Shipping Economics

The Role of Shipping Economist in Ship Design

            In a dynamic realm of ship design, a shipping economist can basically contribute on how architects confront design challenges arising from ambiguous environment.  His task for an architectural firm (herein referred to as firm) is encapsulated into three broad economic functions; namely, maximizing wealth-creation capabilities, efficient allocation of scarce resources and welfare preservation.  Generally, a shipping economist is equipped with mathematical tools and economic models to aid the firm to pinpoint factors that can have significant effects in the field of ship design.  Specifically, his experience in the shipping industry can inject valuable knowledge about varying ship-owner approaches to internal and external issues and their decision-making patterns.  To have clearer understanding on these, further explanation would be necessary.

 

            In designing a ship, architects are like less concerned with the involvement of economic factors considering that ship specification is subject to continuous change.  They may prefer to reach a specific output undermining factors that can disrupt the project.  In doing so, they would come-up with a remarkable design which would resolves functionality, safety, style and some economics.  However, “some” economics is likely biased on how to adapt ship design on the level of budget of ship-owners or the selling amount specified in the contract.  It is largely a cost-minimization approach.  In a different scenario, architects would accomplish a design with larger deck space to entice ship-owners to maximize their revenues per travel.  As a result, they would engage in revenue-maximization approach. 

 

            What a shipping economist can do is to provide architects “what if” scenario planning or simply this would refer to cost-benefit analysis.  This approach combines cost-minimization and revenue-maximization biases into one veil available for comparison.  Complementing the technical aspect of ship design in which architects are adept, shipping economist will be a useful partner in transforming the ship lay-out from mere functional ones into outputs that are also suitable for certain kinds of ship-owners and applicable to certain kinds of external conditions.  The bottom line of demanding ship designs is for ship-owners to gain optimal future returns in the actual ship building investment.  With the contribution of shipping economist, ship-owners would not only receive a design which is cost-effective but also a model that can be a source of competitive advantage over competitors.

 

            His experience in shipping industry gave him understanding about the value chain of ship-owners.  This will not only remind architects to connect ship design to primary (Operations, Logistics and Marketing) and secondary activities (Human Resource, Procurement and Technological Development) at least on the shipping industry’s average but also obtain precise judgment on what to prioritize among them.  For example, there is a newly developed navigational technology that can make ship travel persistent to storms.  Architects’ limited knowledge about ship-owner decision making patterns would be supported by shipping economist to address the issue of incorporating the technology in the design based on ship-owner’s priority in the value chain.  In effect, designs would adhere to core competencies of the ship-owners, thus, maximizing the wealth-creation capabilities of their ships.  Shipping market cycles is also a concept in the industry which shipping economist can discuss.

 

            Outside the operations of ship-owners, external factors have direct affect on them as well as they could undermine, in some cases, disallow developed core competencies to be applied and exploited.  This is especially true from government and international regulations.  Since wealth maximization and welfare preservation is usually negatively related, increasing operational restrictions like maximum quantity of load per travel for safety purposes diminishes the incentive of ship-owners.  As a result, the latter are expecting for a design that is guided by legal and political constraints including other external factors to prevent reduction in future returns forecasts.  A shipping economist has familiarity and matching characteristics with politics and regulations which can address this problem.  In a similar manner, demand for shipping (either passenger or cargo) is also an important external factor to ship-owners that a shipping economist can apply repercussions of the law of demand and supply.

 

            Assuming that ship-owners and architects intends to execute a ship design that qualifies for key internal and external factors (that is, gaining core competencies and addressing external constraints) before anything else, shipping economist can insert some cost reduction scheme in pre-shipbuilding.  For example, the floor size can be reduced into a level which ship-owners will accept or the ship can be fed with a cheaper gas up to the minimum level allowable by environmental policies.  However, this type of contribution is additive and secondary to the precedents since no other cost-effective strategy can alter the devastating effects concerning safety or environmental externalities.  In the contrary, this endeavor can increase the value-added service architects can provide to ship-owners. 

 

            As observed, shipping economist links ship-owners and architects to persuade the latter to prioritize shipping factors that can satisfy the former and provide added-value for design fees.  Added-value because functionality would be a suggestive criterion in ship design (the task of architects) while integrating internal/ external factor analysis, trending, forecasts and cost-benefit approach (the task of shipping economist) would be the ship-owner incentives.  In addition, he also makes analysis of different factors possible (as architects may particularize functionality and reduction of shipbuilding timeframe while ship-owners may particularize revenue-creating capability of the ship, its lifespan and cost of maintenance) to come-up with trade-off summary.  More importantly, they can present their arguments in quantitative and measurable variables which are agreeable with architects’ firm conviction with their field and experience and ship-owner’s limited considerations in calculating their future returns and determine their net present values.  In effect, subjective factors in designing and margin of errors in investing that confront architects and ship-owners respectively are minimized.  As a result, managing the risk involved in ship design is probable for monitoring, evaluation, re-implementation and learning processes. 

