Maritime Insight (June 2015)

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Maritime Insight Issue 1, June 2015

Table of Contents

2

Shipping Market Information

3

Container Shipment Cycle and Risks

10

The One Belt, One Road Initiatives

14

To Hedge or not to Hedge? That is the Question!

20

The Impacts of the Falling Crude Oil Price on Shipping Industry

24

貨櫃航線規劃原理

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Global Economy and Shipping Market Maritime Insight Issue 1, June 2015

SHIPPING MARKET INFORMATION Shanghai Containerized Freight Index (SCFI) The Index, which tracks shipping rates from Shanghai to the world was recorded 676.05 in May 2015, an all-time low and down 67% from a year ago.

Figure 1. Shanghai Containerized Freight Index (2013 – 2015) Source: Shanghai Shipping Exchange, Chineseshipping Net (www.chineseshipping.com.cn)

Dry Bulk Shipping The BDI in May 2015 was recorded 587, a decline of over 50% from a year ago. Industry experts forecasted that the BDI should remain weak for the next two years given the recent slowdown of demand growth in China.

Figure 2. The Baltic Dry Index (BDI) Source: Baltic Exchange, DryShips Inc. Daily Report

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Maritime Insight Issue 1, June 2015

CONTAINER SHIPMENT CYCLE AND RISKS Captain LC Chan Risk Management & Loss Prevention Consultant of CM Houlder Insurance Brokers Ltd.

Capt Chan is currently the Risk Management & Loss Prevention Consultant in CM Houlder Insurance Brokers Ltd. He has extensive practical experience as the ocean going master mariner. Capt Chan had 10 years’ experience as a deck cadet and officer in bulkers, tankers and container vessels and 15 years’ experience as a master in bulker and container vessels.

IMO

states that over 90% of the world’s trade is carried by sea. Goods are often loaded

into containers and then placed on liner vessels to be transported to their destinations. Container Shipment Cycle in general is as follows: 

 

Outbound : Booking – Empty container picked up and stuffing cargo > Laden container taken to container yard > Shipping instruction submission > Export customs declaration > Ship stowage planning & loading container onboard > Prepaid charges & Bill of Lading issued Starts the sea passage Inbound : Arrival notice issuance > Import customs declaration > Collect charges and cargo release instruction > Laden container picked up at discharge port > Empty container returns to carrier & service is completed

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Maritime Insight Issue 1, June 2015

1.

Booking

•

Shipper (ABC Exporting Company) contacts customer service operations of the carrier to place a booking.

•

A booking means space reservation for the cargo on the intended vessel for a container shipment from A to B.

•

The vital information in a booking includes Shipper’s Contact, Consignee’s Contact (XYZ Importing Company) and Cargo Nature/Description.

•

Before accepting a booking the Carrier Customer Service Team has a list of considerations. They are equipment availability (empty container), cargo nature (container size, capacity and type), ship cargo space for that particular trade and compliance requirements of local authority, e.g. In Australia, each state has its own gross road limit.

Risk: Is it a genuine shipment? Is the shipper or consignee an old customer or a new customer? Does the carrier need to conduct the background check of the customer?

2.

Empty container pick-up & stuffing cargo at shipper’s premises

•

After reviewing the booking, the carrier will send the Booking Acknowledgement to the shipper as a confirmation. The shipper should then appoint a trucker to pick up the empty container, instruct the factory or warehouse to prepare cargo for stuffing & prepare the relevant export documents.

•

The trucking service can be arranged by the merchant (Merchant Haulage) or the carrier working on the instruction of the shipper or the consignee (Carrier Haulage).

•

Different commodities (General Cargo, Reefer, Dangerous Goods or Awkward etc.) have their own stuffing handling. Proper container stuffing allows the shipper to pack more cargo and transport safely.

Risk:

What is it really inside the container box? Has the shipper declared all the DG goods (non-declared)? Is the cargo weight mis-declared?

3.

Return laden container to carrier

•

The stuffed container is returned to Container Yard (CY) before CY cut off time.

•

CY (container terminal / depot / rail terminal / barge terminal / an inland city etc.) is a facility inside or outside the container terminal which accepts laden export container from shippers and laden import containers for delivery to consignees.

Risk: Cargo missing, shortage or not same cargo (Cases: Wooden handles turned out to be fireworks / Cargo should be cigarettes, but became resins inside cartons / Laden box became empty box / Shortage of cargo more than 2/3). 4|Page

Maritime Insight Issue 1, June 2015

4.

Shipping Instruction (SI) submission

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Shipper has to provide SI before the SI cut off time.

•

Why does the carrier need a specific SI cut off time? The carrier needs sufficient time to prepare the document for export customs declaration and mandatory Advance Manifesting regulations as applicable.

Besides declaration to outbound customs, some importing countries require carriers to submit the advance manifest at least 24 hours prior to cargo loading onto vessels calling to the designated countries. The destination government will use the advance manifest to pre-screen cargo details for national security reasons prior to the cargo being loaded onboard vessels destined to that country.

•

SI provided by the shipper after stuffing the cargo helps the carrier know how the Bill of Lading (B/L) should be prepared.

•

The data on SI will be used to construct a database showing all cargoes on the vessel. Then a document called “Manifest” can be created for the use of customs etc.

The Bill of Lading (B/L) is an important and official legal document used in the international trade which represents ownership of cargo, contract of transport of cargo between shipper & carrier and the negotiable document to receive cargo. The buyer or consignee can use it to claim the cargo in the discharging port. Nowadays the Sea Waybill in electronic form may be used to substitute the B/L for easing the procedure in delivering the cargo at destination.

5.

Export customs declaration

•

Shipper, as an exporter, has to prepare customs clearance which will indicate that customs duties have been paid and shipment has been approved by the local authority.

•

At the same time the Carrier has to prepare a manifest, i.e. a detailed summary of all cargoes in a vessel and also for trade statistics.

•

Vessel master does not carry the manifest onboard except for those DG, reefers and/or special cargoes, i.e. for port inspection or emergency handling.

6.

