Cram Session

Question 1

Simple definition of economics and maritime economics

Answer 1

Always include scacity, demand and choice. Can be written as ‘the study of the allocation of scare resources that have alternative uses to satisfy demand.’
Maritime economics is the study of how scare productive resources are used to bridge spacial separation of international trading countries most effectively.

Question 2

What are the factors of production?

Answer 2

Land
Labour
Capital
Enterprise

Question 3

Define land (factor of production)

Answer 3

All natural resources
Limited/finite

Question 4

Define labour (factor of production)

Answer 4

Human psyical effort/skill
Quanitiy and quality vary and are limited at any given time

Question 5

Define capital (factor of production)

Answer 5

All material goods used in production, e.g. machinery, equipment, infrastructure, ships etc
Capital is created through the use of resources to increase the value of land and labour
Can also refer to financial capital

Question 6

Define enterprise (factor of production)

Answer 6

Organising the other 3 factors of production into one working production process

Question 7

What is utility?

Answer 7

The power of goods to give pleasure, satisfaction or ‘real need’ fulfillment. Can be quantified as the value a consumer believes a product has, which may be higher or lower than the actual price paid

Question 8

How can shipping create utility

Answer 8

• Place utility; ensuring a good is avalible where it is in demand
• Time utility; ensuring goods are avalible when they are in demand

Question 9

What is the difference between real and nominal values?

Answer 9

Nominal pricing doesn’t take into account inflation

Question 10

Define opportunity cost

Answer 10

Scarcity of resources met with unlimited demand forces choices to be made; each time an economic decision is made, the next best choice is forgone. This forgoing of the next best option is known as opp. cost

Question 11

Define the price mechanism

Answer 11

The point at which demand and supply curves intercept, setting the price for a particular good in a particular market

Question 12

What are the laws of supply and demand?

Answer 12

The demand for goods and services falls when price increases and rises when price decreases, all other things being equal (and visa versa)

Question 13

Besides price, what factors impact demand?

Shifting the curve

Answer 13

• Income; higher income = higher demand
• Taste; including advertising, public perception etc
• The price of other commodities, either complimentary or substitutes
• Complimentary goods = goods that are frequesntly bought together. If the price of a complimentary good rises, demand will fall
• Substitutes - if a substitute good gets cheaper, demand will fall

Question 14

What factors impact supply?

Shifting the curve

Answer 14

• Costs of factors of production; more expensive production = suppliers demand a higher price to offer the same qty
• Changes in methods of production; more effecient production = suppliers are able to supply the same qty at lower prices
• Inventory/stock levels; if a substantial qty of tonnage is laid up or under utilised, shipowners may accept lower rates
• Expectations of future price; if shipowners are expecting rates to increase, they may be unwilling to offer tonnage at current rates, hoping for a higher rate if they wait longer

Question 15

Outline how economic activity impacts demand for shipping

Answer 15

• Seaborne trade accounts for the 75% of world trade volume
  Level of demand is therefore dependant on:
• Level of world economic activity
• The volume of seaborne trade generated by this
• The increase in demand for commodities also generated by this
• The distance over which cargo is hauled
• External factors and events

TL;DR: the demand for shipping space is largely determined by levels of economic activity, which is closely related to the qty and nature of commodities offered in seaborne trade. The further these commodities need to travel, the more demand is generated.

Question 16

Define tonne-miles

Answer 16

Weight in tonnes multipled by miles travelled; used to measure freight demand
e.g. 8 tonnes of cargo carried 500 nautical miles = 4,000 tonne miles, however if the cargo had to travel twice the distance this would be 8 tonnes x 1000 nm = 8,000tmd (tonne mile demand)

Question 17

Define derived demand

Answer 17

Demand for shipping is indirect demand; shipping is an element in the process of production, demanded not for its own sake but for its contribution it makes to final consumer goods/services

Question 18

Define price elastic

Answer 18

• Price elastic = Ed>1
• Percentage change in qty is greater than percentage change in price
• When prices fall, revenue rises
• Implies the presence of substitute products (consumers will quickly move away from purchasing if the price increases; the curve is steeper)

Question 19

Define unit price elastic

Answer 19

• Unit price elastic; Ed=1
• Percentage change in qty is equal to percentage change in price
• When price falls, revenue remains unchanged

Question 20

Define price inelastic

Answer 20

• Price inelastic = Ed<1
• Percentage change in qty is less than percentage change in price
• When prices fall, revenue falls
• Implies a lack of substitute products (consumers will be reluctant to move away from purchasing if the price increases; the curve is shallow)

