Lecture 12 - 20160408

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MT3006 – Ship Chartering

Lecture 02

Cost Calculation

08 April 2016 1MT3006 – Ship Chartering

School of Civil and Environmental Engineering

Division of Infrastructure Systems and Maritime Studies

Bachelor of Science in Maritime Studies

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Scope of Lecture

08 April 2016 MT3006 – Ship Chartering 2

• Importance of Cost Structure Knowledge

• Identify the components behind Cost of Goods Sold

• Calculate the Breakeven Cost of providing Freight Service

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Importance of Cost Structure (1)


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2000 2001 2002 2003 2004 2005 2006 2007

B a l t i c D r

y &

B a l t i c D i r t y T a n k e r I n d e x

G l o b a l G D P G r o w t h & F l e e t S i z e

D e v e l o p m e n t

( % Y

o Y )

Global GDP Growth YoY % & Baltic Index - 2000 to 2007

Euro Area GDP World GDP China GDP VLCC Fleet Growth Capesize Fleet Growth BDI BDTI

Figure 12-1 : Global GDP Growth & Baltic IndexSource: Clarkson

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0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2007 2008 2009 2010 2011 2012 2013 2014 2015

B a l t i c D r y &

B a l t i c D i r t y T a n k e r I n d e x

G l o b a l G D P G r o w t h & F l e e t S i z e

D e v e l o p m e n t

( % Y

o Y )

Global GDP Growth YoY % & Baltic Index - 2007 to 2015

Euro Area GDP World GDP China GDP VLCC Fleet Growth Capesize Fleet Growth BDI BDTI

Figure 12-2 : Global GDP Growth & Baltic IndexSource: Clarkson

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(30,000,000)

(25,000,000)

(20,000,000)

(15,000,000)

(10,000,000)

(5,000,000)

-

5,000,000

10,000,000

15,000,000

20,000,000

2009 2010 2011 2012 2013 2014 2015

( U S $ )

Net Position - Capesize 2009 to 2015Net Revenue Operating Costs Capital Cost Net Position

1. Vessel ordered in 2007, delivered in 20092. 80% bank loans with 7 years loan tenor 3. 25 years lifespan4. Residual value based on historical average from 2000 to 2007

Figure 12-3 : Hypothetical Financial Performance of a Capesize Bulkcarrier ordered in 2007 for delivery in 2009Source: Clarkson; Moore Stephens

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(50,000,000)

(40,000,000)

(30,000,000)

(20,000,000)

(10,000,000)

-

10,000,000

20,000,000

2009 2010 2011 2012 2013 2014 2015

( U S $ )

Net Position - VLCC 2009 to 2015

Net Revenue Operating Costs Capital Cost Net Position

1. Vessel ordered in 2007, delivered in 20092. 80% bank loans with 7 years loan tenor 3. 20 years lifespan4. Residual value based on historical average from 2000 to 2007

Figure 12-4 : Hypothetical Financial Performance of a VLCC ordered in 2007 for delivery in 2009Source: Clarkson; Moore Stephens

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Format of Profit & Loss Statement

Gross Revenue- Cost of Goods Sold

----------------------------------------------------------------------------------------------------Gross Profit

- Selling, General & Administrative Expenses----------------------------------------------------------------------------------------------------Operating Profit (Earnings Before Interest, Tax, Depreciation & Amortisation)

- Depreciation- Amortisation

----------------------------------------------------------------------------------------------------EBIT (Earnings Before Interest and Tax)

- Interest Expense- Tax Expense

----------------------------------------------------------------------------------------------------NPAT (Net Profit After Tax)+/- Extraordinary Items

----------------------------------------------------------------------------------------------------Net Income


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Generic Cost Structure


GrossRevenue

VoyageExpense

OperatingExpense

S&GAExpense

CapitalExpense- - - -

Freight Income+Demurrage+Other Income

Agency Fee+Commission+Freight Tax

+Fuel Cost+Port Charges

Repairs & Maintenance

• Repair Costs• Spare Parts• Transportation

Entertainment+Management Fee+Medical Expense

+Salary & Rental+Stationary / IT+Communication+Research

Interest Expense+Depreciation+

Amortisation

Stores & Spares

• Deck Stores• Fresh Water • Lub Oil & Paints

Insurance

• Claims• H&M Premium• P&I Premium

Statutory

• Annual Tonnage Dues• Survey Fees• Registration Fees

Manning• Provisions• Salary & Allowance• Training & Development• Travelling Expense• Welfare Fund• Union Fees

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Cap ital Cos ts


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Capital Costs

• Depreciation & Amortisation – Avoid capital expenditure recognition in year of occurrence Need for

depreciation

– Need for routine maintenance certified by recognised organisations IS / SS Amortisation

