Chapter 5

Question 1

What are the four markets of the shipping industry?

Answer 1

1. Freight market
2. Sale and purchase market
3. New building market
4. Demolition market

Question 2

Define a shipper, charterer, charter-party

Answer 2

Shipper - individual or company with cargo to transport
Charterer - individual or company who hires a ship
Charter-party - Contract setting out the terms on which the shipper contracts for the transportation of his cargo or the charterer contracts for the hire of the ship

Question 3

Define a consecutive voyage charter, Contract of affreightment, period charter, time charter, trip charter, Bare boat charter

Answer 3

Consecutive voyage charter - Vessel hired to perform a series of consecutive voyages between A and B.

Contract of Affreightment (COA) - Shipowner undertakes to carry quantities of a specific cargo on a particular route or routes over a given period of time using ships of his choice within specified restrictions.

Period charter - The vessel is hired for a specified period of time for payment of a daily, monthly or annual fee. There are three types, time charter, trip charter and consecutive voyage charter.

Time charter - Ship earns hire, monthly or semi-monthly. The shipowner retains possession and mans and operates ship under instructions from charterer who pays voyage costs (see Chapter 3 for definition).

Trip charter - Fixed on a time charter basis for the period of a specific voyage and for the carriage of a specific cargo. Shipowner earns ‘hire’ per day for the period determined by the voyage.

Bare boat charter - The owner of the ship contracts (for a fee, usually long-term) to another party for its operation. The ship is then operated by the second party as if he owned it.

Question 4

Define laytime, demurrage and despatch

Answer 4

Laytime - The period of time agreed between the party to a voyage charter during which the owner will make ship available for loading/discharging of cargo.

Demurrage - The money payable to the shipowner for delay for which he is not responsible in loading and/or discharging beyond the laytime.

Despatch - Means the money which the owner agreed to repay if the ship is loaded or discharged in less than the laytime allowed in the charter-party (customarily demurrage)

Question 5

What is the difference between CIF and FOB

Answer 5

c.i.f. The purchase price of the goods (by importer) includes payment of insurance and freight transport which is arranged by the exporter.

f.o.b. Goods are loaded onboard and buyer takes on all risk, insurance and costs thereafter.

Question 6

Describe the elements of the freight market and the associated flows

Answer 6

Provides freight revenue. Three sectors to this market:
1. Voyage market - trades transport for single voyage
2. Time-charter market - hires out ship for x period
3. Freight derivatives market - deals in forward contracts settled against an index
Freight rates earned in these markets are the PRIMARY motivating force driving the activities of shipping investors
Flows:
Revenue into the shipping industry
Ships/transport out

Question 7

Describe the elements of the sale and purchase market and the associated flows

Answer 7

Involves a transaction between shipowner and investor (usually another shipowner). Money changes hands but transaction doesn’t affect the amount of cash held by the industry (zero-sum game)
Flows:
Cash in
Cash out

Question 8

Describe the elements of the new building market and the associated flows

Answer 8

Commissioning of new ships.
Flows:
Cash out of shipping industry
Ship into the shipping industry

Question 9

Describe the elements of the demolition market and the associated flows

Answer 9

Old/obsolete ships sold to scrap dealers.
Flows:
Cash into shipping industry
Ships out of shipping industry

Question 10

Describe the market cycle of the four shipping markets (10 marks)

Answer 10

At the beginning freight rates rise and cash pours in, leading to shipowners paying higher prices for second-hand ships. Prices bid up and investors turn to newbuilding market and with the confidence of bulging wallets they order many ships. When the ships arrive, the process reverses. Falling freight rates squeeze cash inflow as investors start paying for newbuildings. Financially weak owners forced to sell ships on second-hand market. Older ships will have no buyers-thus forced to sell for demolition. As more ships scrapped, the supply falls, freight rates go up and the process starts again.

Question 11

What is one of the main purposes of the market cycle?

Answer 11

To squeeze out inefficient companies allowing new efficient companies to enter and gain market share. This is how the market mechanism improves efficiency