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Going back a generation, the shipping world was driven by only a few major family owned companies. While there is a place for this type of ownership to some degree, in this new world of consolidation, with competitive new building costs, ship acquisition and ship ownership is now far more driven by cost of finance. While finance was difficult to obtain immediately after the financial crash, it is evident by the number of new building orders since, that this was short-lived and finance is readily available, albeit with far tighter controls.
With restrictions on finance and the global downturn coinciding with record high oil & bunker prices, new breeds of ship owners began to emerge and change the shipping market place.
It is the legacies of the financial crisis that have escalated consolidation and have caused the more traditional owning companies to begin re-trenching. These traditional owning companies have historically been driven by technical or managerial prowess and job creation with the ability to succeed in varying arenas, whether tankers, wet or dry cargo, containers off-shore or storage.
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Other, less risky owning companies have those that were less dependent on accessing finance or able to operate with smaller margins, due to economies of scale such as oil companies, commodity trading houses and even banking companies themselves.
Generally, categories of chemical tanker owners can be listed as:
As per International Bulk Chemical code, chemical tanker is a ship constructed and built with the main purpose to carry chemical cargoes named in the chapter 17.
They can be basic chemical tanker and sophisticated super-segregated chemical tankers that able to carry various types of cargoes at the same time, without having any common pipeline for loading, discharging as well as carrying it. As per MARPOL 73/78, Appendix II, Chapter 17, there are 750 different type of chemical cargoes listed, with different level hazardous from safety of life at sea up to high risk of environmental pollution. Also in this chapter are specified their shipment and transport rules as well as the type of chemical tankers than can carry those cargoes. As per their constructions, chemical tankers can be IMO 1, IMO 2 or IMO 3 of which specifies the level of hazardous and aggressiveness of the cargoes that can be carried with.
A ‘Type IMO 1’ is a chemical cargo carrier constructed to carry products listed in IBC Code. Listed products in this category may have a strong environmental and safety impact and therefore it requires high precaution to avoid any potential pollution. Alkyl (C12+) dimethylamine, Chlorinated paraffin (C10-C13) and Chlorosulphonic acids are some examples for such aggressive cargoes, required to be carried with this type of chemical tankers and located into the cargo tanks with not bigger intake capacity than 1250 m3.
IMO 2’ is a chemical cargo carrier constructed to carry products listed in IBC Code. Products requiring carriage under IMO 2 have a severe environmental impact but less than IMO 1 products. Safe handling of these cargoes still requires appropriate safety precautions within the construction of the tank/ship to stop the environment coming into contact with these products. Alkylated (C4-C9) hindered phenols, Alkyl (C3-C4) benzenes and Ethylene dichloride are some examples for this type of cargoes.
IMO 3’ is a chemical cargo carrier constructed to carry products listed in IBC Code. These cargoes listed for IMO 3 carriage have sufficiently severe environmental impact but is considered the least dangerous with regards to the code. Safe transportation is still of course required, so therefore appropriate ship/tank construction is necessary to decrease the impact or spillage into the environment if in a damaged condition. Acetic acid, Nitrilotriacetic acid, trisodium salt solution and Choline chloride solutions are examples for similar cargoes.
A ballast water treatment system is designed to avoid spreading any potential contagious organism and bacteria in ships' ballast tanks. Using this system helps to remove any potential aquatic organism before the ship de-ballasts. This system has entered into the force on 8 September 2017.
The purpose of the changes of MARPOL Annex VI is to reduce emissions of Sulphur oxide and nitrogen oxide from the ships which will help protect the environment from air pollution. In general, SOX and NOX pollution (and other harmful expulsions) is created by the ships exhaust gases which is generated by combustion equipment and devices such as main and auxiliary engines, boilers as well as generators. Exhaust gas emission components that ships are creating can be categorized as below:
As of 2019 the following emission controlled areas exist:
IMO 2020 regulation will impose and create a pressure on the ship owner to comply with the new restrictions for burning the fuel either by installing the scrubbers or replace high sulphur fuel (HSFO) to low sulphur fuel oil (LSFO), LPG or LNG as was advised by the MEPC 70 in October 2016. However, the new implications mandate 4 main alternatives to cover the new regulations.
Last alternative is that the ship may continue to run on high-sulfur fuel oil, but then she must be equipped with exhaust stack scrubbers that capture emissions. After 1 January 2020, the ship owners will have assessed the short to long term economic implications of scrubber use and choose the optimal commercial decision for the individual owners’ operational needs, even if the use of scrubbers is not chosen.
The NPV net present value method is a leading indicator of project effectiveness because it is most closely related to the goal of raising investor welfare through the investment. NPV represents the present value of future cash returns discounted at the relevant market rate less the current cost of the investment.
With regards to ship management, the application of ship investment strategies is confined to the basic investment valuation models, such as Net Present Value. NPV is considered to be one of the most effective and indicative methods, since it will make allowances for the change in monetary valuations over time through Discount Cash Flow.
When evaluating a project before making a final investment decision, the rating criterion and ranking for that method is the maximum positive net present value. On this basis, the following rule for decision making is made:
NPV > 0 – The investment is acceptable;
NPV < 0 – The investment should be rejected;
NPV = 0 – The investment is on the bard so additional analysis is required.
