I club

insurance. These costs depend on many factors like type and size of vessel; risks

covered; past claim record; size of the fleet; amount of deductibles etc.

6. Ship’s Capital costs: This includes interest on capital; depreciation etc

The vessel related costs and the management overheads, on the other hand, are like fixed

costs and have to be incurred all the time. These are termed as the indirect operating costs.

Normally these are estimated for the year and then calculated on per day basis. This is also called

as the Standing Charges of the vessel.

5. What do you understand by economic of scale?

Ans: These are various cost cutting efficiencies that are brought about as the scale of operation grows, e.g.
specialization of workers i.e. when labour specializes in a particular field or type of work their output is better, more
accurate and fast. This results in overall improvement of the organization. Yet another example is the supermarkets
where due to the shear quantum of business, cost per item reduces and this benefit is passed on to the customers in
form of lower prices. These are various cost cutting efficiencies that are brought about as the scale of operation
grows, e.g. specialization of workers i.e. when labour specializes in a particular field or type of work their output is
better, more accurate and fast. This results in overall improvement of the organization. Yet another example is the
supermarkets where due to the shear quantum of business, cost per item reduces and this benefit is passed on to
the customers in form of lower prices.

6. What is the role of shipping in international trade?

Ans: Around 90% of world trade is carried by the international shipping industry. Without shipping the import and
export of goods on the scale necessary for the modern world would not be possible. Seaborne trade continues to
expand, bringing benefits for consumers across the world through competitive freight costs. Thanks to the growing
efficiency of shipping as a mode of transport and increased economic liberalization, the prospects for the industry’s
further growth continue to be strong.

There are over 50,000 merchant ships trading internationally, transporting every kind of cargo. The world fleet is
registered in over 150 nations and manned by over a million seafarers of virtually every nationality.

Because shipping is a service business, ship demand depends on several factors, including price, speed, reliability,
and security. It starts from the volume of trade, how the commodity trades can be analyzed by dividing them into
groups which share economic characteristics, such as energy, agricultural trades, metal industry trades, forest
products trades and other industrial manufacturers. The shape of the PSD function varies from one commodity to
another. The key distinction is between ‘bulk cargo’, which enters the market in ship-size consignments, and ‘general
cargo’, which consists of many small quantities of cargo grouped for shipment.

Bulk cargo is transported on a ‘one ship, one cargo’ basis, generally using bulk vessels. Some shipping companies also
run bulk shipping services geared to the transport of special cargoes such as forest products and cars. To meet
marginal fluctuations in demand or for trades such as grain where the quantities and routes over which cargo will be
transported are unpredictable, tonnage is drawn from the charter market.

General cargo, either loose or unitized, is transported by liner services which offer regular transport, accepting any
cargo at a fixed tariff. Containerization transformed loose general cargo into a homogeneous commodity which
could be handled in bulk.
7. Write short notes on FOB and CIF.

Ans: Free on Board or FOB

With an FOB shipment, responsibility and liability transfer from seller to buyer when the shipment reaches the
port or other facility designated as the point of origin.

FOB stands for Free On Board. With the FOB type of shipping agreement, the seller or shipper arranges for goods
to be moved to a designated point of origin. Normally this is a port because FOB and other INCOTERM contracts
are mainly intended for maritime shipping.

However, FOB contracts are also used for inland and air shipments. Delivery is accomplished when the seller
releases the goods to the buyer. FOB contracts stipulate that this occurs when the goods cross the rail of the ship.

Cost, Insurance and Freight, or CIF

With a CIF agreement, the seller pays costs and assumes liability until the goods reach the port of destination
chosen by the buyer.

When a CIF – Cost, Insurance and Freight – shipping agreement is used, the seller has responsibility for the cost of
the goods in transit, providing minimum insurance and paying freight charges to move the goods to a destination
chosen by the buyer. From the point of delivery at the destination, the buyer assumes responsibility for unloading
charges and any further shipping costs to a final destination.

The Main Difference

The crucial difference between an FOB and a CIF agreement is the point at which responsibility and liability
transfer from seller to buyer. With an FOB shipment, this occurs when the shipment reaches the port or other
facility designated as the point of origin. With a CIF agreement, the seller pays costs and assumes liability until the
goods reach the port of destination chosen by the buyer.