• Interests & Capital Repayment – Equity Financing

– Debt Financing

– Finance Lease

– Operating Lease


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Depreciation – Straight Line

• Depreciation ExampleVLCC Net Book Value = US$120,000,000

Residual Value = 40,000LDT x US$450/LDT

= US$18,000,000

Lifespan = 25 years

-------------------------------------------------------------------------------------------------------------------------------------------

Straight Line Method

• Annual Depreciation = (120,000,000 – 18,000,000) ÷ 25

= US$4,080,000


Year NBV-Beg Depreciation NBV-End

1 120,000,000$ 4,080,000$ 115,920,000$

2 115,920,000$ 4,080,000$ 111,840,000$

3 111,840,000$ 4,080,000$ 107,760,000$

23 30,240,000$ 4,080,000$ 26,160,000$

24 26,160,000$ 4,080,000$ 22,080,000$

25 22,080,000$ 4,080,000$ 18,000,000$

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Amortisation

• Amortisation Example

Cost of Special Surveys = US$1,500,000

Cost of Intermediate Surveys = US$ 750,000

Intervals between Special Surveys = 60 months

Intervals between Intermediate Surveys = 30 months

Amortisation for Special Survey = 1,500,000 ÷ 60 x 12 = US$300,000 per year

Amortisation for Intermediate Surveys = 750,000 ÷ 30 x 12 = US$300,000 per year


Year 1 Year 2 Year 3 Year 4 Year 5

Amortisation Expense 300 300 600 600 450

- Special Survey 300 300 300 300 300 - Intermediate Survey 300 300 150

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Financing - Equity

• Type of Ship Financing (Equity)

– Value of the vessel is stated under “Asset” in the balance sheet

– Depreciation expense will be incurred

– Cash or retained earnings

– Stocks and shares (or more commonly known as share capital)

– Shareholders’ Equity

– Not tax exempted

– Cost of Equity is difficult to determine Dividend Capitalisation Model = D1 ÷ P0 + g

CAPM Model = r f + β(r m – r f )


Covered more in MT4003 – Shipping Strategy

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Financing - Debt

• Type of Ship Financing (Debt)

– Value of the vessel will be stated under “Assets” in the balance sheet

– Depreciation and interest expenses will be incurred

– Outstanding debts will be stated under “Liabilities” in the balance sheet

– Bank Loans, sale of bonds, bills or notes to individuals and/or institutionalinvestors

– Bank loans usually pegged to LIBOR or other floating benchmarks with a premium

– Fixed rate bank loans are rare and if available, usually very expensive

– Interests payable to financial institutions are tax exempted


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Financing - Debt

• Examples of Ship Financing (Debt)

– Vessel’s value US$120,000,000

– Loan Quantum 80% of vessel’s value

– Loan Tenor 7 years

– Loan Payment Equal payment annually

– Loan Rates 150 basis points above 3-months LIBOR

– Historical LIBOR 3.5% (3-months average)


Loan Quantum 96,000,000$

Loan Capital Repayment 13,714,286$

Loan Rates 5.0%

NBV of Loan at

BeginningCapital Repayment Interest Payment NBV of Loan at End

Year 1 96,000,000$ 13,714,286$ 4,800,000$ 82,285,714$Year 2 82,285,714$ 13,714,286$ 4,114,286$ 68,571,429$

Year 3 68,571,429$ 13,714,286$ 3,428,571$ 54,857,143$

Year 4 54,857,143$ 13,714,286$ 2,742,857$ 41,142,857$

Year 5 41,142,857$ 13,714,286$ 2,057,143$ 27,428,571$

Year 6 27,428,571$ 13,714,286$ 1,371,429$ 13,714,286$

Year 7 13,714,286$ 13,714,286$ 685,714$ -$

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Financing – Capital Lease

• Type of Ship Financing (Capital)

– On balance sheet financing

• PV of the minimum lease payments using lessor’s (Owner) lower implicit rate or lessee’s (Charterer) borrowing rate

• PV value is depreciated over lease period (if no purchase obligation)

• Lease payment is categorised into interest expense

– Criteria

• Title is transferred to the Charterer at end of charter

• Bargain purchase option exists

• Charter period is at least 75% of asset’s life

• PV of charterhire is at least 90% of asset fair value

• Collectability of lease payments is predictable

• No uncertainties about amount of unreimbursable costs yet to be incurred


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Financing – Capital Lease

• Examples of Ship Financing (Capital Lease)

– Lease Period 20 years

– Lease Rates $40,000 per day (ordinary annuity)

