The Concept Relating to Maritime Economics - Essay Example

Maritime Economics The paper would attempt to provide a detailed comprehension of the concept relating to maritime economics. The trade ofshipping has been learnt to be growing as a result of the benefits as well as prospects associated with it from the perspective of international development. In particular, this research paper focuses on exploring the indicators that are used by the shipping companies for the reason of assessing their respective performances. Furthermore, the paper also investigates the effects of the European debt crisis on the market of sea freight and the overall industry of ship-breaking. Table of Contents Maritime Economics 1 1 Abstract 2 Table of Contents 3 Introduction 4 Indicators of Performance Evaluation of Shipping Companies 4 Total Assets (TA) 6 Return on Assets (ROA) 6 Market Value 7 EBITDA Margin 7 Tobin’s Q Ratio 8 Sales Growth 9 Revenue 9 The Reasons of High Operational Costs for Old Ships 10 The Effect of European Debt Crisis on the Sea Freight Market and the Ship Breaking Industry 12 Conclusion 13 References 14 Bibliography 16 Introduction Maritime economics refers to the business of shipping which is considered to be quite intriguing. The shipping industry which marked its commencement with the transportation of cargoes has been witnessing increased significance owing to the related advantages and prospects in the field of international development (Cullinane, 2011). Shipping is considered to be a service based industry that is believed to grant the sustenance with regard to the global trade. The subject of maritime economics is believed to have developed and grown based on the study that is supposed to relate to the past record of shipping, for instance contractual understanding relating to shipping as well as trade (Talley, 2012). Indicators of Performance Evaluation of Shipping Companies Performance evaluation indicators are considered to be essential in order to gauge the operating competence with regard to the shipping industry. It is regarded as essential to draw attention to the condition related to operation performance with the intention of further enhancing the performance. There has been stated to remain available numerous kinds of indicators for the reason of using them for assessing the results attained by the shipping companies or the seaports. The prevailing indicators are believed to be of great use owing to their easy computability with the help of the accessible information. The application of the indicators would enable the evaluation of the performance of a particular shipping company and ascertain the degree of contentment of the obtained results. The performance indicators is learnt to gauge the performance of the shipping companies in sectors like tanker, offshore, container, dry bulk and other miscellaneous sectors (Trujillo & et. al., 1999). It needs to be mentioned in this regard that the indicators related to performance measurement is not regarded as structured, comprehensive or constant. The indicators that are used to gauge the performance of the shipping companies is done with the help of Return on Equity (ROE), Return on Assets (ROA) and Return on Sales (ROS). The performance of the shipping companies has been observed to have been measured or gauged with the application of the financial form of performance indicators such as operating profit, turnover and the net profit that is believed to be computed in terms of per twenty-foot equivalent unit (TEU). The performance is also evaluated on the basis of operational efficiency with respect to the shipping companies. The operating performance of the shipping companies are determined with the application of operating return based on sales or assets, asset turnover, the flow of cash from operations based on the employed assets and sales and the capital expenditure related to assets. It has been considered suitable in this respect to evaluate performance on the basis of certain particular performance indicators (Panayides & Lambertides, 2009). The measures or rather the indicators used for the reason of evaluating the performance of the shipping companies is learnt to include the competition performance indicators, the application of performance indicators based on the market and the indicators linked to financial performance of the shipping companies. The kind of performance evaluation indicators has been explained below: Total Assets (TA) The total assets (TA) are believed to be included in the balance sheet of a particular company and is learnt to depict the possessed assets of the company. A ship is considered to be an asset that has an economic worth attached to it and is possessed or managed by a company in order to reap future advantages or benefits. Assets are learnt to be purchased in an attempt to augment the worth attached to a particular company or enhance the operations of that company with the help of creating a flow of cash (Panayides & Lambertides, 2009). Return on Assets (ROA) Return on Assets (ROA) indicator helps to depict the degree of profitability of a shipping company in relation to the entire assets of the company. The ratio related to this indicator is learnt to be computed in the form of percentage by way of dividing the annual revenue of the company with its respective complete assets. This specific ratio is considered to be quite imperative as it offers a suggestion or an insight regarding