Ship stowage planning & loading container on board

•

Ship Operator (Carrier), based on cargo information obtained from shippers, has to prepare a ship stowage plan & send to the terminal usually via EDI prior to vessel arrival.

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Maritime Insight Issue 1, June 2015

•

Terminal operator loads the cargo on the vessel based on the ship operator’s instruction. Planning arrangement shall take into account ship stability, cargo safety and so on. For example, the proper segregation of DG, hot cargoes to be easily accessible (train cargo, first to discharge cargo….).

7.

Prepaid charge invoice issuance, settlement & B/L issuance

•

B/L can be released if payment is settled, cargo is loaded & vessel departed and the relevant export documents are submitted. The payment term is either “prepaid” at loading port or “collect” at discharging port.

•

At this stage, the vessel master shall follow the procedures below to ensure a safe voyage.

Voyage from A to B (before departure) •

• • • •

• • • • • •

Observe the sailing instruction. (The sailing instruction prepared by the charterer or the operator will list out the ship’s schedule, ports of call, agency information, cargo stowage contact information, ETA reporting requirements etc. ) The vessel is properly manned (Minimum Manning Certificate). Navigational equipment & engines are in good order. Charts & publications are correct and up-to-date for the voyage. Passage Plan is well prepared and it takes into account the weather condition, surface currents, ship’s safe route, ship stabilities, adequate UKC (underkeel clearance) at sea & in port, pirates etc. The bunker onboard is sufficient to reach destination and ensure bunker segregation is done to avoid the emulsification. Ensure adequate water / food / stores / medicines / spare parts (critical equipment) onboard. Customs / immigration etc clearance is done. Vessel & cargo are properly secured for the voyage. Shipboard search for stowaways / drugs / suspicious items has been carried out. Anti-pirate measures are in place if there is a chance to enter pirate active area.

To save cost and protect the environment, the carrier shall try its best to be fuel efficient • •

Procurement of bunker at a low cost - supplier selection & terms negotiation. Replenishment of bunker at most cost efficient ports - decision model to cut cargo and/or empty repositioning.

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Maritime Insight Issue 1, June 2015

• • • • • •

Allow buffer time on sea passage for maintaining the most economic speed & plan for slow steaming. Select optimal route for trans-ocean sailing or even at coastal and riding along currents. Pursue minimum ballast through proper stowage planning. Direct berthing and sail as soon as possible - more sea time to run at economic speed. Proper engine maintenance and hull/propeller polishing. Incentives to key personnel onboard.

En route or before arrival • • • • • • • • • • • • •

Passage plan and charter party are observed & safe navigation at all time. Batten down if expecting the arrival of bad weather (tightly secure everything). Take tanks sounding daily (especially the cargo hold bilge well). Carry out the deck and engine room maintenance (avoid unsafe practices). Carry out drills and exercises, i.e. safety and security trainings – fire drill, boat drill, man overboard exercise, bomb threat drill, oil spill drill etc. Vessel should have an Emergency Organisation Chart in which crew duties and muster locations are listed for handling the emergency. Check reefer temp, cargo condition & cargo/containers lashings daily (OOG / Awkward Cargo etc). Exchange/treatment of the ballast water in time (to avoid Invasive Species immigrating to other areas). Search for Asian Gypsy Moths / Beetles / Stink Bugs. Change fuel before entering the SECA. Keep safe distance from typhoon or severe low pressure in case of need to change destination. Update ETA periodically (4, 2, 1 days & anytime that the ETA is changed…..). Changing route due to rendering assistance at sea – master’s obligation.

Note: Bulker / Tanker = Cargo holds cleaning to commence. Arriving Port • • • • •

Ensure navigation equipment and engines are in good order. Ensure vessel is ready for berthing or anchoring. Ensure pilot embarkation ladder is in good order. Follow the local regulations such as slowing down to avoid whales and not to pass ships alongside at high speed etc. Documents for port formalities ready for customs/immigration/USDA…. 7|Page

Maritime Insight Issue 1, June 2015

• • • •

Vessel is well prepared for port state control inspection. Crew ready for berthing and cargo operation. Safe navigation all the time to ensure proper bridge management. Avoid water pollution, oil pollution and noise pollution and ensure garbage segregation is done.

Note: Bulker / Tanker – Cargo holds shall be ready for inspection. Cargo Operations •

Ensure proper cargo stowage via central planner, terminal <local planner> and ship.

• • • •

Achieve minimum ballast. Achieve optimum trim. Avoid long crane (too many boxes in one bay). Ensure correct cargo segregation (DG etc.) so as to avoid re-handling.

• • • • •

Ensure DG documents are in place. Ensure reefers are checked and in good order. Keep cargo working area in good order (no grease) and clean. Physically check lashings for OOG (yacht) / flatrack cargo etc. Ensure cargo lashings are properly done before sailing.

Risk In Port - Vessel is being arrested (Liability Issue) • • • • • • •

Cargo damage / shortage – arrested by cargo interest Port facilities damage – arrested by port authority After a collision (slight contact etc.) – arrested by opponent ship owner Alleged collision / oil pollution – arrested by opponent ship owner / port authority Monetary dispute – arrested by bank / charterer etc. Bunker dispute – arrested by bunker supplier Others

---- End of a safe voyage ----

8.

Arrival Notice issuance

•

The carrier sends arrival notice to consignee advising of goods being imported prior to vessel arrival. Consignee shall then prepare the relevant documents for customs clearance, appoint trucker to pick up the laden container and prepare to un-stuff it at factory or warehouse etc.

•

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Maritime Insight Issue 1, June 2015

9.

Import customs declaration

• • • •

Carrier has to submit an import cargo manifest to customs. Consignee has to prepare customs declaration documents and submit to customs. The customs clearance to approve the shipment for import is granted to consignee if all applicable customs duties have been paid (usually via the customs broker). Customs will also need data to compile import trade statistics.

10.

