SHIPPING COMPANY

EONOMICS
Costs and revenues from running
a ship

Marina Zanne, M.Sc.

Marina.Zanne@fpp.uni-lj.si
 Ships costs
capital costs
loan repayment
depreciation
operating costs
crew costs
stores
repair & maintenance
insurance
administration
 Ships costs
voyage costs
fuel costs
port / canal charges
service charges (tugging, pilotage,cargo
handling etc)
 Costs structure

Costs
included in
the charter
fee/freght rate

$/day

$/t
Stopford M. (2009): Maritime economics, p. 182
 Capital costs: Cost of loan
Capital costs (depend on how the ship is
financed):

Financed by a loan:
size of loan
source of loan
interest rate
terms of loan
Final price Cash price Interests Cash price n Instalment
 Capital costs: Cost of loan
Loan Cash price Down payment

r 1 r
n
Capital recovery factor CRF
1 r n 1
Instalment CRF Loan
Final price Cash price Interests Cash price n Instalment

where
r interest rate (for adeqaute period of time)
n number of instalments
 Example
Cash price = 75.000.000 $.
Terms of loan:
down payment 1/3 of the cash price
interest rate: 4% (per 6 months)
paying period: 4 years, repayments twice
a year, fixed instalment

Whats the ships final price?

 Capital costs: Depreciation
Depreciation refers to two very different but related
concepts:
decline in value of assets, and
allocation of the cost of tangible assets to periods in
which the assets are used.

Depreciation costs depend on:

cost of the asset,
expected salvage value of the asset,
estimated useful life of the asset, and
a method of apportioning the cost over such life.
 Capital costs: Depreciation
There are plenty of depreciation methods,
e.g.:
straight-line depreciation
declining-balance method
sum-of-years' digits method
activity depreciation
 Straight line depreciation
Book value at Depreciation Accumulated Book value at
beginning of year expense depreciation end of year
Original value

Scrap value

Book value = Original value - Accumulate d depreciati on

 Straight line depreciation
According to accounting standards, the useful life of ship is
20 years, with 350 days of exploitation per year.

If a company buys an used ship, the amortization period

(utilization life) is shorter for this ships age.
 Straight line depreciation
Cost of ship Salvable value
Annual depreciati on expense ADE
Useful life of ship years

Daily depreciati on expense DDE

ADE
350 days
Salvable value SV Displaceme nt Price of scrap metal
 Example
What is the annual and daily depreciation expense
for a newly bought 14 years old ship at the price
of 24.000.000$.

The ships displacement is 15.200 tons and the

scrap metal value is 220 $/t.

Prepare the depreciation plan!

 Operating costs
crew costs
stores
repairs
maintenance
insurance
administration
 Operating costs: Crew costs
There are several direct and indirect costs
incurring when crewing of the vessel:
- wage costs - recruitment/selection and processing
- travel costs - medical tests
- on board victualling - social dues
- training - communication/bank charges
- (union fees) - crew accident insurance payment
- sick pay
- (standby pay)
- port expenses
- agency fees
 Operating costs: Crew costs
Depend on:
size of the crew,
employment policy of the owner/operator,
ships flag Flag of convenience ITF
minimal wages for ranks on board
 Crew costs: Wages
Bulk carriers
Master Cheif Chief officer, 2nd officer,
engineer 2nd (1st 3rd (2nd asst)
asst) engineer
engineer
UK 9.000-13.000 9.000-13.000 7.000-10.000 5.500-7.000
Italy 7.000-9.000 6.500-8.500 6.000-8.000 4.500-6.000
Croatia 4.900-5.500 4.800-5.400 3.400-3.800 2.150-2.350
Poland 4.600-8.000 4.400-7.000 3.470-5.000 2.750-4.000
Romania 3.800-4.120 3.600-3.910 2.880-3.180 2.060-2.340
Ukraine 3.500-5.000 3.300-4.500 2.560-3.700 1.850-2.400
India 4.300-6.000 4.000-5.700 3.200-4.200 2.000-2.400
Philipines 3.700-6.000 3.300-4.800 2.300-3.700 1.950-2.600

