Written examination ISSC module 3.

1 – Economics of Ship Operation,

Feb 16th 2022. Surname, First name: Student ID:

Write name and student ID (“Matrikelnummer”) on every sheet of paper.

Allowed tools/devices:
• ruler,
• pocket-calculator
• dictionary German/English; your native language/English

Answers must be given in English

Do not forget to include the Eigenständigkeitserklärung in your Upload

Duration: 90 minutes Maximum points possible: 100

All pages including title page: 7

I. Fundamentals (32 points)

A. Economies of scale

Explain what “economies of scale” in shipping are and from which phenomenon they result
in 2-3 sentences. Additionally, illustrate the idea with the help of a diagram and state a
major assumption that needs to be made for economies of scale to work. (12 points)
Economics of scale is the effect when the cargo prices per unit decreases with an increasing
size of the vessel, assuming full utilization of the vessel. This results from the fact that

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Written examination ISSC module 3.1 – Economics of Ship Operation,

Feb 16th 2022. Surname, First name: Student ID:

voyage, operational and capital costs of the larger vessels are not increasing in proportion to
the capacity of the vessel.

B. Cost drivers 1

Briefly explain the two driving forces that are responsible for the higher fuel consumption of
older vessels for the same vessel type and size.
(4 points)
1. Technical / Design improvements à the technical improvement of the Engine and
Hull design leads to a lower consumption of fuel nowadays. The “old design” of the
hull (also of other technical parts e.g. ME or propeller) was less efficient and the
vessel consumed more fuel.

2. Hull smoothness à Marine growth (e.g. mussles and plants) were growing on the
outer hull caused slower speed and higher consumption. Modern Anti-Fouling
Coatings on the hull reduce the fouling.

C. Cost drivers 2

Briefly explain two reasons, why older ships have higher operation costs
(4 points)
The need of repair and maintenance rises with the age of the vessel, as by time more and
more parts need to be repaired and exchanged and maintenance work to be done (rust
removal and painting). Together with this fact, the need of more crew member arises, as the
workload increases with the age of the ship as well.

D. Rate levels

Which cost categories should according to Stopford at least be covered by a freight rate
before the owner should accept a voyage charter? Explain in detail how Stopford argues and
state what a silent pre-condition of this minimum-rate is.

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Written examination ISSC module 3.1 – Economics of Ship Operation,

Feb 16th 2022. Surname, First name: Student ID:

(6 points)

Voyage Costs & Operational Costs: Stopford argues that these cost categories are the most
important because without crew and bunkers the ship cannot keep trading. Whereas the
capital costs do not immediately affect the operation of the vessel.
In this context the silent precondition says that the freight rate shall also include the ballast
voyage which the vessel to nearest point of the next cargo. The second pre condition, which
is less important than the first, says that the capital costs cannot be ignored forever.

E. Cube rule

Write down the correct formula of the cube rule and state two important limitations of that
function (i.e. where and when does it not provide suitable results) (6 points)
design consumption in tons per day * (effective speed in knots/design speed in knots)^2
= effective consumption in tons per day
The cube rule is first limited by the fact, that the calculated effective consumption is only
efficient when the engine runs 50-10% close to the design speed of the vessel.
Furthermore, the cube rule underestimates the consumption in coastal areas. Therefore, in
shallow waters the actual consumption will increase, as the propeller consumes more
energy, because of less water under the keel.

II. Financial and rate issues (26 points)

A. Bareboat deals and ship investment discussion

A shipowner is pondering to buy a secondhandship for US$ 20 million.

A cargo trader would like to charter this vessel by means of a bareboat charter contract for a
duration of 5 years, paying US$ 6.0 million for each year. Afterwards, the ship has reached its
life expectancy and will be given back to the shipowner.
The future scrap value of the ship is estimated to be US$ 5.0 million.
Required:
The shipowner wants to know if he/she should invest in this ship when his/her desired rate
of return on investment is 8%. Explain, which tool would be suitable to answer this question
and apply it to the given case to answer the question.

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Written examination ISSC module 3.1 – Economics of Ship Operation,

Feb 16th 2022. Surname, First name: Student ID:

(12 points)

I would do a discounted cashflow analysis in order to figure out the the Net Present Value of
this investment. If the NPV result is positive (as it is the case here) I would definitely
recommend to invest into this asset, because the return of this investments exceeds the
criteria. If the NPV is 0, the investment more or less meets the criteria. If the NPV is negative,
the Investment does not meet the criteria and I would not recommend to invest.

B. Link between freight and time charter rates

It is common knowledge in the maritime industry that freight rates (or more precisely the
expected spot market earnings) will drive the time charter rates. However, this must not
always be the case. Explain two scenarios in which the freight rates on a spot market could
increase very sharply, without the charterers being willing to pay higher time charter rates.
(6 points)
Scenario 1 – In case the fuel price increases. Along with this, the voyage costs would
increase too and the owner would ask for higher freight rates while the earnings would
remain the same as before

Scenario 2 – In case, the length of a time charter contract is relatively long (e.g. one year or
longer). During that time the freight rate on the sport market increases very sharply, due to
any reason (like trade embargos, war, natural catastrophe…). The already before closed
Time Charter Contracts will not be affected in terms of their rates.