Collect charges invoice issuance, settlement & cargo release instruction

•

In order to meet the import cargo release requirements, the consignee has to prepare a properly endorsed Original Bill of Lading for exchange of Delivery Order (Import FCL Release Order etc). Again for Sea Waybill issuance, the cargo delivery procedure is eased at destination. Pay all collect charges in full and ensure customs clearance has been granted by local authority.

•

11.

Laden container pick-up at discharging port

•

Terminal will base on the instruction of the carrier to release the container to the consignee. Consignee has to appoint trucker to pick up the container (Merchant Haulage) or ask the carrier to perform haulage for them (Carrier Haulage).

•

Detention charge will be incurred if a customer does not return the emptied container to carrier’s facility within the free container rental time allowed.

12.

Empty container return at destination & shipment done, i.e. service fulfillment

Once the consignee, XYZ Importing Company, has settled the outstanding charges, received all the goods and returned the empty container to the carrier, the shipment cycle is completed.

--- End of the Container Shipment Cycle ---

However, more Risks that may be encountered include: • • •

Cargo pilferage onboard, at terminal and/or during the inland transportation. Mass destruction weapons placed inside the box. Stowaways/Refugees turn out to be terrorists.

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Maritime Insight Issue 1, June 2015

THE ONE BELT, ONE ROAD INITIATIVES “One Belt, One Road” is the Chinese Framework for organising multinational economic development, and was introduced by President Xi Jinping in the fall of 2013.

The National Development and Reform Commission, Ministry of Foreign Affairs, and Ministry of Commerce of the People's Republic of China released the official article “Vision and Actions on building the “Silk Road Economic Belt” and “21st-Century Maritime Silk Road” in March 2015. The article highlights that the scope of the initiative will extend well beyond infrastructure construction. The Belt and Road Initiative is a way for win-win cooperation that promotes common development and prosperity and a road towards peace and friendship by enhancing mutual understanding and trust, and strengthening all-round exchanges.

The “Belt” will be a network comprising of rail routes, overland road, oil and natural gas pipelines, and other infrastructure projects. It will stretch from Xi’an in central China, through Central Asia, and ultimately reach Moscow, Rotterdam, and Venice.

Figure 1. The “Belt” – Silk Road Economic Belt The “Road” is a maritime network of port and other coastal infrastructure from South and Southeast Asia to East Africa and the northern Mediterranean Sea.

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Figure 2. The “Road” – 21st-Century Maritime Silk Road

Five Cooperation Highlights Cooperation and connectivity are the main themes in the initiative. Their five major goals are to promote policy coordination, facilities connectivity, unimpeded trade, financial integration and people-to-people bonds.

Policy Coordination

Important Guarantee

Facilities Connectivity

Priority Area

Investment and Trade Cooperation

Hot Focus

Financial Integration

Essential Support

People-to-People Bonds

Social Infrastructure

 Policy Coordination Policy coordination is fundamental for initiative implementation. The coordination will include inter-governmental cooperation, macro-policy exchanges and communication mechanism to further mutual political trust and new cooperation consensus.

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 Facilities Connectivity Improving the connectivity of the infrastructure in the countries along the Belt and Road is a priority area. Linking up unconnected road sections, port infrastructure construction, and cooperation in order to deliver international transport facilitation are the three key areas regarding transport infrastructure construction. Priority will also be given to the connectivity of energy infrastructure and the construction of cross-border optical cables and other communications trunk line networks.

 Investment and Trade Cooperation Improving investment and trade facilitation, enhancing customs cooperation, expanding trade areas, and developing modern service trade and cross-border e-commerce is a major task. More efforts will be made to eliminate investment barriers, expand mutual investment areas and push forward cooperation in emerging industries. It is encouraging for Chinese enterprises to participate in infrastructure construction and make industrial investments in countries along the Belt and Road.

 Financial Integration Financial integration is an important underpinning for implementation of the Belt and Road Initiative. Efforts will be made in building a currency stability system and establishing the Asian Infrastructure Investment Bank and BRICS New Development Bank. Financial integrationwill strengthen practical cooperation of China-ASEAN Interbank Association and SCO Interbank Association and encourage their companies/financial institutions to issue Renminbi bonds in China. An efficient financial regulation coordination mechanism will be established in the region.

 People to People Bonds The spirit of friendly cooperation will be carried forward to promote cultural and academic exchanges. More students will be sent to each other’s countries to promote jointly run schools. The scale of tourism will be expanded and it will be made more convenient to apply for tourist visas in countries along the Belt and Road. The cooperation of science and technology will be increased and think tanks in the Belt and Road countries will be supported to jointly conduct research and hold forums.

The Asian Infrastructure Investment Bank This is a multilateral development bank (MDB) conceived for the 21st century. Through a participatory process, its founding members are developing its core philosophy, principles, policies, value system and operating platform.

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The Bank’s foundation is built on the lessons of experience of existing MDBs and the private sector. Its modus operandi will be lean, clean and green: lean, with a small efficient management team and highly skilled staff; clean, an ethical organisation with zero tolerance for corruption; and green, an institution built on respect for the environment.

The AIIB will put in place strong policies on governance, accountability, finance, procurement and environmental and social frameworks. There are 57 prospective founding members as at May 2015 (Data Source: aiibank.org).

Opportunities for Hong Kong Hong Kong, is an international city with the world's seventh-largest stock market in terms of market capitalisation and second in terms of equity funds raised through initial public offerings. The city can serve as a fundraising hub, offshore renminbi hub & liquidity pool, asset management and logistics & transport hub for global financial, trading and shipping for the "One Belt, One Road" initiatives, and it has unparalleled legal, trading and risk management expertise.

Being the super-connector to the Mainland and the rest of the world, the "One Belt, One Road" initiatives will create huge opportunities for Hong Kong's financial services industry and its professionals, and Hong Kong should seize the opportunity to boost its competitiveness.