 

Board Criteria: Application of Shipping Economics to Ship Design

 

            From this point forward, it is to be assumed that the firm is designing a ship based on its own decision-making that will undermine instances wherein ship-owners tend to customize their orders.  In doing so, the firm is expected to come up with designs that consider shipping economics in order to maximize the event that their models will be saleable or leasable and minimize the idea that they will have sub-optimal market value, if not, has not been allowed to be manufactured due to weak economic considerations.  The vital role of shipping economics is to fulfill the objective of ship design (which is the actual ship construction).

    

The speed factor.  Shipping cycle is categorized as short-term and long-term with varying effects to demand for ship either owned or chartered.  Short-term cycle relies on market factors especially industry specific and political ones while long-term cycle relies on one-big technological breakthrough that can induce turn-around in the whole shipping industry.  In this view, ship design should be able to attain not only the deadline of finishing an order, but more importantly, the cycle in which the order is associated and pegged especially in short-run cases.  With each passing months, market factors tend to diminish its advantageous value for industry players.  In effect, the rationale of placing an order for new ship also looses its value-adding capability to them.  The ship design should partake in just-in-time aspirations of the firm to satisfy customers.  Better yet, it should use its economic research capabilities in order to anticipate changes in demand. 

 

In the long-run cases, however, speed factor is less crucial especially when the technological boom came from a public/ non-profit organization.  This is because industry players are in homogenous footing regarding market information while the specification of the technology will likely be disclosed.  However, if the technology is created by private firms or developed with national interests in it, it is unlikely that it will be shared to the whole industry rather selected entities.  This could delay orders from the industry for ship design waiting for approval to sell of the newly founded technology.  Investors want to maximize future earnings in buying new ships.  As it takes decades for a technological breakthrough, in both cases, ship design is likely to accomplish speed factor.                   

 

The price factor.  This has closer relationship with the demand for ship design.  Investors are adept to compare investment alternatives before coming up with their final decision.  If freight rates are high followed by numerous sea trade under shot-term cycle, the demand for new ships may less likely occur because ship-owners/ shippers tend to speculate about the length of time and returns the period can be exploited.  For this cyclical change, it is expected that it is coupled with lower prices of ships to post incentive to buy and deter speculations.  In effect, pricing can derive adjustments according to the design of ships.  Short cycle advantages can be sufficed by less ornamented ships in favor of reliability.  The design can specify lower material grade or lesser divisions to cut production costs in procurement, completion time and labor.            

       

            The challenge, however, is that the firm may not coupe with the fact that short shipping cycle has no simple formula to predict the shape of the next cycle.  Research, timing and luck would be helpful but the firm should have sufficient strength in its value chain to support any contingent events in the market.  In doing so, market knowledge applied to ship design benefits may only be offset by the cost of research including research leakage to prominent competitors, higher compensation due higher risk and organizational shocks from mobilizing firm resources.  At the end, whatever anticipation and responses the firm would apply, the ship-owner/ shipper appraisal on the future cash generation of the produced ships will serve as their reference point in buying. 

 

            The security and reliability factors.  Perishable, fragile, expensive and regulated cargoes requires ships that can deliver the intended service to protect and even add values to the merchandise.  Ships that carry these items should be able to stand natural calamities and ship/ engine malfunctions.  Since orders on these kinds of ships tend to be price takers except significant customers, ship design should prioritize these aspects.  In a similar manner, they are also crucial in ships that are intended to serve its owners longer or perhaps through greater distances.  In doing so, the speed and price factors would be undermined to give way for the design to achieve these goals.  The design should also take into consideration the current and forecasted commodities that will top sea trade.  This is to allow ship features to take its position on whether it will serve as a shipper of bulk or general cargoes.  If however, architects tend to create a flexible ship (somewhere in between of these general types of cargo ships), it can be said that added feature will be enjoyed by buyers/ lessee.             

 

Economics of Ship Design for Different Kinds of Ships

Demand Factors

Significant Events

Supply Factors

Significant Events

World Economy (assuming that sea trade is very elastic to industrial production p.122)

 (International) China’s largest offshore oil exploration firm ready to invest at least billion to secure stability of energy level. (Europe) According to EuroGas, the demand for natural gas will consistently increase from 2003-2025 that will hasten importation. 