8. Answer problem “A” attaché herewith.

PROBLEM A

Seahorse Shipping Company Limited required a ship for Rs. 9,00,00,000/- and spent

Rs.1,80,000/- towards capital expenditure to put ship into use. The balance life of the ship

is 9 years. The company got her insured at 5%. The freight was also insured at the same

rate, the amount of policy being Rs. 1,50,00,000/-.

During the six months ended on 30th September, 1997 the ship made three round trips to

Rotterdam and was half through the fourth trip (one way completed). It carried the

following cargo.

To Rotterdam 23,000 Tonnes @ Rs. 186/- per Tonne

From Rotterdam 19,000 Tonnes @ Rs. 192/-per Tonne

To Rotterdam 24,000 Tonnes @ Rs. 188/- per Tonne

From Rotterdam 20,000 Tonnes @ Rs. 195/-per Tonne

To Rotterdam 24,000 Tonnes @ Rs. 185/- per Tonne

From Rotterdam 19,000 Tonnes @ Rs. 194/-per Tonne

To Rotterdam 22,000 Tonnes @ Rs. 188/- per Tonne

Primage was 5% and address commission was 7.5%. The expenses incurred were :

Port Dues Rs. 5,25,000/-

Wages & Salaries Rs. 63,60,000/-

Fuel Rs. 37,35,000/-

Stevedoring Rs. 12,70,000/-

Stores Rs. 13,40,000/-

Stock of stores as on 30.9.1997 Rs. 1,20,000/-

The ship is to be depreciated fully during the balance life of the vessel with NIL residuel

value.

Prepare VOYAGE ACCOUNT to ascertain profit or lose for the period 1st April, 1997 to

30th

September, 1997.
Ans:
 TEST PAPERS 2
1. Describe the importance of sea-borne trade and give some major Commodities moving by different types
of ships.

Ans: Up to 90% of world’s merchandise are carried by sea and the reason is that there are multiple benefits for foreign
trade compared with air, rail or road transport.
In an ever-growing globalized economy, the necessity for shipping bigger volumes of cargo in the less time possible is
increasing. This has led to the construction of the so-called mega vessels, with the capacity to carry huge amounts of
goods into thousands of shipping containers at once. This dynamic benefits the economy of scale and foreign trade,
import, and export of all kinds of merchandise and raw materials.
“Today, around 90 percent of world trade is carried by the international shipping industry. Without shipping the
import and export of goods on the scale necessary to sustain the modern world would not be possible. And seaborne
trade continues to expand, bringing benefits for consumers across the world through competitive freight costs. Yet
the fact remains that most of the world’s population is not aware of the vital role shipping plays in their everyday
lives,” said Koji Sekimizu, Secretary-General of IMO when he announced the theme for International Shipping
Day 2016: “Shipping: indispensable to the world”.
In this sense, shipping is present in the development of our daily lives, even if we are sometimes unaware of this fact.
To help you understand why shipping is the favourite way of transport, here we will show you four reasons:
 It´s cheaper: Shipping industry has the most competitive freight costs, as is one of the most cost-effective ways of
goods transportation through long distances.
 It´s the ideal way to move big volumes of cargo: Vessels are built to carry huge amounts of goods and raw materials
in comparison with the capacity of airplanes or trucks. In addition, shipping allows the movement of liquids, gas and
dangerous cargo. For this matter, there are certain regulations to keep the safety of the vessel, the crew, and the
cargo.
 It´s safe: The percentages of losses caused by incidents during transport by sea have dropped until it lowest since a
decade according to reports from Allianz.
 It’s eco-friendly: In comparison with the road transport, the maritime industry is less dangerous for the environment.
The shipping industry is responsible for only 12% of the total of pollution generated by human economic activities.

2. How are bunkers purchased?

Ans: The price of bunker depends on the following:

- as some crude may give more lighter products etc.

– by barge, by pipeline etc.