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Maritime Insight Issue 1, June 2015

“TO HEDGE OR NOT TO HEDGE�; THAT IS THE QUESTION! Dr Girish Gujar and Prof. Hong Yan Background

Volatility in fuel prices strongly influences the viability of the maritime transport sector. We are presently witnessing a precipitous fall in the price of oil globally. In the short term, the fall in oil prices will translate into higher margins for transportation operators and some passthrough savings to customers. But there remains great uncertainty about the sustainability of these prices. Hence this article aims to analyze the impact of a decline in global fuel oil prices on the maritime industry, particularly the ocean shipping sector. Subsequently we propose to explore how this impact could be minimized. In this context, we attempt to answer the following questions:

1. To what extent do the changes in fuel oil prices affect the Value at Risk (VaR) of the global ocean shipping sector?

2. How can the Value at Risk be minimized by hedging against future increase in oil prices?

In the absence of direct/indirect subsidies from the State the shipping sector is extremely vulnerable to changes in fuel prices apart from currency and interest rate fluctuations. Hence even minor changes in the input costs, particularly fuel prices, can and does drastically affect the business risk of the sector as a whole. As is the case with all other modes of transport, fuel is a major operating expense for ship operators and lower fuel oil prices, in the short term, are beneficial to ocean shipping companies by way of lower operating costs and leading to higher margins. In the longer term, lower fuel prices may also expand the number of vessels available in the market leading to an oversupply of ships. When oil prices spiked in 2008, it was reported that the shipping companies adopted a strategy for reducing fuel costs through the deployment of newer, more efficient ships; reduction of travel speeds (slow steaming); 14 | P a g e

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and consolidation into larger vessels to amortize fuel costs across more shipment units.

Assuming the current lower oil prices are sustained in the long term, operators could profitably differentiate their services by moving back in the other direction. First, shipping companies could redeploy smaller vessels on specialized routes that previously did not have sufficient demand to justify operations. In addition, companies could seek cost savings by postponing the purchase of new ships and substituting older, less fuel-efficient vessels. But, it’s also easy to imagine a scenario (or series of scenarios) in which oil prices rise. U.S. shale production, which has been one driving factor behind the falling price of oil, has an average break-even price of $70 to $80 per barrel; sustained prices below this level could cause production to dry up, leading to an eventual “re-rise” in oil prices. In the era of high oil prices, prudent companies hedged their exposure and sought efficiencies. In the era of low prices too, prudent companies should hedge by embracing the new price levels with caution rather than abandon.

The drastic drop in crude oil prices has created a situation where the cost of crude in the near term is cheaper than the cost of crude in the long term. This is called contango in the financial markets. Sometimes contango is naturally occurring based on carry costs or storage cost. But sometimes, when the price differential becomes significant, speculators can profit by purchasing a commodity on the spot market, paying the carry or storage cost, and contract for delivery at some future date. When future prices are less than spot prices we say the market is in backwardation. In the last few decades (as could be the case presently too) future prices of oil were in ‘Normal Backwardation (Geman and Kharoubi, 2008). Furthermore, with high volatility in oil prices, cash flows of shipping companies could also become volatile. Hence there is a higher investment probability as fuel costs increase which correlates with a lower cash flow (Carter, et al. 2006).

Black-Scholes (1973) and Merton (1973) showed that forwards, futures, swaps and options are of extreme importance to the finance industry. They demonstrated that a risk free position is created by hedging some of the underlying asset. However a hedging option can lose or make money and hence carries with it some speculation. Poitras (2002) explained that with the goal of minimizing the risk exposure, an optimal risk strategy is also required for profit maximization. Morell and Swan (2006) demonstrated that oil prices are more volatile than 15 | P a g e

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any other costs for a shipping company. Thus, this oil risk has to be factored into the strategic planning (Lu&Chen, 2010).

Source: Photo Gallery of Hong Kong, Office of the Asian Logistics and Maritime Conference

As many participants in the bunker fuel market are constantly seeking better strategies to hedge their exposure to fuel price risk, we wanted to explore a hedging strategy which is not utilized regularly but could be a productive strategy for many companies. In summary, given that the market for bunker fuel options is rather illiquid, participants in the bunker fuel market who desire to hedge with options can do so via a hybrid hedge through a combination of crude oil options and fuel oil crack spread swaps. While this article is based on the perspective of a bunker fuel consumer looking to hedge against potentially higher prices, a company looking to hedge against potentially lower prices could employ a similar strategy whereby they would purchase a put option on crude oil, rather than a call option, and then combine it with a fuel oil crack spread swap.

Measuring Value at Risk (VaR)

It is of extreme importance for a shipping company to know how much risk it faces at any 16 | P a g e

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given time and how to measure this risk (Stulz, 2003). As market conditions change, (in our case changes in oil prices) shipping companies face market risk. Market risk arises from changes in market conditions that yield uncertain future earnings. A method to calculate this risk is called Value at Risk (VaR) (Risk metrics and Stulz, 2003). It measures the z percent chance of losing at least Y over a certain time horizon. A 5% VaR is the dollar amount we do not expect to lose in 95% of the cases (Jorion, 2006).VaR allows shipping companies to uncover their exposure to financial risk and then try to minimize this exposure. It also allows stakeholders to make informed hedging decisions and avoid expensive failures. đ?‘ƒđ?‘Ś<đ?‘Œ=đ?‘§ %

To calculate VaR, we assume the random variable y is normally distributed. Risk metrics measures the exposure of a firm to the market risk by using the market value of a firm. Next, the standard deviation of the return is used to measure approximately how much the firm can value move. Risk metrics also assumes that the returns are normally distributed. The VaR can be calculated as follows: đ?‘‰đ?‘Žđ?‘…đ?‘Ą (5%) = 2.33đ?œŽđ?‘Ą đ?‘‰đ?‘Ą đ?‘‰đ?‘Žđ?‘…đ?‘Ą (1%) = 2.33đ?œŽđ?‘Ą đ?‘‰đ?‘Ą where the market value and the standard deviation of the firm at point t is given by đ?‘‰đ?‘Žđ?‘…đ?‘Ą đ?‘Žđ?‘›đ?‘‘ đ?œŽđ?‘Ą .đ?‘‰đ?‘Ą is the market value of the S&P500 shipping index on the first day of the month. We could measure the VaR both at the 1% and 5% quintile. However, we could also calculate monthly VaR instead of weekly VaR. Standard deviation will also need to be calculated monthly by multiplying the square root of the number of days in a month by the daily returns.