Drewry; Ship management (2006), p. 112

 Crew costs: Wages
Tankers
Master Cheif engineer Chief officer, 2nd officer,
2nd (1st 3rd (2nd asst)
asst) engineer
engineer
UK 11.000- 10.000-15.000 8.000-11.000 6.000-8.000
16.000
Italy 8.000-10.000 7.500-9.500 6.500-8.500 5.000-6.500
Croatia 7.500-8.900 7.400-8.800 6.000-6.500 2.500-2.800
Poland 7.000-10.000 7.000-9.000 3.900-4.900 3.200-3.800
Romania 5.500-7.500 5.500-7.200 4.200-5.700 2.500-3.100
Ukraine 5.000-7.000 4.300-6.900 3.500-5.500 2.450-2.850
India 6.000-8.000 6.000-7.800 4.800-5.800 2.400-3.000
Philipines 4.500-6.500 3.700-4.800 2.580-3.700 2.250-2.600
Drewry; Ship management (2006), p. 113
 Crew costs depending on
nationality
Indian crew (8+10) Filipino crew(8+10)
Wages 43.000 $/month 38.300 $/month
Victualling 3.720 $/month 3.720 $/month
Miscellaneous 4.300 $/month 3.830 $/month
SKUPAJ 51.020 $/month 45.850 $/month
Tours of duty Officers 4-6 8-10
Tours of duty Ratings 9-10 9-12
Normal working week - Ratings 40-44 44

Guaranteed overtime per month 103-109 85

Ratings
Leave per month served - Officers 15-22 6-10

Leave per month served - Officers 7 6-10

Drewry; Ship management (2006), p. 118

Crew costs
depending
on ships
age

Stopford M. (2009):
Maritime economics,
p. 228
 Operating costs: Repairs &
maintenance
routine maintenance; maintenance of engine and
equipment, painting jobs, renewal at the hold while the
ship is at sea
breakdowns; mecanical failures resolved in repair
yards loss of trading time
spares; replacement parts
periodic maintenance; regular maintenance at repair
yards in order to maintain sea worthiness (class) and
obtain certifications (necessary for insurance)
classifcation societies (dry dock every 2 year, special
survey every 4 years)
 Repairs & maintenance
regular maintenance less breakdowns
these costs increase with shipss age and
in average accumulate for 14% of
operating costs
 Operating costs: Insurance
vary from ship to ship
2/3 insurance of the hull and machinery
protection of owner against physical loss or
damage depend on claimed value of the
vessel and previous claim records obtained
from marine insurance company
1/3 third party insurance covers against
third party liabilities (injury of death of crew
members or passengers, damage to cargo,
collision damage, pollution etc.) obtained
from P&I club
Operating costs: General costs /
Administration
shore-based administrative and
management charges
communication costs
agents in ports
flag state fee
marketing
 Voyage costs
fuel costs
port charges
port dues
service charges (e.g. tugs, pilotage, cargo
handling)
canal charges
 Voyage costs: Fuel costs
Depend on:
fuel price
engine power and efficiency only cca 23%
of energy consumed is applied to propelling
the vessel (the rest is lost for cooling the
engine, lost as exhaust emissions, lost at the
propeller and hull friction)
design and state of the hull hydrodynamics
ships speed
 Voyage costs: Fuel costs
Consumption for a Panamax bulk carrier
Speed [knots] Main engine Main engine Stopford M. (2009): Maritime
consumption consumption economics, p. 235
[t/day] [t/day]
16 44 55
15 36 45
14 30 37
13 24 29
12 19 23
11 14 18
IFO380 IFO180 MDO MGO
Singapore 468.50 477.50 681.00 689.50
http://www.bunkerworld.com/pr Rotterdam 453.50 471.50 - 706.50
ices, 30.10.2010 Houston 460.50 473.50 738.50 -
Fujairah 474.50 493.00 - 732.50
Los Angeles 476.50 493.50 757.50 757.50
 Fuel prices

http://www.bunkerworld.com/prices, 30.10.2010
 Voyage costs: Port charges
Fees for the use of facilities and services provided by the
port

port dues service charges

(pilotage, towage, cargo handling)

general use of port facilities (e.g. docking, wharfage for

provision of the basic infrastructure), based on:
volume of cargo
weight of cargo
gross tonnage fo the vessel
net tonnage fo the vessel
 Port charges: Cargo handling
costs
costs of loading and discharging cargo
(shipowners are concerned about this
costs especially in liner service operations)