the level of efficiency with regard to the management in terms of employing its respective assets for the reason of creating or producing revenue. ROA is regarded to be increasingly industry dependent which helps to use it as a yardstick to evaluate the performance of the other similar companies or even the performance of the same company for the previous years (Panayides & Lambertides, 2009). Market Value Market value is also commonly referred as the market price which is stated to be the present or ongoing quoted price that is used by the investors for the reason of purchasing or selling a specific amount of share with regard to a common bond or stock at a definite time. The market value can also be computed as the sum of market worth of the existing debt and the market capitalization. It is even explained as the “total market value”. In relation to the stocks, the market value as frequently been considered to be distinct in comparison to the book value at the market is believed to entail the factor of future growth prospect. Majority of the investors who are observed to make use of the primary evaluation in an attempt to choose stocks is believed to consider the market value of a company. The market value of the company helps the investors in ascertaining the soundness in relation to the particular market value or whether it is underrated in contrast to its respective book value and net assets (Panayides & Lambertides, 2009). EBITDA Margin EBITDA Margin financial indicator is made use of or rather applied to evaluate the profitability factor of a particular company in the form of making a contrast of the company’s revenue with the generated earnings. Particularly, EBITDA is believed to be obtained from the factor of revenue so, this specific indicator depicts the percentage that is left after the calculation of the complete operating expenses. The computation of this indicator is shown below: EBITDA Margin = EBITDA/Revenue It needs to be stated with reference to the above context that usually an increased value is preferred for this particular ratio as it would specify the competence of the company to retain its earnings to a large extent with the help effectual processes that aids in trimming down certain particular expenses and also in keeping them low (Panayides & Lambertides, 2009). Tobin’s Q Ratio Tobin’s Q Ratio acts as an indicator of the accumulative market value with regard to all the similar companies included in the share market and states the requirement of the accumulated value to be equal with regard to their individual replacement costs. The computation of this particular ratio is attained by dividing a company’s market value with the value related to the replacement of the company’s assets (Panayides & Lambertides, 2009). Q Ratio = Total Market Value of Firm/ Total Asset Value For instance, a decreased Q ratio implies that the associated cost with regard to the replacement of the company’s assets is higher compared to its respective stock value. This further indicates the undervaluation of the stock of the company. On the contrary, an increased value of the ratio depicts that the worth of the company’s stock is considered to be expensive compared to the replacement expenses related to its assets. This also further implies the overvaluation of the stock. Therefore, an appropriate value of the ratio would direct the investment decisions of the investors in the stocks of that particular company which would reflect a constructive performance of the company (Panayides & Lambertides, 2009). Sales Growth The quantity of sales that is obtained by a particular shipping company subsequent to the subtraction of allowances provided for missing as well as damaged goods, any kind of permitted discounts as well as returns can be referred as sales growth. The sales figure that is stated on the financial reports of a company is believed to be the net sales that are obtained after the stated deductions (Panayides & Lambertides, 2009). Revenue The amount of revenue generated is also considered to be an indicator that is used for evaluating the performance of the shipping companies. Revenue is stated to be the sum of money that is received by a company during a definite period. It is stated to be the ‘gross income’ from which the net income is derived after making the necessary deduction of expenses. Revenue is also stated to be the sum of money obtained or gained from the business activities of a company (Panayides & Lambertides, 2009). Therefore, the above indicators could be well applied or made use of for the reason of assessing the performance of the shipping companies (Panayides & Lambertides, 2009). The Reasons of High Operational Costs for Old Ships To begin with the fundamentals, the expenses related to running ships are believed to be reliant on the amalgamation of few important factors. Initially, the broadest structure that relates to costs in case of ships in the course of fuel consumption is the physical state which directs the necessity for repairs as well as maintenance and the amount of crew needed to operate the ships. Therefore, it can be well comprehended that the operating costs accounts for the major amount of expenses in relation to running a ship. It has also been stated in this respect that in the midst of ships that are of the same size, it is quite customary to observe that the cost structure associated with the old or aged ships to be different in comparison