Following the ramifications of the catastrophic financial crisis in 2007, a decrease in demand from developed economies destabilized the harmony between global aggregate supply and demand. Most economies that were almost pushed to the brink of collapse knees are still recuperating from the consequences of the financial crisis up to date. Such consequences include unemployment, global debts, to name but a few. Be as it may, most of these economies, organizations, and households bounced back and battled the aftermath, a move that has helped them to realize global economic growth and development. Consequently, international trade has expanded surprisingly in the last decade. The financial crisis undermined economies development efforts and also hampered endeavors that pursued to widen opportunities and enhance the living standards. In any case, global trade has navigated away from the financial crisis and has subsequently assumed a cardinal part in boosting sustainable development of least developed economies.
Successively, maritime trade conveys more than nine-tenths of tonnage of the global trade (Bank, 2013). The maritime industry, competitive and overwhelmed by privately owned corporations, has conveyed to trading economies expanding limit, by and large, enhancing administration levels, and declining unit shipping costs. To get to and separate the most extreme advantage from this dynamic trading asset each country relies on upon the execution of its ports; not just on the capacity and quality. One of the biggest shipping companies is the Maersk Group, which is global conglomerate operating in approximate works in exactly 130 countries with a workforce of more than 89,000 employees CITATION Mae16 \l 1033 (Maersk, 2016). The company operates in an array of maritime domains such as shipping, logistics, and the oil and gas industries making it one of the prevalent container shipping companies.
Factors that Drive Global Demand and Supply for Shipping
In 2015, Maersk announced a 389 million British Pounds less profit that previously anticipated (BBC, 2015). The companys progress depicts the performance of the global trade as it is the worlds largest shipping carrier. According to the companys financial reports, its profits would fall to 3.4 billion dollars that year with the company shares hitting a low of 6.5 percent in early trading. According to Reuters, shipping companies that were charging approximately 233 million dollars to ship 20-foot containers from Asia to Northern Europe were making a loss. These losses and decline in profits were attributed to lower shipping margins. Maersk, for instance, was earning half its profit from the companys line operations. The company blamed this on diminishing growth in the worldwide container shipping market.
Succinctly, global trade is governed by the fundamental market principles where supply and demand interact to determine freight rates and prices. Supply and Demand plays a key role in the economic decision-making process made by organizations. Fundamentally, the quantity of a product demanded by its consumers is directly influenced by the price of that particular product and the prices of other products, the income of the consumer, tastes and preferences, among other factors. On the other hand, the quantity of the product supplied dependent on the prices of substitute commodities, and the costs of production. In a competitive market, the two forces of demand and supply interact to determine the equilibrium price.
In the maritime industry, freight rates are resolved on the premise of arrangements between shipping organizations and forwarding proprietors, mirroring the harmony in the middle of ships and cargoes in the market. A higher supply of vessels will most likely result in a decline in rates and prices whereas an increase in freight rates portray a shortage of vessels. The following are the key factors that influence demand in the shipping market;
The Global Economy
The shipping industry is an exceptionally cyclical business sector that is intensely reliant on the global economy. This cyclical drift in the maritime market goes back to the late nineteenth century and has added to an example of business sector vacillations taking into account a few diverse economic variables. Market cycles are not extraordinary to the delivery business; they happen in almost every industry that depends intensely upon demand and supply to decide market values. The period from 1956 to 1966 is no special case with regards to market variances in maritime cycles as both highs and lows happened influencing the world economy colossally (Crisis, 2012).
Global economy creates the main part of interest, either through imports of crude materials or exchange finished products. If the global economy were to go local, the result could be that manufacturing turns out to be progressively local. Since moderately ease manufacturing focuses exist in all regions of the world, more products devoured in Asia, Europe, and the Americas could be created closer to home. This pattern would have significant ramifications for worldwide shipping demand as trade routes, and imbalances would change. Asian request for fossil fuel and steel could decay yet to some degree be substituted by expanded interest in different locales.
Raw Materials Available
Some of the raw materials demanded by the shipping industry are seasonal such as agricultural products. These raw materials are therefore bound to fluctuations. Hence, their demand patterns are not constant. Additionally, trading in raw materials is affected by overall demand and availability.
Average haul expresses the distance covered by a cargo ship before it arrives at its destination. For instance, occasional terminations of the Suez Canal have expanded the normal ocean travel distance between the Arabian Gulf and Europe from 6,000 miles to 11,000 miles.
