Essay on Maritime Economics

The shipping industry is characterized by fabulous profits, disastrous miscalculations, professionalism as well as ingenuity since the first steamships were made more than one hundred years ago. It includes dramatic scandals like the Tidal Marine in the 1970s, and equally shipping superstars such as Onassis and Niarchos (Grammenos, 2002). In the 1980s, some ships were bought at few million dollars but their asset value increased by 700-800%, making the some of the entrepreneurs in the industry be among the richest people in the world. Some of the miscalculations include the remarkable incident in 1973 in the tanker market under which orders exceeding 100m.dwt were placed on supertankers but did not materialize. Regardless of how various events in the shipping industry may be fascinating, it is important to understand that the shipping industry comprises of the bankers, shipbuilders, brokers, and ship owners who undertake the duty of transporting approximately 4000 million tones every year. Also, it is one of the industries known to facilitate international trade (Lirn, Lin and Shang, 2013). Therefore, in studying the shipping market, one is drawn to the discussion of the global economy in general. This research will concentrate on the economic analysis of the maritime industry specifically, on key areas that management responsibilities should consider to facilitate growth of the shipping company.

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The notion of the shipping industry as the means of economic development has existed for more than a century. According to Adam Smith in his book The Wealth of Nations, he stated that in a capitalist society, the central economic force is the division of labor, and level through which this is practiced depends on the size of the market (O'Rourke and Smith, 2007). Also, he argued that a business existing in its own country town without connections to other parts of the world becomes difficult for it to achieve optimal efficiency since a small market limits its specialization. According to his view, the shipping industry has the potential of opening up markets to facilitate specialization. Sea trade and economic development are associated through a process explained by Adam Smith as:

As by means of water carriage, a more extensive market is opened to every sort of industry than what land carriage alone can afford it. So it is upon the seacoast, and along the banks of navigable rivers, that industry of every kind naturally begins to subdivide and improve itself, and it is frequently not until a long time after that those improvements extend themselves to the inland parts of the country(O'Rourke and Smith, 2007).

Since Adam Smith explained the role of shipping industry in economic development technology has grown, and the developed countries currently have good inland infrastructure. However, growth of technology in the shipping industry has been more significant. Since 1960s, bulk shipping and unitization have played an important role in opening the global markets for the raw materials and manufactures. However, the earnings in the industry are more volatile because of various alterations in the market (Stopford, 2009). From 2004 to 2013, the earnings in the shipping industry were low and more volatile. The volatility of these earnings results from changes in economic, political, and environmental factors (Qian Kun, Duan Gui-jun and Peng-fei Zhang, 2015). Therefore, it is important to have effective management strategies in the industry by identifying the main areas that will be beneficial to the shipping company. Therefore, five key business areas that management responsibility should consider are approaches to financial management, technicalities of the shipping company, human resources and Strategies to adjust to the market risks, and quality and safety.

In financial management, it is important for the manager to incorporate best practices, which affects the performance of the company directly. These practices include integration of the shipping operations with finance and harmonization of the costing structures in the firm. About integration of operations with finance, some of the best practices include incorporating the operational functions such as procurement with financial and accounting management(Jahn, 2014). Under the harmonization of accounting structures in the shipping company, the best practices involve the use of harmonized charts, which have valid legal entity on all platforms to ensure that there is full reporting of the revenues and costs in the managerial perspectives.

Under the safety and quality management in the shipping company, one has to recognize that a large number of maritime accidents result from inadequate fire safety equipments on board. Therefore, a manager in a ship management company should step up dedicated safety and quality teams, which provide frequent reports to the CEO of the company (Duru, 2013). Crewing is a critical factor in the ship management service as well as the field of competency. However, most ship managers have a challenge in managing their crew. There were approximately 1.4 million active seafarers in 2010. Balancing demand and supply of the seafarers was difficult because of raised concerns about the availability of certain professionals such as engineers on board (Ppiaf.org, 2016). Also, the package offered to some of the seafarers is below the average in the market. In future, more focus should be given on development, training, compensation and welfare of the ship crew to ensure that they are motivated in their tasks, and reduce employee turnover (Jahn, 2014).