Question 21

What is perfect price inelasticity

Answer 21

• Perfectly price inelastic = Ed=0
• Qty does not change regardless of price changes
• Implies no substitute products - curve is flat

Question 22

What are the rules of derived demand price elasticity?

for shipping

Answer 22

• Few substitutes for shipping = low elasticity of demand
• Although alternative sources for products may exist, they will still require shipping
• Freight rates are a small proportion of final costs, so even a large increase in freight rates makes little difference to the final consumer
• Elasticity of demand for the final product is an important factor in the elasticity in derived demand for shipping;
  *the derived elasticity in demand for shipping = transport cost as a fraction of final price multiplied by elasticity of demand for final conumer good

Question 23

What two (very basic) ways impact the supply of shipping services?

Answer 23

• Altering the stock of vessels
• Altering the way the existing stock of vessels is employed

Question 24

How can the stock of vessels be changed? How does this impact the supply of shipping services?

Answer 24

• Can increase or decrease depending on newbuilds and scrappage rates
• These are long term changes; new builds take at least 2 years
• Note the opportunity costs for both building and scrapping ships

Question 25

How can you alter the use of the existing fleet to impact the supply of shipping services?

Answer 25

• Storage numbers
• Layups
• Vessel speeds
• Balance of laden voyages
• Proportion of time spent at sea vs in port

Question 26

Discuss vessels as storage

Answer 26

Using vessels as storage reduces the overall active fleet. This is not always reversible as the vessel is likely to experience significant corrosion and they may need to be altered to be utilised effectively (e.g. FPSOs). Besides oil they are also used in grain like silos

Question 27

Discuss lay-ups

Answer 27

This reduces the overall active fleet. The ship is put in a safe ancorage and a skeleton crew is retained to ensure maintenace work continues. Costs will still be involved in making them fully operable again; however these costs may be lower than operating at a loss of an extended period
This is common in times of poor demand and where a large proportion of elastic supply comes from

Question 28

Discuss changing the speed of the fleet in terms of supply of shipping

Answer 28

Slower ships = the same fleet generates fewer tonne miles over the same period, restricting supply
AKA slow steaming
Remember the optimium speed ranges of engines; sometimes layups are more cost efficient

Question 29

Discuss altering the proportion of laden vs ballast voyages in terms of freight supply

Answer 29

More laden vs ballast voyages = more freight supply; however this is not always simple, e.g. most oil exporting regions do not import/visa versa, so although 50% of tanker capacity is technically not utilised it may not be possible to utilise.
Changes in this category generally come from the demand side, where increased demand forces the development of new production coming on stream, which can have a knock-on effect of increased fleet utilisation

Question 30

Discuss time at port in relation to freight supply

Answer 30

Shorter turn arounds = more time at sea = more tonne miles over a given period
Often this is out of the shipowner’s control, as delays, changes in infrastructure etc are managed by ports

Question 31

Besides new builds/scrapage, what factors impact supply in the long term?

Answer 31

• Level of technology; better technology = more efficent boats = higher freight supply, even if overall tonnage is equal (e.g. containerisation)
• Changes in the price of inputs; more expensive crew = lower overall supply (in the short term this can also be seen in bunker prices; when bunkers are expensive ships may choose to go slower)

Question 32

Outline the development of the merchant fleet since the 1970s

Answer 32

• Note the complication in desciding what ships to include (too small, great lakes only etc)
• Average annual growth rate of 3.7% in both GT and dwt
• World fleet has doubled since 2002
• Fastest rates of growth 1971-1977 and 2002-2011; average over 7% per year
• During the 70s this was caused by the arab-israeli conflict spiking crude prices 400% and the suez closing in 1967
• Global fleet shrank during the 80s, annually about -1%dwt
• Cyclical

Question 33

What are the factors involved in deciding to scrap a vessel?

Answer 33

• Average lifespan of ~30 yrs
• An asset’s economic lifespan is when a replacement can be operated at a lower overall unit cost than the current one
• Main factors are depreciation and operating cost;
• Depreciation is based on an asset’s expected lifespan once it has been used, e.g. a ship with an expected lifespan of 20 years will depreciate by 5%/year. Operating costs usually increase with age. Once an asset is fully depreciated it cannot lose value however its operating costs are likely to be high
• Other factors include strength of markets, regulation (e.g. requiring double hulls), efficency of new vessels (both in terms of cost and enviromentally)
• The technical lifespan of a vessel is much longer than its economic lifespan; if maintained vessels can last indefinately but the cost of repairs will also increase with age (see private passenger ships, tall boats etc)

Question 34

Define surplus tonnage

Answer 34

Surplus tonnage = the ‘slack’ avalible to respond to unexpected increases in demand; comprised of vessels slow steaming, laid up or idle; since 2003 this has been 1-2%, besides 2008 when it rose to ~4%

Slowsteaming is an imperfect measure as vessels may slowsteam due to high bunker costs rather than a lack of demand

Note this will never be 0.