Random shocks may not be as significant in driving demand for shipping but they include stuns that influence the security of the economic framework, for example, common catastrophes, wars, financial emergencies and so forth.
Most if not all raw materials might be transported from remote areas of inception if transport costs have been reduced to a friendly level.
On the other hand, below are the factors that affect supply:
a) The Global Fleet
The number and composition of the fleet across the world directly signify the prevalent supply of vessels. The size and composition of the global fleet are directly proportion to shipping supply.
b) Fleet Productivity
It is not enough to have an adequate global fleet, but their productivity is also key. The fleet size might be fixed but their productivity conveys an aspect of flexibility.
c) Shipyard Production
Shipbuilding assumes a dynamic part in the size and composition of the global fleet as well as its productivity. Nonetheless, it more often than not takes somewhere around one and three years from a ship order to delivery.
Scrapping is also vital in the growth of a fleet hence ultimately influencing shipping supply.
e) Freight Earnings
Just like in any other business sectors, most stakeholders in the shipping industry are profit oriented (UNCTAD, 2013). Freight rates, therefore, influence cargo ship owners and shipping companies to adjust their carrying capacities (Lewis, 2006).
Implications of a Drop in Demand for the Shopping Firms
A lot of our cutting edge information about the Maritime economy and industries has been founded on historical occurrences in the global economy. The continued globalization and the world now being interlinked, the maritime industry can pride itself in an array of benefits. Be as it may, the industry also faces a risk of encountering challenges due to a drop in demand. Shipping is, for the most part, the essential method for transporting parts and the nished products around the globe. Since transportation is such an old industry, with a background marked by consistent change, now and again progressive and sporadically disaster, Time and again it becomes evident that shipping and trade may slip away from the economy. The airline sector is Maritimes nearest counterpart, and it has scarcely 60 years of economic history (Marronage, 2009). It assumes a fundamental part of the economic development and global trade. Economic growth and development, trade, and transport are mutually reassuring.
A healthy shipping demand necessitates the existence of a revival in consumer demand, particularly in developed economies. Shipping demand is a derived demand. Therefore, it cannot propel demand for its pricing through pricing mechanisms. Shipping demand is also very volatile and more often than not reflects international trade trends. BRIC countries namely Brazil, Russia, India, and China happen to have the greatest potential to motivate international oil demand and container shipping. A drop I demand would cause a ripple effect in all the largest shipping firms. For instance, a significant decrease in shipping demand across Asia would see Asia lose its place as the leading production hub if the transportation costs in the region were to keep escalating. A drop in shipping demand, therefore, results in a reduction of firms ability to compete globally.
Fluctuations in demand ultimately affect shipping rates making them quite volatile as was the case with Maersk. This demonstrates an unpleasant aspect of the shipping industry setting that has been represented in market trends expectations. On the contrary, an increase in supply in shipping such as the growth in 2014 and 2015 which saw more cargo ships being delivered was good news for the shipping firms. An increase in supply increases the fleet which in turn drives economies of scale and ultimately boosts efficiency. The increase in supply would not be as effective if it were followed by a drop in demand.
The financial crisis led to a drop in shipping demand and almost brought many global shipping firms to their news. Its effects are still felt years after the crisis. In 2015, Maersk announced a drop in its expected profits in 2015 with its shares also falling, all this emanating from a drop in demand. This is a classic case of how a drop in demand can affect shipping firms negatively.
Key Methods of Capital Budgeting and its Importance in Managing the Financial Performance of Shipping Firms
The shipping industry is one of the most capital intensive industries (Stopford, 2003). Cargo ships can cost up to $125 million each, about the same price as a jet. LNG tankers, the most costly ships, cost approximately $250 million each. The tankers conveying the oil imported by the United States alone have a substitution expense of $150 billion (Stopford, 2003). Capital Budgeting is, therefore, most imperative all managerial tasks. Shockingly a percentage of the qualities of the shipping business do not fit effectively with financial prerequisites (Cheng, 1979). Most investors are inclined towards certain profits and clearly categorized financial structures. Shipping firms, however, do not fulfill these criteria as incomes are unpredictable; financial structures regularly need straightforwardness and information may not always be available.
Capital budgeting refers to the procedure of figuring out if or not an investment or a commercial project is beneficial in the long run. Regularly organizations will have a few potential projects and must quantify each one's potential keeping in mind the end goal to make a correlation and pick only one or a couple. T...
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