to the fresh ones. In the field of market economics related to shipping, the association that is shared among the age and expense of a ship is considered to be amongst the most vital issues owing to the fact that it describes the slope that is observed in a supply curve for the short-run (Stopford, 2009). It is believed that with the growing age of the ship, a decrease in its respective capital expenses is observed but at the similar time an increase or boost is recorded in its voyage as well as operating expenses in comparison to the new or fresh ships. The fresh ships are considered to be increasingly competent owing to a blend related to technical enhancement that is observed because of the built of the ship which is done with increasingly modern efficient engines in comparison to the older version of ships. The old ships are believed to lose their operational efficiency owing to the running and tearing of the engines that is incurred with the running of the ships. The expenses associated with the running of the old ships are believed to increase with time owing to the augmented operating expenses, requirement for larger crew, the maintenance as well as the repairing expenses are observed to be incurred frequently accompanied with lesser fuel efficiency. Therefore, it can be inferred from the above made discussions that the high operational expenses of the old ships make them less competitive than the fresh ones implying that the shipping companies should only have fresh ships in their fleets. The representation of the alteration in the expense profile with age by way of contrasting the annual expenses related to three bulk carriers has been provided below. One of the ships is stated to be 10 years old, the other one 20 years old and the final one is 5 years old (Stopford, 2009). Source: (Stopford, 2009). The Effect of European Debt Crisis on the Sea Freight Market and the Ship Breaking Industry The net trade volume related to the industry of shipping was observed to witness a rise during the previous century. A significant rise was observed in the market of sea freight owing to the development of free trade accompanied with a rising requirement associated with the consumer products. However, the trade of shipping and specifically the sea freight has suffered to a great extent owing to the ‘European debt crisis’ which has led towards an unexpected and striking decrease in the shipping requirement (Corbett & Winebrake, 2008). Though the declines in the world economy & trade would affect the sea freight market owing to the ‘European debt crisis’ in the short run, but the industry is believed to recover in the long run for being considered as the commercial form of transport that is fuel competent as well as carbon friendly. These characteristics help the market of sea freight to transport goods along with raw materials effectually and safely which implies that a major portion of the world trade would be conducted through the sea in the long run (Marisec, n.d.). The debt crisis in Europe is also believed to adversely affect the market of ship breaking owing to the declining steel scrap prices, currency crisis, the decreasing non-ferrous prices accompanied with debt fears. These reasons have resulted to a large turn down or drop in relation to the ship recycling or breaking industry. Numerous end buyers were believed to refrain from proposing offers on fresh units for the fear of further decrease in the market prices (The Economic Times, 2011). Conclusion The above discussion helps to provide a lucid comprehension of the subject of maritime economics. The discussion also helps in recognizing the indicators that need to be made use of by the shipping companies in order to evaluate their respective performances. The research paper also discusses the various issues associated with the operational costs with regard to the old and the fresh ships. Finally, the paper addresses the way the declines with respect to the world trade as well as economy owing to the ‘European debt crisis’ affects the sea freight market in the short term as well as in the long run. References Corbett, J. J. & Winebrake, J., 2008. The Impacts of Globalisation on International Maritime Transport Activity: Past Trends and Future Perspectives. International Transport Forum, pp. 1-31. Cullinane, K., 2011. International Handbook of Maritime Economics. Edward Elgar Publishing. Marisec, No Date. Value of Volume of World Trade by Sea. Shipping and World Trade. [Online] Available at: http://www.marisec.org/shippingfacts/worldtrade/volume-world-trade-sea.php [Accessed March 27, 2012]. Panayides, P. M. & Lambertides, N., 2009. Sustainable Performance in Transportation: The Case of Shipping Companies. Logistics & Sustainable Transport, Vol.2, Iss.2, pp. 1-21. Stopford, M., 2009. Maritime Economics. Taylor & Francis. Talley, W., 2012. The Blackwell Companion to Maritime Economics. John Wiley & Sons. The Economic Times, 2011. Troubling Times to Continue for Shipbreaking: Global Markeing System. Transportation. [Online] Available at: http://articles.economictimes.indiatimes.com/2011-10-10/news/30263365_1_debt-fears-latest-weekly-report-european-markets [Accessed March 27, 2012]. Trujillo, L. & et. al., 1999. Privatization and Regulation of the Seaport Industry. World Bank Publications. Bibliography Frankel, E. G., 1987. The World Shipping Industry. Routledge. Goss, R. O., 1977. Advances in Maritime Economics. CUP Archive. Read More