The main criterion for the NPV is defined as follows:
NPV=∑t=0N(Rt/1+P/100)-I0
Where;
R1 = Cash Flows for first year
R2 = Cash Flow for second year
R3 = Cash Flow for third year
P/100 = Discount factor
PV = Present Value
NPV = Net Present Value
I0 = Initial Investment
N = Total Economical life of the ship
“R” includes all incomes and expenses that are covered by the shipowner during the whole construction, operation and scrapping cycle of the ship (Construction + Economic life + Resale (Scrap). These include capital expenses (initial payment “Deposit” for the ship's contract, loans, taxes, interest) and operating expenses (crewing, maintenance, insurances and admin fees) paid by the owner as well as scraping value and incomes from the freight and TC hires. This study shows that the calculation is not guaranteed mainly due to the significant uncertainties associated with NPV formula elements but is also standard for the calculation of returns.
The price of a ship is based on the demand and supply of market transactions, which in most cases are provided by well-known broking companies. With a comparative goal, time charter contract has been proposed, where the figures are taken into account according to broking companies reports. At the given calculation of the chemical tankers, it is assumed that the capital investments are funded with 70% loan and 30% own equity. The effective interest rate on debt is currently considered to be 5.6264%. It is assumed that the chemicals are newly built and will be in operation in about 10 years before being sold in the second-hand market. There are also $ 95,000 administrative costs and $ 375,000 reserve finance is considered.
For the purpose of this study, it is assumed that the ship is time chartered for a period of time. This approach is often used to avoid the negative result of using the conditions of a spot market and uncertainties of the market. Also, another purpose of such approach can also be explained by the fact that, determining and assessing the relevant time charter equivalent, which is calculated in order to disclose and recheck the actual market level of the carriage being discussed.
Given the fact that the ship will be registered under FOC (Flag of Convenience), any distribution of loan repayments according to the tax provisions 'interest = cost / the principal – from the profit after taxation [11]' will not be mandatory. Resources in the depreciation fund will also not be necessary due to the lack of tax payments. Thus the capital costs during the loan repayment period are possible to be set up by the shipowner to the full amount of the annual loan repayments. Furthermore the shipowner will be free to set up the appropriate share of the operational profit as a depreciation fund.
| Description | Amount |
|---|---|
| New building price | US$ 22,500,000 |
| Initial Investment | 30% US$ 6,750,000 |
| Bank Loan | 70% US$ 15,750,000 |
| Annual Loan Interest Rate | 5.63% US$ 886,158 |
| Admin Expenses for the loan | - US$ 95,000 |
| Savings | US$ 375,000 |
In today's market, 10,000 DWT Chemical tankers has a TC value of about $ 9,750 per day, and the ship is assumed to have a minimum 3 years’ Time charter period contract, thus eliminating the uncertainties and negative effects of the spot market.
At the first scenario, the invested chemical tanker is assumed to have been in service for a 7-year period, after which the shipowner decides to sell it for $ 15,000,000. The calculation will show following:
Assumption 1 - 7 Years operational period before the ship is resale in second hand market
Total net income after 7 = $ 6 157 972
Initial Invested Capital (equity) = $ 6 845 000
NPV after 7 years = - $ 687 028
Assumption 2 – 8 Years operational period before the ship is resale in second hand market
Total Net Income after 8 years = $ 7 355 544
Initial invested capital (equity) = $ 6 845 000
NPV after 8 years = $ 510 544
| Scenario | NPV | IRR |
|---|---|---|
| 7 years | -$687,028 | X% |
| 8 years | $510,544 | Y% |
As a result, the study shows that the methods for analyzing the initial investment for any business are as same as in the 'Investment in shipping' analysis. As already noted, whether the investment is good and whether to continue or reject, the results of the analyses, from which the following approach gives a clear idea to the ship owners and investors:
This study shows that the continuing technical development that characterizes the chemical tankers and the high value of the capital investments are combined to keep the operators involved in this highly specialized commercial activity. Although the market has been particularly difficult for the ship owners during last decade, they continued investing and building new tankers. In general, the shipping world was driven by only a few major family owned companies. Whilst there is a place for this type of ownership to some degree, in this new world of consolidation, with competitive new building costs, ship acquisition and ship owning is now far more driven by cost of finance.
Whilst finance was difficult to obtain immediately after the financial crash, it is evident by the number of new building orders since, that this was short-lived and finance is readily available, albeit with far tighter controls. With restrictions on finance and the global downturn coinciding with record high oil & bunker prices, new breeds of ship owners began to emerge and change the shipping market place. In principal, shipping business is highly regulated market but in chemical tanker market, due to nature of the cargoes, this sector is even stricter than other divisions. Implications of BWM system, ECA/SECA pressures and finally IMO 2020 Low Sulphur bunker regulation make feel the owners that they are more focused on complying the legal requirements rather than commercial activities.
Despite all that restrictions and difficult implication, the investors are still there to invest in new buildings. Stricter restrictions supposed to clear the market from old ships that it is not economically wise to retrofit the ships but to scrap it and stabilize supply and demand curve! As a result, in this study is shown the calculation for 10000 dwt chemical tanker IMO II marine line coated assumed to trade at black sea and Mediterranean sea and as per given details optimal duration for internal rate of return is calculated accordingly.
Evolution and Financial Analysis of Chemical Tanker Ownership. (2024, Feb 17). Retrieved from https://studymoose.com/document/evolution-and-financial-analysis-of-chemical-tanker-ownership
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