C. Optimization of voyage speed for bulk carriers

In class, we have learned a methodology to optimize the operation speed of bulk carriers.
Explain, if or if not an environmentalist (i.e. Greta Thunberg) would agree or disagree with
the methodology which we have used. What would be that person’s ideal solution to a case
where the bulker could travel at a speed of 10, 12, or 14 knots? Do you need additional data
to answer this question?
(4 points)
The ideal solution in this case would be the medium speed at 12 knots. The lowest speed
would result into lower fuel costs but the vessel will take too much time. At the highest
speed, the vessel is able to finish this voyage faster, but the fuel costs would increase
significantly. Anyhow, it’s hard to make a decision based on the given information. To make

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Written examination ISSC module 3.1 – Economics of Ship Operation,

Feb 16th 2022. Surname, First name: Student ID:

a reliable decision on this problem, it would be helpful to have information about the
distance of the roundtrip, design speed, fuel price, freight rate and cargo capacity of the
vessel.

D. Secure lending (from the perspective of a bank)

Name 4 ways which banks use to reduce their risk when lending money to a shipowner (4
points)
- Bank can assign earnings or insurances from the the owner
- The bank as lender can take a first mortgage on the ship being purchased
- The bank can have a mortgage on other ships or assets of the owner
- the bank can assign income of a long charter to them as lenders

III. Voyage Earnings (42 points)

A. Explain the weakness of the voyage _cashflow_ computation.

Explain, using full sentences, two reasons why “voyage cashflow” might be a misleading
figure when trying to compare freight income as well as for cashflow planning. (8
points)
Voyage cashflow does not include the time component (à duration of the voyage).
For example, two contracts have the same cashflow (e.g. 100 000 dollar), but that
doesn’t include the voyage earnings, they can have different voyage earnings according
to the length of the voyage.
So, the cashflow doesn’t really give a daily result, that’s why cannot use them as
comparing tool or for cashflow planning.

B. Solve the Voyage Earnings Task

(34 points)
The owner of the VLCC Oil tanker MS Silwa is offered one contract by his broker:

Voyage: from Iraos to Japos

Cargo: 240,000 t of crude oil
freight revenue: US$ 4,500,000

Currently, the MS Silwa is 600 nm away from port Iraos and does not have a cargo in the
holds.

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Written examination ISSC module 3.1 – Economics of Ship Operation,

Feb 16th 2022. Surname, First name: Student ID:

Use the data on the following pages and compute the voyage earnings/day as well as the
voyage cashflow using the methodology learned in class. Assume that the vessel will be
operated at 15 knots.

Study the ship characteristics and port information carefully.

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Written examination ISSC module 3.1 – Economics of Ship Operation,

Feb 16th 2022. Surname, First name: Student ID:

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Written examination ISSC module 3.1 – Economics of Ship Operation,

Feb 16th 2022. Surname, First name: Student ID:

Vessel information
The MS Silwa has a scrubber system installed. However, the auxiliaries can only operate on
MGO.
VLCC MS Silwa
DWT 300,000
HFO consumption per day (laden voyage) 85 t @ 15 knots
HFO consumption per day (ballast voyage) 80 t @ 15 knots
MGO consumption 5t
- per day of sea voyage MGO
consumption 10t
- per day of port stay / idle
times
Capital cost US$ 25,000 per day
Operation cost US$ 10,000 per day
Characteristics Length: 325 m
Beam: 59 m
Draught: 19 m
Cargo discharge performance
6,000 t/hour

Other relevant items:

• Current bunker prices:

o HFO: US$ 500 / ton o
MGO: US$ 800 / ton
• Broker’s Commission: 2.5 %
• Current position of MS Silwa: 600 nm away from port Iraos, vessel is without cargo at
the moment

Port Information
Chinos
Export demand none
Loading performance 250,000 – 300,000 t n.a.
Port fees (per call) US$ 40,000
Other info Port Chinos is beautiful this time of the year.
The captain always wanted to see port
Chinos and an occasion like this might not
present itself again in the near future. Also,
Chinos has one of the cheapest calling costs
in the range.

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Written examination ISSC module 3.1 – Economics of Ship Operation,

Feb 16th 2022. Surname, First name: Student ID:

Port Information - continued

Iraos
Export demand steady and regular
Loading performance 220,000 – 249,000 t 4.0 days
Loading performance 250,000 – 300,000 t 5.0 days
Port fees (per call) US$ 70,000
Other info Not working Saturdays and Sundays

Japos
Export demand none
Loading performance 220,000 – 249,000 t n.a.
Loading performance 250,000 – 300,000 t n.a.
Port fees (per call) US$ 47,800
Other info -

Norwos
Export demand steady and regular
Loading performance 220,000 – 249,000 t 3.0 days
Loading performance 250,000 – 300,000 t 3.5 days
Port fees (per call) US$ 85,000
Other info Not working on weekends

Canal information
Canal Suos
Allowed maximum speed 8 knots
Sea-Margin None, but the HFO consumption is 50%
higher than the cube rule would suggest
Dues per passage of VLCC with cargo US$ 150,000
Dues per passage of VLCC without cargo US$ 100,000
Other information Average waiting time at the North entrance:
2 days (only when entering)
Maximum dimensions Length: 330m
Beam: 60m
Draught: 20m