2010

GUC – MBA 1st Term
Cairo - Egypt

Business Economics
Research Paper
A look into the Economics of the shipping business.

Mai Hamed

12/27/2010

Table of Contents

List of Figures ................................................................................................................................................ 3 List of Tables ................................................................................................................................................. 3 Introduction to NNC Business Activity .......................................................................................................... 4 Backward and Forward Market .................................................................................................................... 8 The freight market .................................................................................................................................... 8 The sale and purchase market .................................................................................................................. 9 The New Building market.......................................................................................................................... 9 The demolition market ............................................................................................................................. 9 Supply and demand Functions in the shipping market .............................................................................. 10 The Demand Functions: .......................................................................................................................... 10 The Supply Functions .............................................................................................................................. 11 Freight Supply and Demand .................................................................................................................... 12 Price Elasticity of Demand .......................................................................................................................... 14 Market Structure of Wheat Transport into Egypt....................................................................................... 16 NNC Scale of production ............................................................................................................................. 16 References .................................................................................................................................................. 17

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List of Figures

Figure 1 Bulk Carriers .................................................................................................................................... 5 Figure 2 Container Vessel ............................................................................................................................. 6 Figure 3 Passenger Vessel ............................................................................................................................. 7 Figure 4 Backward and Forward markets of the shipping industry .............................................................. 8 Figure 5 Supply – Demand in Freight Market ............................................................................................. 12 Figure 6 Inelastic Freight Demand Schedules ............................................................................................. 15

List of Tables
Table 1 Ten Variables in the Shipping Market Model ................................................................................. 10

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Business Economics – Research Paper
Introduction to NNC Business Activity
Founded in 1981 in accordance with the Law No. 43 of 1971 enacted the investment of Arab and foreign money and the free zones and amendments with a capital of $ 50 million. National Navigation Company is a leading shipping company in the transfer of bulk and general Cargo in Egypt, and between the various ports of the world. NNC operates tankers and other types of vessels and shipping carriers, besides leasing its own vessels. In August 2003 was the merge of the Egyptian Company for Maritime Transport in the National Navigation Company.

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National Navigation Company's fleet consists of 13 vessels, as follows:  8 dry bulk tankers with total capacity of 480,000 tons

The company transfers about 8 million tons of dry bulk and general cargo a year on its owned and leased vessels to the Egyptian ports in addition to various ports in the world.

Figure 1 Bulk Carriers

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Container vessel Its capacity is 3000 containers of cargo.

Figure 2 Container Vessel

General cargo vessels The company has two general cargo vessels of 12,825 tons capacity each. They operate on the navigational line Alexandria / Mediterranean ports / ports in northwest Europe

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Passenger Ships The company owns two passengers vessels that operate on the line of the Suez / Safaga / Jeddah / Suez

Figure 3 Passenger Vessel

The company in July 2007 made a contract with the Korean shipyard STX SHIPBUILDING located in South Korea to build 6 dry bulk carriers   4 tankers load 81 000 tons each and 2 tanker tonnage of 58,000 tons of cargo each

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Backward and Forward Market
The international shipping industry can be divided into four closely related shipping markets, each trading in a different commodity: the freight market, the sale and purchase market, the new building market and the demolition market. These four markets are linked by cash flow and push the market traders in the direction they want.

Backward Market

Forward Market Sale & Purchase Market

New Building Market

NNC
Ship owner

Freight Market Demolition Market

Figure 4 Backward and Forward markets of the shipping industry

The freight market
The freight market consists of ship owners, charterers and brokers. They use four types of contractual arrangements: 1. the voyage charter, 2. the contract of affreightment, 3. the time charter and 4. The bareboat charter. Ship owners contract to carry cargo for an agreed price per tonne while the charter market hires out ships for a certain period. A charter is legally agreed upon in a charter-party in which the terms of the deal are clearly set out.

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The sale and purchase market
In the sale and purchase market, second-hand ships are traded between ship owners. The administrative procedures used are roughly the same as in the realestate business, using a standard contract. Trading ships is an important source of revenue for ship owners, as the prices are very volatile. The second hand value of ships depends on freight rates, age, inflation and expectations.

The New Building market
The new building market deals with transactions between ship owners and ship builders. Contract negotiation can be very complex and extend beyond price. They also cover ship specifications, delivery date, stage payments and finance. The prices on the new building market are very volatile and sometimes follow the prices on the sale and purchase market.

The demolition market
On the demolition market ships are sold for scrap. The transactions happen between ship owners and demolition merchants, often with speculators acting as intermediaries.

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Supply and demand Functions in the shipping market
The shipping economy is enormously complex, so the first task is to simplify the model, by singling out those factors that are most important. For this report, 10 factors have been selected as being particularly important: five affecting Demand and five affecting Supply.