After calculating VaR, we could use the Risk Metrics back testing method to compute the actual percentage of VaR violations, hence calculating the accuracy of the Value-at-Risk. Back testing allows us to see the number of times actual profit or loss exceeds the Value-atRisk amount.

Once we confirm that the Value-at-Risk calculations are accurate, we could then attempt to 17 | P a g e

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establish a relationship between VaR and global oil prices using statistical techniques (regression analysis). In particular, we could analyze the impact of one period of lagged percentage in the next year’s consumption hedged on fuel costs scaled by total operational costs. In order to timely reflect the impact of the hedging decision that is made in year t-1 and the actual hedging, we could use the lagged variable hedging variable as an independent variable. Formally: đ??šđ?‘˘đ?‘’đ?‘™ đ??śđ?‘œđ?‘ đ?‘Ąđ?‘ / đ?‘‚đ?‘?đ?‘’đ?‘&#x;đ?‘Žđ?‘Ąđ?‘–đ?‘›đ?‘” đ??śđ?‘œđ?‘ đ?‘Ąđ?‘ đ?‘Ą = đ?›ź0 + đ?›˝1 đ??ťđ?‘’đ?‘‘đ?‘”đ?‘’đ?‘Ąâˆ’1 + đ?›˝2 đ??šđ?‘˘đ?‘’đ?‘™ đ??śđ?‘œđ?‘ đ?‘Ąđ?‘ đ?‘Ą + đ?œ€ Subsequently we could then develop a method to minimize the risk by hedging it. Prior to taking a decision on hedging the risk we could analyze as to how much fuel hedging reducesthe value at risk of a shipping line.

Hypothesis Development

The first hypothesis states that changes in the fuel oil prices have a positive co-relationship with the VaR of the shipping industry. In order to ensure steady cash flow to the sector as a whole, all shipping companies attempt to sell shipping space in advance. In addition, as a competitive strategy they sell the shipping space at deeply discounted prices. Even as the cash flow is secured by selling the shipping space, there is a tremendous increase in the value at risk (VaR). This makes the shipping sector extremely vulnerable to fluctuating input costs and an upward rise beyond a particular level result in the sector compromising on service quality and frequency. A sustained rise eventually results in the bankruptcy and closure of the business.

H1: Changes in fuel oil prices has a positive co-relationship with the Value at Risk (VaR) of the shipping industry

The second hypothesis follows from the first hypothesis. There is a relationship between oil prices and the price of shipping space. Fuel oil being the most important input, a rise in the oil prices will see a proportionate increase not only in the VaR, but also in the price of shipping space. According to Hooker (1996), if the cost of input rises, so does the cost of the final product. A shipping line will have to pay more to purchase oil, and as the price of oil 18 | P a g e

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increases, this rise in cost will be passed onto the consumer as a rise in price of shipping space.

However this might not be a viable proposition always, as increase in the prices of tickets could have an adverse impact on sales revenue due to existing competition (Bergman, 2002). As such the shipping line in question may have to absorb the higher fuel costs which could result in an erosion of profits or downright losses as the case may be (Klemperer, 1989).

H2: Shipping lines that hedge against oil price increases will have a lower value at risk (VaR).

Conclusion

In order to avoid incurring huge losses the shipping lines have no option but to minimize VaR (while not missing the opportunity to exploit the advantage of declining oil prices). From our first hypothesis we expect the present decline in oil prices to lower the value at risk for these shipping lines. Since oil prices are still declining, we expect the lines NOT TO HEDGE yet (because hedging is a cost which adversely impacts the bottom lines), until they are absolutely sure of no further decline in oil prices. Once the shipping lines start hedging against oil price increases, we could then expect the shipping space prices to rise, holding all control variables (competition, taxes, changes in interest rate, changes in exchange rate, inflation) constant.

KNOW OUR AUTHORS Dr Girish Gujar Deputy Director Laboratory of Container Security Department of Logistics and Maritime Studies The Hong Kong Polytechnic University Prof. Hong Yan Director of the Laboratory of Container Security Professor at Department of Logistics and Maritime Studies The Hong Kong Polytechnic University

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An Interview with Dr Meifeng Luo Maritime Insight Issue 1, June 2015

THE IMPACTS OF THE FALLING CRUDE OIL PRICE ON SHIPPING INDUSTRY The continuous drop in oil prices is one of the most significant factors that influence the global economy today. Due to a combination of various political and economic reasons, the production of spot oil increases and thus causes the oil price to decrease. In this article, Dr Meifeng Luo i shared his perspectives on the oil price downturn and future shipping markets. Dr Luo is an Associate Professor at the Department of Logistics and Maritime Studies of The Hong Kong Polytechnic University, Director of IMC-Frank Tsao Maritime Library and R&D Center and also Associate Editor of Maritime Policy & Management. He has over thirty years’ experience both in work and research in the field of maritime and shipping economics. His research papers are published in the leading journals in the maritime field, such as Maritime Policy & Management, International Journal of Shipping and Transport Logistics, and Journal of Transport Economics & Policy. In addition, he has been interviewed by major media in Hong Kong with regards to Hong Kong’s development in the shipping and maritime industries.

As fuel is a major operating expense for carriers, the drop in oil prices undoubtedly has an impact on the shipping market. In the short term, bunker carriers retains a benefit from bunker savings and container shipping companies also stand to benefit from lower operating costs. The lower oil prices are thus considered beneficiary for carriers and shipping companies. In addition, according to Maersk’s sensitivity forecasts, every $100/ton change in bunker price will have a $200 million impact on the shipping line’s profit. This suggests that the ocean carrier expects to retain a benefit from fuel cost savings. However, in the long run, lower fuel prices may also expand the number and variety of fleet vessels. As a result, the shipping freight will be decreased due to increased competition among dry bulk carriers.

