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ITLS6300 Maritime

Management and
Logistics

Day 1 : Revision

Professor Michael Bell

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Revision 1

Explain the difference between tramp and liner shipping and give examples of the
kinds of freight carried by each type of shipping?

Tramp shipping usually takes a ship load of cargo from one port to another. The ship
is chartered by the customer for one or more voyages. Bulk cargoes, like coal, iron
ore, grain, crude or refined oil is generally carried this way. As the cargo is carried by
the ship load, the bill of lading is rather simple. Liner shipping, by contrast, operates
on fixed routes to fixed schedules. Containers are generally carried by liner
companies. As containers generally hold mixed cargo for multiple customers, there
are many bills of lading. While tramp shipping companies tend to be small, liner
shipping companies are generally large. Liner shipping companies generally operate
a mix of owned and chartered ships, but ships will generally be chartered on time
rather than a voyage basis.

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Revision 2

How do economies of scale arise in shipping and what effect do economies of scale
have on liner shipping networks?

Economies of scale in shipping arise because many costs, like the charter and crew
costs, do not depend much on the quantity of cargo or the number of containers
carried. Furthermore, the fixed and marginal costs increase less than proportionally
with the size of the ship. Hence the unit cost for a full large ship is substantially less
than the unit cost for a full small ship. In the case of liner shipping, these economies
of scale encourage the evolution of hub ports where container flows can be
consolidated on to large ships and then transported with few intermediate ports of
call to a second hub port near the destination, where the flow is deconsolidated for
delivery to the destination port (unless the destination is the hub port) by feeder
services. The economies of scale in general more than compensate for the costs of
transshipment.

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Revision 3

(a) Suppose OOCL have 50 ships with a total size of 200,000 TEUs. In order to
retain the same level of occupancy for the same volume of freight, how many
additional TEUs would OOCL require if its ships are slowed from a sailing speed of
20 knots to 10 knots? (b) What size of ship would OOCL look for and why?

(a) If OOCL ships are slowed by a half then as a rule of thumb the capacity of the fleet
must be doubled in order not to decrease the maximum volume of freight that can be
carried. This means that OOCL must provide 200,000 TEUs more capacity.
(b) The average size of ship is currently 4,000 TEUs. If similar sized ships are bought
or chartered, then the same frequency of calls at any particular port can be
maintained. However, OOCL may decide to buy or charter larger ships in order to
benefit from the economies of scale, in which case the frequency of port calls will
decrease.

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Revision 4

The economic state of the shipping industry exhibits long-term secular trends due
technological change, medium-term business cycles, and seasonal variation.
Describe the features of the business cycle in shipping.

The business cycle exhibits peaks and troughs corresponding to boom and bust. In
the build-up to the peak, the world economy is strong, the demand for shipping is
high, freight rates increase, charter rates increase, slow steaming gives way to faster
sailing to improve ship productivity, abundant financing is available, orders are
placed for new ships, and the price of newbuilds increases. Some event (like the GFC
or a war) brings the peak to an end, the demand for shipping tumbles, freight rates
come under pressure as newbuilds arrive, charter rates fall, slow steaming is
introduced to absorb excess shipping capacity and reduce fuel costs, ships are laid up
or scrapped when it pays to do so, the price of newbuilds falls, and financing for
newbuilds becomes scarse. At some point the world economy recovers, newbuilds
look underpriced, banks regain their appetite for lending to ship owners, and the
cycle repeats.

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Revision 5

How does an increase in the price of oil impact on the freight rate, the charter rate
for five-year old ships, and the price of newbuilds?

Distinguish between tankers used to transport oil and other types of ship. An
increase in the price of oil will reduce the demand for oil and therefore the demand
for tankers, reducing their charter rate and the price for five-year old ships
(mirroring the spot market for oil). Because of the lag between ordering and
delivery, the demand for newbuild tankers will depend on the longer term
perspective for oil, price of ships and the availability and cost of finance for
newbuilds. The increase in the price of oil will also lower demand generally leading
to a fall in world seaborne trade and freight rates. Slow steaming will help to soak up
excess shipping capacity and save fuel. Weak demand will favor larger ships with
lower unit costs, but only if they can be filled. In the container sector, shipping lines
join alliances in an attempt to fill their ships, essentially by reducing port calls.

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Revision 6
A basic gravity model of international trade suggests that the amount of trade
between countries A and B depends on the GDP of A, the GDP of B and the cost of
trade between A and B. (a) Why does international trade occur? (b) What factors
are known to influence the cost of trade? (c) How would a reduction in the cost of
trade between countries A and C be expected to affect the trade between A and B
and between A and C?

(a) International trade occurs because of comparative advantage (one country is


more efficient than another at producing something) and product differentiation
(consumers place more value on a product from another country than on the
domestic alternative).
(b) Sharing a common frontier, sharing a common language, sharing a common
colonial history, and being in a past or present colonial relationship are all
known to reduce the cost of trade.
(c) A reduction in the cost of trade between A and C will divert some exports from A
away from B to C. Moreover, importers in A may be tempted to source products or
commodities from C rather than B. A reduction in the cost of trade between A and
C may also stimulate some trade between A and C that was not diverted from B.
These effects can be captured by the gravity with gravitas model.

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