A manager in a ship management company should ensure that best practices are involved in the management of technicalities in the firm. Balancing the costs of defects with the costs of maintenance and availability of the vessel is a responsibility of every shipping manager (Jahn, 2014). Given the increased number of losses from 2010 to 2013 because of shipping technicalities, the manager should ensure that the superintendents and chief engineers in the ship combine their practical experiences and skills in technical management. Increased compliance and regulatory pressures are challenge to technical management. When considering responses from a survey conducted on technical management, 77% of the respondents stated that competitive pressures and costs are the main factors causing inefficiencies in technical management (Jahn, 2014). This raised concerns on commercial issues in the maritime industry because of existing pressures. Life Cycle Management (LCM) is a new concept in technical management receiving significant attention. This focuses on hull structures and machinery, reducing the costs of maintenance as well as offering more information about the availability of the vessel.

The market risks in the maritime industry depend on the forces of supply and demand in the market, changes in the value of foreign exchange currencies, changes in transport fares and seasonality of some trades. One of the causes of short-term volatility in the maritime industry is seasonality of specific businesses or trades (Qian Kun, Duan Gui-jun and Peng-fei Zhang, 2015). For instance, most of the agricultural goods are subject to seasonal variations resulting from harvests, specifically, sugar grains and citrus fruits. Seasonality affects the spot market disproportionally making it difficult to plan for the transport of these commodities (Yip Lau, 2015). The shippers of these seasonal commodities depend on the spot market characteristics to meet the tonnage requirements.

Fluctuations in supply of certain commodities affect the tonnage requirements, which are met via the long-term contracts. On the other hand, sudden increase or decrease in demand of specific commodities associated with changes of the sources of supply make it difficult for the shipping companies to adjust their prices to meet the market requirements. For instance, in 1960, Middle East was the main source of crude oil. However, during the 1970s, there was discovery of new oil reserves close to the Middle East market like Alaska and North Sea. This reduced the need for deep-sea importation of crude oil. These new developments affected the volume of sea trade and consequently, decreased the cost of sea transport (Stopford, 2009). The change in the value of foreign exchange also affects the revenues and profits attained by the shipping company (Albertijn, Bessler and Drobetz, 2011). These result from political, economic and environmental factors, and can make the shipping company incur losses or derive profits from the same. Given these vulnerabilities, the manager of a shipping management company should ensure that effective strategies are established to address each of the challenge. Also, strategic sourcing activities should be embraced to identify the buying and selling trends in the market. Incorporating computer software that links the shipping company with the importers and exporters of various commodities in the market can minimize the chances of incurring losses resulting from market risks.

Bibliography

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Duru, O. (2013). Irrational Exuberance, Overconfidence and Short-Termism: Knowledge-to-Action Asymmetry in Shipping Asset Management. The Asian Journal of Shipping and Logistics, 29(1), pp.43-58.

Grammenos, C. (2002). The handbook of maritime economics and business. 1st ed. London: LLP.

Jahn, C. (2014). Best Practices in Ship Management. 1st ed.

Lirn, T., Lin, H. and Shang, K. (2013). Green shipping management capability and firm performance in the container shipping industry. Maritime Policy & Management, 41(2), pp.159-175.

O'Rourke, P. and Smith, A. (2007). On The wealth of nations. 1st ed. New York: Atlantic Monthly Press.

Ppiaf.org. (2016). MODULE 3 Alternative Port Management Structures and Ownership Models :: Port Functions, Services, and Administration Models. [online] Available at: https://ppiaf.org/documents/toolkits/Portoolkit/Toolkit/module3/port_functions.html [Accessed 23 Nov. 2016].

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Yip Lau, Y. (2015). Development and Formation of Shipping Networks in the Contemporary Shipping Environment. ujm, 3(4), pp.148-152.