CHCtm Ltm DIS tm CLtm

CHC cargo-handling costs

L loading charges
DIS cargo discharge costs
CL cargo claims
 Voyage costs: Canal charges
Suez & Panama canal
Suez; charges are calculated in terms of the
Suez Canal net ton (roughly corresponds to
cargo-carrying space below the deck)and
Special Drawing rights (not commonlyused
measures) charges vary for different types
and sizes of ships
Panama; flat rate per Panama Canal net ton
is used
Bulk carriers costs depending
on ships age
100%
11%
90%
5%
80% 39%
47%
70%

60% 3% 40% capital

50% 2% maintenance
voyage costs
40% 35%
operating costs
33%
30%

20%
31%
10% 22%
18%

0%
5 years 10 years 20 years

Stopford M. (2009): Maritime economics, p. 222

 Revenues
Shiponwers earn revenues in several
different ways different distribution of
risk and apportionment of costs between
shipowner and charterer.
 Revenues: Voyage charter
Shipowner pays all costs (except maybe
cargo handling) and is responsable for
managing and running the ship, as well as
of planning and execution of voyage.

Calculation involves:
determining how much cargo the vessel can
carry
establishing what price of freight rate can be
charged per unit transported
 Ships productivity
Ptm 24 Stm LDtm DWU tm

P productivity in ton miles of cargo per year

S average operating speed per hour
LD number of loaded daysat sea per year
DWU deadweight utilization
t time period
m ship type
Ptm FRtm R revenue per dwt per annum
Rtm
DWTtm FR freight rate per ton mile of cargo
transported
 Revenues: Time charter
fixed daily or monthly payment for hiring
the vessel
the owner still takes the operational risk
and the charterer takes the market risk;
the charterer pays the fuel, port charges,
stevadoring and other cargo related costs
 Revenues: Bare boat charter
the owner (e.g. a bank) finances (interests,
depreciation) the ship and receives a
charter payment to cover the expenses
(and desired profits)
charterer covers all operating costs,
voyage costs and cargo related costs
charterer takes operational and market
risk
 Profit / loss account
Profit / loss:
revenues
costs

Stopford M. (2009):
Maritime economics,
p. 248
 Example: Optimizing the ships
speed
Calculate the optimal shipss speed for the following voyage:
Distance: 6.200 miles
Bunker costs (IFO): 500 $/t
Bunker costs (MDO): 790 $/t
Consumption (MDO) at sea and in ports: 1,5 t/day
Port days: 5 days
Penalities (per day): 31.000 $/day if cargo is not delivered
within 23 days
Fixed daily costs: 15.000 $
DWT: 67.000 t
Freight rate: 22 $/t
Port charges: 64.000 $ (cargo handling costs excluded)
 Example: Optimizing the ships
speed
Consumption at sea is as follows:
Speed [knots] Main engine
consumption
[t/day]
16 44
15 36
14 30
13 24
12 19
11 14
 Costs & revenues: Summary

Stopford M.
(2009):
Maritime
economics,
p. 220
 Distinction between profit and
cash
Profit is a concept used to measure financial return from
business.

The cashflow of a company represents the difference

between cash payments and receipts.

Some costs are not paid in cash at the time of occurance

(for example the purchase of the ship; cash transaction
takes place when the ship is built, whilst the ship loses a
proportion of its value by the each passing year this is
represented as depreciation in a profit / loss account).
 Sources & further reading
Stopford M.: Maritime economics, London,
Routledge (2009), Chapter 6