Demand 1. The World Economy 2. Seaborne commodity trades 3. Average Haul 4. Random Shocks 5. Transport Costs

Supply 1. The World Fleet 2. Fleet Productivity 3. Ship Building Production 4. Scrapping and Losses 5. Freight Revenue

Table 1 Ten Variables in the Shipping Market Model

The Demand Functions:

1. The World Economy Business cycles determine short – term cycles in sea trade. Regional development cycles determine medium to long – term trends in sea trade. 2. Seaborne Commodity Trades Crude Oil – Oil products – Iron Ore – Coal – Grain – Containers. 3. Average Haul Average Distance cargo shipped. 4. Random Shocks Example: A financial crisis. 5. Transport Costs Driven up and down by the market

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The Supply Functions

1. World Merchant Fleet Deliveries increase fleet and scrap reduces it. Operating costs rise as ships grow older. 2. Fleet Productivity Affect the shipping investor’s decisions toward: 3. Ordering (Ship building deliveries) which is affected by banks’ lending policies. And 4. Scraping (scrapping and losses) which is affected by government regulatory policies. 5. Freight Revenue – driven up and down by the market.

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Freight Supply and Demand
$ Per ton 44 D S

28 15 6 Cargo Quantity / Tonne Miles per Year
Figure 5 Supply – Demand in Freight Market

Explanation The world economy, through business cycles and regional growth trends determines the broad volume of goods traded by sea. Developments in particular commodity trades may modify the growth trends (e.g. development in the steel industry may influence the iron ore trade), as may changes in the average haul over which the cargo is transported. The final demand for shipping services measured in ton miles (i.e. the tonnage of cargo multiplied by the average haul). The use of ton miles as a measure of demand is technically more correct than simply using the dead weight of cargo ships required, since it avoids judgment about the efficiency with which ships are used. That belongs more properly to the supply side of the market. Turning to the supply side, in the short term, the world merchant fleet provides a fixed stock of transport capacity. When demand is low only part of this fleet may be trading and some ships will be laid up, or used for storage. The fleet can be increased by new building and reduced by scrapping. The amount of transport
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this fleet provides also depends on the logistical efficiency with which ships are operated – in particular, speed and waiting time. For example; a fleet of tankers steaming at 11 knots and returning from each cargo voyage in ballast carries less cargo in a year than the same size fleet of bulk carriers steaming at 14 knots and carrying a back haul for all or part of its journey. This efficiency variable is generally referred to as “Fleet Productivity” and is expressed in cargo ton miles per dwt (dead weight) per annum. Finally the policies of banks and regulators have an important impact on how the supply side of the market develops.

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Price Elasticity of Demand
Will market demand be very responsive or very unresponsive to a change in a freight rate? Both are possible and consistent with a downward sloping relationship between rates and cargo quantities. The demand for dry cargo tonne miles (multiplication of tones carried over a distance in nautical miles) is a derived demand. The principal underlying the estimation of price elasticities for derived demands are: 1. The value of the own price elasticity of demand for the final good. 2. The existence of close substitutes 3. The proportion of the total final price which transport constitutes.

Since NNC is a major transporter of Wheat into Egypt, let’s take Wheat as our transported good.

Wheat itself is an input; it is used in making of bread and pasta. Bread and pasta are price inelastic. Wheat movements from major exporting regions such as North America have to go by sea; air transport is a very expensive alternative. Historically and former studies suggest that freight rates are about 5% of the final price of most traded commodities. Conclusion is that, taken as a whole, market demand is likely to be extremely inelastic with respect to changes freight rates.

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$ Per ton

D2 D1

D3

Cargo Quantity / Tonne Miles per Year
Figure 6 Inelastic Freight Demand Schedules

The above figure represents different volumes of demand, generated by higher and higher levels of economic activity, industrial production, or world trade volumes. A fall from D2 to D1 would represent a decline in tone miles demanded, or cargo tones moved. A rise or shift of the demand schedule from D2 to D3 would represent the long term expectation. In some periods of the demand cycles, the demand schedule will be shifting rapidly out to the right, reflecting boom conditions. In other years, it will be hardly shifting at all; and perhaps even decline.

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Market Structure of Wheat Transport into Egypt
NNC competes with several other competitors – up to 12 competitors in winning the tender that the Egyptian General Authority for Supply Commodities (GASC) issues for the transport of the Wheat Supply into Egypt imported from several parts of the world. It is fair to say that NNC operates in a monopolistic competition market where the 12 companies give their tender and the company with the lowest price wins the contract. Other companies competing with NNC are: Clarksons Egypt and Ibramar

NNC Scale of production
NNC currently holds a tonnage capacity of 510692 through its fleet of 13 vessels. In 2007 the company made a deal with STX Building in South Korea to build new 6 bulk carriers which will increase the capacity of NNC to 989208 and change its scale of service.

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References
1. http://www.mfti.gov.eg/english/affiliates/np/gasc/gasc.htm 2. http://books.google.com.eg/books?id=tfsC6RUDn2QC&pg=PA136&dq=suppl y+and+demand+in+shipping+market&hl=ar&ei=jkQYTfPSFca1hAeqstG4Dg& sa=X&oi=book_result&ct=result&resnum=1&ved=0CCQQ6AEwAA#v=onepag e&q=supply%20and%20demand%20in%20shipping%20market&f=false 3. http://www.pfri.uniri.hr/~bopri/documents/06bshipSupplyDemand2_000.pdf 4. NNC - Commercial Affairs Documents

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