Question 35

What is segmented supply?

Answer 35

The supply of tonnage isn’t even across industries, although it can be analysed as a whole it doesn;t function that way. The main segments are;
* Wet trades
* Dry bulk
* Unitised (container ships)
* Non-unitised liner (general cargo)
* Shortsea (ferries)
* Cruise
* Specalised/dedicated vessels (offshore supply ships, drilling rigs etc)

In the long term, these markets trend together, but short term can have huge variations, e.g. in 2002 88% of the world’s surplus tonnage was tankers vs 60% in 2006

Question 36

Describe the shape of the freight supply curve in the short vs long term

Answer 36

A shallow ‘J’ shape; as freight rates increase, different elements of supply are reactivated;
* in the very short term, ships can speed up; if rates continue to rise then
* ships can be reactivated following a lay-up, but if rates continue to rise
* ships may be unconverted from floating storage

After this point it is impossible to release additional tonnage in a limited timeframe, meaning the right hand side of the curve is vertical

As the time scale increases, it is easier to increase supply, meaning the right hand side of the curve is never vertical and the curve is more shallow; as the time scale increases, the curve stretches right; supply gets more elastic with time

Question 37

How can the supply of shipping be measured?

Answer 37

• Volume in tonnes of cargo moved per day, trip or year
• The tonne miles produced by a vessel per day, trip or year

Question 38

What are the two kinds of short run costs?

Answer 38

• Fixed; don’t change basis output
• Variable; increases with output

Question 39

What are some examples of variable costs?

Answer 39

• Fuel, port/canal fees, stores/provisions, load/discharge costs
• Variable costs fall as output rises due to economies of scale, but eventually can rise as diseconomies of scale come into effect, leading to a U shaped curve

Question 40

What is marginal cost? How can costs be optimised?

Aka incremental cost

Answer 40

The additional cost of supplying 1 more unit; usually forms a J shaped curve. Optimal production is where variable and marginal costs intercept; near to the bottom of the U shaped variable cost curve (defined as ‘constant returns,’ where economies of scale have been maximised but diseconomies are not yet in effect) and just as the J shaped marginal cost curve starts rising

Question 41

Describe long run costs

Answer 41

In terms of costs, the ‘long run’ is the period of time over which all costs are variable (no fixed costs exist given a long enough time period). This is typically a more perfect U shape, whereas short run costs will skew to the right (between a U and a J)

Question 42

What are considered conventional vessel operating costs?

Answer 42

• Capital related costs; repayments of the loan/mortgage used to purchase a ship, cost of the owner’s capital being tied up in the ship (opportunity cost of other potential investments)
• Direct operating costs; H&M insurance, P&I cover, crew costs etc
• Voyage related costs; fuel, port/canal dues

Question 43

How can voyage costs vary?

Answer 43

• Cargo load factor; higher load factor = lower cost per unit
• Vessel speed at sea; engines have an optimum operating range, or ‘lean cost’ range - 1% increase in speed usually leads to a 3% increase in fuel consumption however less time at sea will also reduce overheads for the voyage
• Voyage distance; longer voyages = higher cost per unit due to increased fuel consumption and direct capital/operating costs accrued (but this will reduce port/handling costs)
• Cargo handling speed; quicker port turnarounds = lower average cost
• Proportion of journey in ballast;
• Size of vessel
• Time in port vs sea

Question 44

Describe economies of scale in relation to ship or fleet size

Answer 44

• Managerial; staff are able to become more specalised if they work with larger fleets- seniors can direct general policy whilst delegating specific tasks to expers (e.g. marine/engineering superintendants)
• Commercial; placing regular bulk orders for items such as bunkers or maintenance supplies reduces per unit cost
• Financial; easier to raise finance as a large company
• Risk bearing; split into insurable (large companies can get lower insurance premiums), internal risk baring (higher risk tolerance), and uncertainties (larger companies are more likely to be diversified)
• Technical; a decrease in per unit cost for bigger vessels vs smaller ones