World Fleet (this is affected by four shipping market)  

Ships have an average life span of 25 years.  North and South American countries particularly those within Panama Canal region hold at least 70% of different fleet types. 

Seaborne Commodity Trades [assuming that it is affected by seasonality factors, demand and supply of commodity, change in processing (Short term), Shipper policies (Long term)]

Energy products will continue to be the most sea-traded commodity with reference to Euro Gas forecasts.

Fleet Productivity (this is affected by speed of voyage, port time, cargo capacity, vessel time of productive of unproductive days in percent)

Bigger ships will positively affect its cargo capacity but this is restricted by the ability of national ports to provide a compatible infrastructure. 

 Average Haul (affects by changing the ship route that can increase/ decrease of ton miles)

In the future, many countries will invest in energy exploration that may limit maritime transport due to internalization.  However, global projections show that supply will be deficient with the demand growth rate at 0.2%

Shipbuilding Deliveries

Far East is the only region that has significant increase in deliveries.  Probably, these are likely the causes of ship importations due to lack of building capabilities.  

Political events

Germany conceded about Iran nuclear enrichment that may intensify energy trading between Europe and other Arab countries.  On the other hand, US refusal on this may shift relational ties with Europe.    

Scrapping (affected by age, technical obsolescence, scrap prices, current earnings and market expectations)

Scrapping processes are increasing in developing countries due to lower labor costs.  Developed countries like US almost abolished its scrapping industry.

Transport Costs (should be low or the trade will provide higher advantages to the customer)

In the past 10-20 years, transport cost has been able to be sliced from 4-5% of cost of goods into mere 0.50% today. 

Freight Rates (short run – supply respond to prices, long run – prices contribute to investment decision of scrapping and buying ships)

According to 1997-1999 data, freight rates are lower with time charters than single voyage rates.

 

 

Cruise Liner of 2,500 Passengers     

            This type of ship is considered the most expensive among the classes of ships which carries the most important cargo – humans.  In effect, its design should basically emphasize safety and convenience for travelers specifically vacation goers.  The satisfaction of passengers are directly related when the ship provides vacation atmosphere they deserve.  They should be able to view marine scenery outside the ship and be provided with enough space and internal design to enjoy socialization with other people.  Ship design should contain amenities suitable for longer travel in which passengers can find the ship similar to their homes otherwise demand will not be optimized. 

 

            Freight rates are lower when the ship is intended to operate under time charters.  Due to this, designers should be able to balance the economic status of this type of ship against the value-added features of the ship.  As a prerequisite, safety should be incorporated in the design no matter what the future demand for cruising is.  This is because it is more expensive and with reputation stake to risk safety just because ships are insured.  In addition, analysis of frequent destination of travelers should be considered.  If the common country/ regional attractions have modern ports, amenities like pools or gym would be less significant in the design.  This should be offset by routing strategies in which there will be frequent stop-over.      

    

            Cruise liners may frequently encounter unused deck space at times of work peaks.  This can serve as opportunity for designers to impose flexible decks for them to be used when spaces are idle.  Parcel size distribution (PSD) information can aid in such decision making in which the ship-owner can forecast and specify wide range of parcel sizes.  For example, the cruiser is forecasted to have a passenger-cargo ratio of 90:10 as vacation peaks but diminishes to 40:60 on off-peaks.  To increase the productivity of this ship, designers should think of optimal size of the ship or provide specifications about possible combination of commodities that the ship can carry.                  

 

Fast Ferry

            Smaller than cruise liners, ferries are bound to connect inland islands to the mainland that suitably fits on its second name as water taxi.  Unlike the preceding liner, ferries have lesser commitment to passengers regarding its facilities.  In design, it can have limited amenities emphasizing on the speed of arriving at scheduled ports.  Ports need not be modernized as the passengers would likely have the objective of visiting their relatives or probably going to their work.  Design should emphasize more on its strategy to minimize average haul travel compared to cruise liners in which the travel should maximize the vacation.  In effect, the design is more inclined in improving the functionality of the ship.  But similar to cruise liner, ferries should have strategy in maximizing its cargo capacity.  However, this should be a primary consideration for ferries not simply maximizing the use of decks because short travelers often have their merchandise probably to sell in other nearby islands.   