The slumping oil price would not have much influence on the container shipping market; instead, the freight for container shipping might even increase if taking other factors into account, such as port congestion and shipping alliances. In order to be competitive in terms of service lanes and shipping networks, carriers form alliances to enhance capacity and create scales of economy. 20 | P a g e

An Interview with Dr Meifeng Luo Maritime Insight Issue 1, June 2015

With more carriers joining alliances, the need for large ships occurs and so the rate of utilization will improve. That’s why the container shipping market and dry bulk shipping market are different. Also, the impact that volatile oil prices might have on these two markets differs. In actual fact, the Shanghai Containerized Freight Index (SCFI) during November 2014 to January 2015 has indicated that Brent Crude Oil Price and bunker price have fallen slightly, while the SCFI has increased slightly during that period. There are various factors contributing to the shipping freight rate, such as port congestion, which might lead to a short supply of available container ships on the market in the short term and thus results in increased shipping freight rates.

However, it is a rather different story in the Dry Bulk Shipping market. When bunker drops, supply of ships increases as new players come and join the market. Ships that were previously less efficient would be considered for operation again due to low bunker savings. In addition, shipowners will place more orders for building new ships. As a result, a buildup of ship supply will cause a continuous decline in shipping freight as well as the BDI index. Lastly, shipowners do not have the say about the shipping freight. Oil price drop will directly lead to freight price drop. The party that benefits the most are the shippers and charters rather than shipowners.

Overall, the change in prices has implications for the world economy in the future, with immediate and in general beneficial implications for the shipping industry, although some sectors of the industry will be negatively affected. The effect on the shipping industry could help shipping in three ways, according to Dr Meifeng Luo. First, an oil price drop will stimulate economic growth; secondly, cheap oil boosts oil demand, sea trade, shipping alliances and large ship building; thirdly, the drop also gives oil traders lots of opportunities to speculate on future price increases by holding oil in tankers. Other benefits include that the oil price reduction will make shipment flexible and faster to meet demand and optimize revenues by altering trade routes rather than focusing on saving fuel costs. Though slow steaming is more environment friendly, larger and faster ships would replace smaller, older and slower ships. Interestingly, China could be one of the winners in this round. Due to these lower prices, it is predicted that in the near future, more oil will be transported to China. In the global market, the bulk market will shift toward transporting grains, ores and cement. Furthermore, we will see an increase of demand for tankers as the oil price drop will boost demand for oil storage at sea while also boosting demand for large ship building so as to keep more oil storage. i

This article is written by CYT ICMS researcher based on an interview with Dr Meifeng Luo

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與羅梅豐博士的專訪 Maritime Insight Issue 1, June 2015

原油價格波動對航運的影響 持續下跌的原油價格是影響全球經濟的重要因素之一。複雜的政治與經濟原因，引起 原油開採量增加，導致價格下跌。由於油料是航運公司重要的運營成本，那麼低油價對航運會 帶來什麼影響呢？羅梅豐博士ii 就油價對航運領域的影響發表他的專業分析與見解。同時也分 享了他對未來航運市場發展的看法。羅博士是香港理工大學物流及航運學系副教授，萬邦曹文 錦海事圖書館暨研究及發展中心總監，同時也是期刊《海事政策與管理》的副主編。羅博士擁 有超過三十年的海事與航運經濟領域的工作與研究經歷。他的研究成果發表在海事領域的著名 期刊上，例如 Transportation Research Part B, Transportation Research Part A, Journal of Transport Economics & Policy, Maritime Policy & Management 等。羅博士針對香港航運與海事行業發展接 受過香港媒體多次採訪與報導。

油料是航運的重要運行成本之一，油價下降無疑對航運市場有着重要影響。從短期看， 儲存更多原油使得油輪行業獲益，而班輪公司也可以降低運營成本。越來越低的油價對於航運 公司整體還是有益的。Alphaliner（2015，第 9 期）也有類似的報導。同時根據馬士基的敏感度 22 | P a g e

與羅梅豐博士的專訪 Maritime Insight Issue 1, June 2015 預測，當每噸油價變動 100 美金時，班輪行業的利潤將會有 2 億美元的改變。因此油料成本的 節省可以增加班輪公司利潤。但從長遠看，低油價或許會引起更多的船隻投入運營，這將導致 更加激烈的競爭，繼而引發運價下跌。

油價下跌對於班輪運輸市場倒沒有太多影響。從 2014 年十二月到 2015 年一月，布魯特 原油價格與油輪價格輕微下跌，而上海貨櫃運價指數 (SCFI) 卻輕微上漲。班輪運價是由多方 面因素影響的，例如港口堵塞，這往往會造成班輪短缺，短期會導致運費上升。為了保持服務 路線與服務網絡的競爭優勢，班輪運輸公司往往形成聯盟來增加服務能力與提升規模經濟。隨 著更多的班輪運輸公司加入航運聯盟，需要更大的船隻與提升船隻裝載率。班輪運輸的市場結 構與乾散貨市場也存在差異，因此低油價對於這兩個市場的影響也完全不同。

油價下跌同時讓更多的船隻將投入市場。過去效率較低的船隻也可能重新投入運營。 而現時的船舶市場讓船東決定建造更多的新船。因此，運力增加會持續降低運價和 BDI 指數。 由於市場競爭激烈，油價下跌直接受益的不是船東，而是貨主。

綜上，油價變動對於航運總體有益，但對於某些領域有損害。油價對於航運有三方面 的幫助。第一，油價下跌可以促進經濟增長。第二，低油價可以促進油料需求、原油和成品油 的貿易和海洋運輸。第三，油價下降和市場投機行為導致原油儲存增加。油價下降會使得航運 更加靈活與快速滿足顧客需求，通過調整航線來優化受益，而不是更多的關注節約油料。船舶 會繼續大型化、航行速度也越來越快，儘管低速航行更加環保。有趣的是中國將成為這輪競爭 的贏家。低油價將引發更多的原油運往中國。在全球市場中，乾散貨市場的運費將降低，有利 於中國穀物、礦石和水泥的進口。而且，我們可以預見用於儲存原油的油輪需求會增加，也會 繼而需求更大的油輪來儲存更多的原油。

ii

本文由 CYT ICMS 人員根據與羅梅豐博士的專訪整理而成

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Maritime Insight Issue 1, June 2015