Considering the importance of various specifications of heavy oil standard fuel

specifications have been developed. According to this a fuel is identified by a unique

number/letter etc. The maximum or minimum limits of various specifications are specified, e.g.

Fuel grade D-15 having a maximum of 3.5% Sulphur or a maximum specific gravity of 0.981.

Such standard specifications have been issued by CIMAC (Association of diesel engine

manufacturers), ISO and British Standards. Now while ordering bunkers a ship owner has to

indicate the unique identification number to the supplier.

In the pre-oil crisis era of the 70s, the bunker were sold by the oil majors (e.g. Mobil,
British Petroleum, Esso, etc.). The ship owners used to have term contracts with the suppliers

and the prices hardly fluctuated. However as the crude price shot up from $2 a barrel to about

$40 a barrel, the heavy oil prices also went up from about $30 a tonne to more than $330 a

tonne. The role of oil majors also reduced and presently the bunkers may be purchased from

the following sources:

With the fluctuation of bunker prices and with the availability of many supply sources, the

method of purchase shifted from contract to spot. Further a new player in the market entered as

the Bunker Broker. His job, like any broker, is to bring two parties together and arrange bunker

supplies.

3. What factors are considered when fixing the prices of port services?
Ans: Port charges primarily consist of Pilotage (sea and port pilot), towage, mooring/unmooring, shifting of
vessel (pilotage, towing, mooring etc., ships and gangway watchmen, berth hire, mooring hire,
communication charges, agency charges etc. BIMCO and other publications provide substantial data on port
charges covering ports all over the world to assist the shipowners.
4. What is the difference between voyage and disbursement accounts?
Ans: Disbursement accounting is part of operating cost.
In expenses are as per port call, as per port tarrif structure.
Voyage account is specifically for any voyage of a vessel maintaining expense, revenue earned for that
voyage example from Singapore to Los Angeles. It will consider all the ports vessel called to complete that
voyage
In DA operator will obtain proforma DA I. E estimate of expenses to be incurred on that port from port agent
for that particular port , once berthing or discharge whatever that port call is over , a final DA I e actual
expenses are submitted. Ship operator pay to Port agent and DA transaction is closed

5. What factors influence the productivity of a port?

Ans: Productivity can be defined as a measure of efficiency with which inputs are converted into outputs
through some action, service or process. There are various measures of productivity, however the most
common one is related to labour which is equal to out put produced per unit of labour input e.g. cargo
loaded in Tons/Stevedore/Shift. The out put parameter could be number of TEUs loaded or discharged per
hour, tons of iron ore loaded per day or rate of oil loading per hour. The other measure is the berth
occupancy ratio. This, though indicates the utilization of berth in a port, is not really very significant now as
due to faster movement of cargo the vessels may stay for a very short time in a port. The productivity of a
port is also influenced by the effective operations of other related facilities. E.g. road network i.e. the cargo
discharged in a port must be removed quickly so that fresh cargo can be discharged. Quick and efficient
processing of documents; prompt inspection by government agents e.g. customs also helps in increasing the
productivity of a port.
6. What are subsidies? Give some examples of subsidies in shipping.
Ans: Subsidies : If a government or other authority subsidizes something, they pay part of the cost of it.
Direct: e.g. construction subsidies to the shipyard e.g. in USA
 Indirect: low interest loans, construction subsidies, higher depreciation,
duty free import of spares, other material

7. What are INCOTERMS? Quote and comment on any four items.

Ans: Normally, many of the parties to a contract are unaware of the different trading practices in their
respective countries. This can give rise to misunderstanding, disputes and litigation with waste of time and
money because this is a lengthy procedure. In order to overcome these problems, the International Chamber
of Commerce has published INCOTERMS.
The purpose of these INCOTERMS is to provide a set of international rules for the interpretation of the most
commonly used trade terms in foreign trade. Thus, the uncertainties of different interpretations of such
terms in different countries can be avoided or at least reduced to a considerable extent.

1: EXW – Ex Works
The seller must give the buyer access to goods at an agreed location. From that moment, the buyer bears almost all
costs and risks during the entire shipping process.