 

            As transportation costs are being minimized each year, it is expected that the future of fast ferry will become relevant and increasing to small to medium scale businesses.  Inter-island trade will increase and can consider fast ferries as an efficient shipper of general cargoes.  The world sea trade accounts for 13% of agricultural commodities and this support the fact that short-travel will flourish especially as the economies are being industrialized.  In effect, the requirement of food supply will rise and regular shipments should be conducted to prevent spoilage of such goods.  Due to this, ship design should be able to transport different kinds of cargoes probably a wide range of dry and wet agricultural goods.  Compartments/ divisions, technology and other supporting equipments should be accomplished in the design to maintain profitability of ship use especially when general cargoes are seasonal outputs.      

              

Container Vessel of 7,500 Tonnages

            Without passengers and exclusively cargoes, container vessels far exceed the economies of scale of ferries although the latter has differentiation in its service that may unleash some value to other customers.  Due to its large size and mostly dry (manufactured) commodities on-board a container, specialized divisions and technology are less required compared to ferries.  The focus of the design instead is on the strength and reliability of the container.  The design should be flawless in the ease of loading and unloading heavy commodities in order to prevent damage or delay.  It might incorporate flat racks, open top containers, platforms and other necessary adjustments of design to the features of goods to be carried.  Metal industry shares the 25% of world sea trade suggesting that this type of ship should have a water tight design in order to protect such of cargoes.  Since the security and reliability factors are very vital in such sea trades, the design of the container will dictate whether ship-owners/ shippers will pass the risk of loss/ damage to customers or rely on the vessel itself and absorb default.

 

            The concentration of ship production is in the American continent while the major regional ship deliveries are in the Far East.  This suggests that future designs would prioritize the cost aspect of shipbuilding to adjust in the capacity to buy/ charter of mostly developing countries.  On the other hand, internal customers within the economic developed regions would prioritize the productivity and value-adding aspect of the ships.  This is so because developed countries have their long-term liquidity to finance ship maintenance and absorb the risk of losing a ship or default a shipment agreement.  Unlike developing countries whose operations/ profitability is volatile in terms of security and economic recessions.  In effect, ship designs for developing economies should have shorter life span probably with sub-standard building materials. 

LNG Tug Operating in Major Sea Ports                    

            Liquefied natural gas (LNG) carried by ships may not have the capacity, may loose efficiency or may simply not compatible with certain port characteristics that tugboats would be necessary.  Unlike large size of preceding ships above, tugboats are far smaller in size.  To optimize efficiency, tugboats should be designed according to the size an average LNG racks.  This is because bigger tugboats would necessitate larger amounts of energy in the form of diesel or electricity while smaller ones would loose the opportunity to serve larger racks of LNG.  Assuming that the size of tugboats and engine energy requirements are positively related, tugboat design should reflect the incapacities of LNG carriers to maximize their use. 

 

            Political events suggest that developed countries like Germany are open-minded about the environmental risk of energy explorations putting into consideration that the world’s natural resources are depleting.  As a result, the future trending of energy sea trade would continue to rise probably exceeding 50% of sea commodities.  LNG carriers can maximize their performance if their internal design has storage properties prerequisite for LNP commodities.  In effect, it also becomes crucial for tugboat designs to be able to perform notch tug or even be an integral unit of LNG carriers to have vertically integrated operation.  Due to this, there will be lesser need to contract with port administrators in chartering tugboats and also LNG carriers could prevent engine malfunction delays because tugboats intended for deep waters can provide back up engines.

Ore Carrier 

            This kind of ship requires a different kind of design untypical for the preceding ships to obtain functionality and efficiency.  Since ore has higher mass than its volume, the importance of the ship design is pegged to having higher center of gravity to prevent stagnation in the sea.  Otherwise, the ship may not reach optimal utilization of its capacity.  Its design should also allow port infrastructure to have ease in unloading the merchandise that suggest that the design should make the ship stable and with open platforms.  In addition, the heavier weight of the cargo makes them more dangerous to the carrier during accidents.  In effect, the enclosure of working and populated places inside the carrier should have more durable properties than other parts of the ship.

 

            The world economy and commodities that will be sea-traded are supportive to the production of ore carriers.  As this would partly result to mass production of such ships, the design should not be undermined in favor of productivity.  In doing so, the shipping operators and shipping customers may engage in shipping market economics (that is, they will halt the new building market in favor of chartering).  This is to minimize the risk of losing investments due to low quality carriers.  In addition, the trend also indicates that ship designs should prioritize ore carriers because of the increasing world demand for energy.  Unlike container vessels, requirements of ore carrier designs are almost synonymous and significant for different country economies as it is commonly shipped as bulk cargo (higher risk) and also has national interest in them.

 

 

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