貨櫃航線規劃原理 Mr. Michael Lee

國際集裝箱班輪產業，曾經有過令人稱羨的光景，隨 著全球化的加速，外貿市場規模的增長，船舶大型化，產業 的資本投入不斷的加劇，固定資產的利用率風險也隨之提 高。過去幾年整體集裝箱班輪產業面臨了激烈的競爭，許多 國際集裝箱班輪公司面臨嚴重的虧損。這些產業的現狀和特 性, 決定了國際集裝箱班輪運輸企業在船舶資產的利用率其投 入航線配置及管理上科學規劃的重要性。特別是現在的集裝 箱船舶大型化後，涉及的成本投入，艙位的分配，船舶的周 轉率和利用率，其整體運算和管理更加複雜。

國際班輪公司在航線部署及航線規劃涉及船舶資產投入其成本和投資回報必須 經過精確的預估和計算。所有的部署戰略最高原則就是要達成資產的大使用及周轉率， 進而產生最大的經濟效益，最優的投資回報。這方面相關的研究，文獻也比較多，但 是多數著重在成本和投資回報的領域，針對固定船型，特定航線對資產的配置，航線 的設計，艙位的分配，進行探討。大部分的學者缺乏對於船舶利用率和周轉率相關問 題的實務知識，以及不了解載具（集裝箱本身）調度對整體航線艙位配置和靠泊順序 規劃產生的影響，因此許多大部分的研究缺乏完整真實的航線部署決策分析。僅提供 片面簡單的成本固定艙位的計算。

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Maritime Insight Issue 1, June 2015

在實務上大型集裝箱班輪公司每天面臨的問題是整體的，動態的，每時每刻資 源的配置都得面臨訂艙需求改變而需要作出相對應的調整。以中型規模國際集裝箱班 輪公司為例，航線少則一，二十條，大型集裝箱班輪公司基本都有五，六十條航線， 上百條船投入運營，每個鐘頭都需要做大量的資源調配及價格上的決定。資源調配並 不能夠解決整體收益率和利用率的提升，重點還是需要動態及時的調整運價以刺激需 求。而成本和資源的計算及探討都只能針對現有或過去的現象進行闡述和解釋。真正 實務上操作面臨的市場瞬息萬變，需求變化是難以預估的，管理者只能夠在有效的範 圍內對其進行正確的修正和調配。對於從事研究及經營管理的專業人員有必要從真實 的大型國際集裝箱班輪公司實務上，決策面的角度來探索未來集裝箱班輪的經營管理 的科學。

大型國際集裝箱班輪公司新航線的部署開拓，一般準備工作都在二到三年前即 先行開展。一個新航線的開展涉及除了要決定投入什麼樣的艙位規模，船型，船數外 來決定是否涉及需要新造船舶和新增集裝箱外的主要因素外，最重要的還是市場規模 （Market Size）和價格 ( Average Freight development) 的推算。單靠公共資料臨時收集不 容易掌握長期市場發展趨勢的敏感度，因此大型集裝箱班輪公司，全球各分公司每週， 每月都要保持中長期市場預估，一些比較成功的大型集裝箱班輪公司常態保持 5 個季 度當地市場，區域，國家的進口，出口分到每一個航線的自己貨量，運費和成本的預 估。同時還要對市場規模按照航線進行市場規模及佔有率預估，這類預估一般需要配 合目的港海外的海關及進出口資料交叉比對來確定數字和預估成長率的精度。

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Maritime Insight Issue 1, June 2015

有了上述現有自家運量，運費，成本過去，和未來中長期資料，除了可以用於 決定未來是否建造全新自由船舶外，還可以對於需要投入的集裝箱自有箱和租箱的數 目進行配置。但是更重要的是空箱的調度和市場運費整體平均水平在航線上艙位的調 配，及航線靠港其港口和靠港順序的選擇。

Source: Photo Gallery of Hong Kong, Office of the Asian Logistics and Maritime Conference

國際班輪在實務運作中並不是使用運費作為航線的決策，而是使用毛利或淨利 來作為決策的基準之一。船舶資源投入，除了依照各港口前往各目的港航線運費高低 外，運費高的港口優先取得較多的艙位，還要根據淨利和市場的淡旺季進行艙位配置 的調配，及港口動態的刪選。淨利的部分和空重箱比例，內陸運輸及空櫃閒置成本有

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Maritime Insight Issue 1, June 2015

關，而淡旺季的部分則是班輪公司為了最大獲利，會在旺季是減少毛利低港口的艙位， 減收，拒收，或選擇不靠該港。以中美航線為例，旺季是上海港口出發前往美國的集 裝箱重箱運費比重慶前往美國重箱的運費低，但是毛利高，重慶的貨物基本比較難取 得充足的出口艙位。在旺季時，中國北方港口以 20'集裝箱為主的重貨，許多船公司也 會選擇戰略性抽掉北方航班，增加南方輕貨為主港口，以提高船舶實際重量裝載率。 在做出上述決定的同時還要兼顧客戶的服務滿意度。透過上述模式可以了解大型國際 班輪的動態決策系統是非常複雜，全球，及時，動態，而且具有很強的時效性要求。 這裡涉及的大量全球性零時差的溝通，複雜的管理和決策時效性。整體決策的系統結 構和運作雖然各家班輪不一，但是每天大家都面臨一樣複雜的問題，需要不斷的在時 間壓力下做出的決策對應資源的配置，才能保持船舶等資產的有效使用率。