2: FCA – Free Carrier

The seller must make the goods available at his own risk and expense at his own premises or at an agreed place. In
both cases, the seller is responsible for the clearance of the goods for export. It can be agreed that the buyer must
instruct the carrier to transfer a “Bill of Lading (BL)” with a note on board to the seller.

3: CPT – Carriage Paid To

The seller has the same responsibilities as with FCA, but in this case also pays the delivery costs.

4: CIP – Carriage Insurance Paid To

The same seller responsibilities as with CPT, only in this case the seller is obliged to pay the insurance with a high
coverage ratio. Parties can agree separately to apply limited coverage.

5: DAP – Delivered At Place

The seller bears the costs and risks during the transport of the goods to an agreed address. As soon as the goods
have arrived at this address and are ready for unloading, the risk passes to the buyer.

6: DPU – Delivered at Place Unloaded

The seller is responsible for the costs and risks of delivering goods to an agreed destination where goods can be
unloaded for further transport. The selling party arranges customs and unloads the goods at the agreed place. The
buyer arranges the customs clearance and any associated rights.

7: DDP – Delivered Duty Paid

The seller bears the costs and risks of transport, carries out the export and import responsibilities and pays any
import duties. As soon as the goods have arrived at the address and are ready for unloading, the risk passes to the
buyer.

8: FAS – Free Alongside Ship

The seller bears all costs and risks until the goods are delivered next to the ship. From that point, the risk is for the
buyer and he also arranges the export clearance and import clearance.

9: FOB – Free On Board

The seller bears all costs and risks until the goods are on board the ship and also arranges the export clearance. As
soon as the goods have been delivered to the ship, the buyer bears all responsibilities.

10: CFR – Cost And Freight

The same applies to the seller and buyer as with FOB, but in this case, the seller must also pay for the transport of
the goods to the port.

11: CIF – Cost, Insurance, and Freight

The seller has the same obligations as with CFR but also pays the (minimum) insurance costs. The buyer must pay for
more comprehensive insurance.

8. Answer problem “B” attached herewith.

PROBLEM B

M.V. Adventurer sailed fromCalcutta for U.K. and Continent and completed return voyage

at Mumbai. The portwise summary of Freight Earnings and Disbursements of the round

voyage is as under:

CALCUTTA Tons loaded 4800

Freight Rs. 67,60,000

Brokerage Rs. 2,88,000

Stevedoring 4,32,000

Port Dues 55,000

COCHIN Tons loaded 3500

Freight Rs. 26,00,000

Stevedoring 4,20,000

Port Dues 40,000

Agency Fees 15,000

Commission 1,40,000

SUEZ Port Dues 60,000

Canal Dues 6,00,000

Agency Fees 65,000

LONDON Tons discharged 5600

Tons loaded 4000

Freight Rs. 75,00,000

Stevedoring 7,70,000

Port Dues 2,10,000

Commission 3,00,000

ROTTERDAM Tons discharged 1800

Tons loaded 2000

Freight Rs. 30,00,000

Stevedoring 7,00,000
Port Dues 1,60,000

Commission 1,20,000

HAMBURG Tons discharged 400

Tons loaded 1500

Freight Rs. 32,00,000

Stevedoring 5,70,000

Port Dues 2,00,000

Commission 90,000

ANTWERP Tons discharged 800

Tons loaded 1500

Freight Rs. 19,00,000

Stevedoring 5,40,000

Port Dues 95,000

Commission 75,000

SUEZ Port Dues Rs. 75,000

Canal Dues 7,00,000

Agency Fees 70,000

KANDLA Tons discharged 4000

Stevedoring 60,000

Port Dues 45,000

Agency Fees 15,000

MUMBAI Tons discharged 4500

Stevedoring 8,00,000

Port Dues 60,000

a) The Voyage was completed in 170 days, of which 110 days were spent in port and

the balance were steaming days.

b) All inclusive standing charges were Rs. 55,000 per day.

c) The vessel consumed 25 tons Bunkers per day while steaming and 5 tons per day

in port. The average cost of Bunkers comes to Rs.2000 per ton.

d) Container hire charges amounted to Rs. 17,00,000.

You are required to prepare the voyage Account and arrive at G.O.P. and N.O.P. per

day.