對於新航線的投入，則需要根據市場規模和該公司在特定航線的市場佔有率， 航線沿線各港口雙向運費的水平，空重箱的市場比例進行評估計算成本。再根據各公 司商業的戰略考量及未來業務發展目標而決定是否對於該市場進行擴容。對於現有航 線的擴容和全新航線的投入，前期的市場部署準備工作也不一樣。針對航線部署前的 準備工作，一般必須在航線投入前的 18-24 個月開始進行準備。由航線所屬的各港口， 城市進行上述的市場分析和計算，然後是區域未直接靠泊的中轉港口，城市對於整體 區域的計算，上述計算採取雙向整合統計，必須包含起始港口和目的港，同時需涵蓋 起始港的內陸和目的港的內陸市場整體分析。根據該分析最終確認最佳船型，船速， 及靠泊順序。

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Maritime Insight Issue 1, June 2015

航線部署規劃需要考慮眾多因素，航線的經營和管理更加複雜，班輪資產的投 入及成本的計算是相對固定，但僅止於計算，實際資產的利用率和周轉率卻是時時動 態變化，需要根據宏觀市場需求的變化，季節的淡旺，價格的波動進行相對應的資產 部署及價格的調整。即便航線部署所有相關的因素都被充分的考量，經營管理也都配 置了良好培訓的專業人員，但仍不能避免競爭者復制同樣的配置和部署，以及在同一 航線上的價格和服務的競爭。

集裝箱船舶大型化後，單一港口或多個港口靠泊並不足以滿載，還需要依靠區 域港口向中轉港集貨。船舶艙位配置和多條支線中轉的安排也加大了營運的複雜性。 目前大多數的國際班輪公司缺乏整合決策系統的輔助，許多的資訊尚需要靠郵件，數 據傳遞收集，無法提供時時動態的資訊，更缺乏對於需求資訊的全面偵測能力。未來 能夠掌握動態需求資訊的能力將成為提高船舶利用率的製勝關鍵。 28 | P a g e

Maritime Insight Issue 1, June 2015

CALL FOR ARTICLES The Maritime Insight (ISSN 2312 - 0606) is a quarterly magazine launched in June 2013 under the CY Tung International Centre for Maritime Studies. It aims to combine both theoretical and practical knowledge and promote collaborations among scholars and professionals in the maritime industry. It mainly covers article reviews of general interests to the profession with a special focus on different maritime concerns. The Maritime Insight endeavours to summarise current maritime initiatives and to bring forward topics for further discussions in academic research whilst also offering implications to industrial players and policy makers. Interested parties are cordially invited to submit the practical article in Chinese or English. The article can be 2-6 pages long. All submitted articles will be peer-reviewed. We are looking for articles focusing on but not restricted to: • • • • • • • • • • • • •

Hot topics such as “One Belt, One Road”, “Internet + Shipping” Coastal Policy & Management; Marine Resource Management; Marine Spatial Planning; Cross/Trans-border Initiatives; Green Shipping; Environmental Impacts; Sustainable Management; Development & Social Responsibility; Alternative Fuel Technologies; Renewable Energy; Safety Technologies; Cruise Market; Cruise Tourism; Cruise Hub; Cruise and Ferry Services; Maritime Safety, Security & Piracy; Maritime Law & Insurance; Shipping Finance & Investment; Revenue Management; International Trade; Bulk Shipping; Modelling of Shipping Market; Port Congestion; Port Reform and Governance; Port Competition; Ports growth strategy; Port Operation & Management; Intermodal Transport; Transport Connectivity and Collaboration; Transport Management; Maritime Education and Training

The Maritime Insight Facts and Figures Maritime Insight has published 7 issues including more than 35 articles and is now circulated to a wide and varied audience of nearly 2,000 contacts in Hong Kong, the Mainland and Taiwan. It is read by senior decision makers and influencers from shipping sectors and professional associations.

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Maritime Insight Issue 1, June 2015

WORKSHOP SERIES ON INTER-DISCIPLINARY MARITIME PRACTICE 綜合性海事業務運作工作坊 The Department of Logistics and Maritime Studies, CY Tung International Centre for Maritime Studies of The Hong Kong Polytechnic University, and Institute of Sea Transport and Hong Kong Logistics Management Staff Association are jointly hosting a workshop series on "Inter-disciplinary Maritime Practice", which will cover the entire lifespan of the ship, from the decision to purchase to its final loss or scrapping. The workshops will be based on a case study format. The moderators are Messrs Raymond T.C. Wong (王德超), Cho Hor Wong (黃祖河) and Manson Cheung (張迅文) and guest speakers are being invited to share their experience on different topics. Topic 1) Decision Making in Ship Acquisition 船舶購置決策 2) Financial Options for Ship Acquisition 船舶購置融資考慮方案 3) Sale & Purchase and NewBuilding of Ships 船舶買賣及訂購新船 4) Ship Types, Machinery& Equipment 船舶種類，機械及設備 5) Management of Ships & Ship Managers 船舶管理 6) Ship Operations, Crewing & Technical Maintenance 船舶操作，維修保養及船員管理 7) Ship Employment, Chartering & Administration 船舶營運，租賃及行政管理 8) Marine Insurance (Hull & Machinery, Protection & Indemnity) 海事保險（船殼及互保協會） 9)Disputes & Casualty Management (Legal & Commercial) 海事糾紛及海損理賠 10) Professional Services in Maritime Practice 海事業務有關專業服務

Date 9th Jan 2014 (Thur) 23rd Jan 2015 (Fri) 9th Apr 2015 (Thur) 7th May 2015 (Thur) 4th Jun 2015 (Thur) 2nd Jul 2015 (Thur) 6th Aug 2015 (Thur) 3rd Sep 2015 (Thur) 8th Oct 2015 (Thur) 5th Nov 2015 (Thur)

Please send your registration to: cyt.icms@polyu.edu.hk

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C.Y. Tung International Centre for Maritime Studies Maritime

Education | Research | Consultancy

DISCLAIMER

All opinions stated in the articles and “Interviews� are those of the respective authors and do not necessary reflect the views of the editors or ICMS. We hereby express our gratitude to all the authors for their photographs and articles. If you are interested in subscribing an e-alert or you have any inquiry about the Maritime Insight, please feel free to contact us. Email: cyt.icms@polyu.edu.hk | Website: www.icms.polyu.edu.hk

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