– Cost of Capital 15%

– PV of Lease $91,386,239

– Annual Depreciation $4,569,312


NBV of Loan at

BeginningLease Payments Interest Payment NBV of Loan at End

Year 1 91,386,240$ 14,600,000$ 13,707,936$ 90,494,175$

Year 2 90,494,175$ 14,600,000$ 13,574,126$ 89,468,302$

Year 3 89,468,302$ 14,600,000$ 13,420,245$ 88,288,547$

Year 4 88,288,547$ 14,600,000$ 13,243,282$ 86,931,829$

Year 5 86,931,829$ 14,600,000$ 13,039,774$ 85,371,603$

Year 6 85,371,603$ 14,600,000$ 12,805,741$ 83,577,344$

Year 7 83,577,344$ 14,600,000$ 12,536,602$ 81,513,946$

Year 8 81,513,946$ 14,600,000$ 12,227,092$ 79,141,037$

Year 9 79,141,037$ 14,600,000$ 11,871,156$ 76,412,193$

Year 10 76,412,193$ 14,600,000$ 11,461,829$ 73,274,022$

Year 11 73,274,022$ 14,600,000$ 10,991,103$ 69,665,125$Year 12 69,665,125$ 14,600,000$ 10,449,769$ 65,514,894$

Year 13 65,514,894$ 14,600,000$ 9,827,234$ 60,742,128$

Year 14 60,742,128$ 14,600,000$ 9,111,319$ 55,253,447$

Year 15 55,253,447$ 14,600,000$ 8,288,017$ 48,941,464$

Year 16 48,941,464$ 14,600,000$ 7,341,220$ 41,682,684$

Year 17 41,682,684$ 14,600,000$ 6,252,403$ 33,335,087$

Year 18 33,335,087$ 14,600,000$ 5,000,263$ 23,735,350$

Year 19 23,735,350$ 14,600,000$ 3,560,302$ 12,695,652$

Year 20 12,695,652$ 14,600,000$ 1,904,348$ 0$

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Breakeven TCE


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Definition of P&L Items (Shipping Perspective)

• Basic Time Value of Money Concept

– A dollar today is worth more than the same amount in the future because of its potentialearning capacity

• Bank Interests• Opportunity Costs• Inflation

– Annuity is a series of equal payments or receipts that occur at evenly spaced intervals.For example, leases and rental payments. Payments or receipts occurring at the end of each period is called an ordinary annuity. Payments or receipts occurring at thebeginning of each period is called an annuity due

– Present value (PV) is the current worth of a future sum of money or stream of cash flowsgin a specified rate of return.

– Future value (FV) is the value of a sum of money at a specified date in the future that isequivalent in value to a specified sum today taking into account TVM


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Calculations – Capital Costs

• Time Value of Money / Discounted Cash Flow

• Cash-flow constant, no variance TVM

• Cash-flow varies NPV / IRR

• Analysis to focus on cash-flow. Depreciation, amortisation andinterest expense are not applicable

• Cash-flow variance arising from:- – Escalation in operating costs

– Dry-docking or infrastructure expense

– Earnings volatilities / Fluctuations in freight market


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Calculations - TVM

• Formulas – Sum of Money

• Formulas – Present Value


FV

(1+r)n

Future Value of a Sum of Money = PV x (1 + r)n

Present Value of a Sum of Money =

PMT 1 PMT

r (1 + r)n r -= - FV( ) xPresent Value of Ordinary Annuity

PMT x (1 + r) 1 PMT x (1 + r)

r (1 + r)n r ) x -Present Value of Annuity Due = ( - FV

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Calculations - TVM

• Formulas – Future Value

• Formulas – Payment

08 April 2016 MT3006 –

Ship Chartering 22

PMT PMT

r r x ( PV + )Future Value of Ordinary Annuity = - (1 + r)n

PMT x (1 + r) PMT x (1 + r)

r r

x

(PV +

)Future Value of Annuity Due = - (1 + r)n

PV + FV

(1 + r)n - 1PV + ) x -r Payment of Ordinary Annuity = (

PV + FV -r

(1 + r)n - 1 (1 + r)= ( PV + ) xPayment of Annuity Due

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Calculations – Breakeven TCE

• Vessel’s NBV $60,000,000

• Vessel’s Lightweight 40,000MT

• Scrap price $450/LDT

• Lifespan 15 years

• Cost of Debt 5.0%

• Cost of Equity 30.0%

• Debt Weightage 60%

• Equity Weightage 40%

• Operating Expense $6,500/day

• Charter Period 10 years

• Charter Type Time

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Ship Chartering 23

PV = - 60,000,000

Annual Depreciation = {60,000,000 – [(40,000 ÷1.016) x 450]} ÷ 15

= $2,818,897

FV = 60,000,000 – (2,818,897x 10)

= $31,811,023

N = 10

I/Y (I) = (5%x60%) + (30%x40%)= 15%

PMT = 9,033,361 ÷ 365= $24,749 per day

T/C Rate = 24,749 + 6,500= $31,249 per day

BB Rate = $24,749 per day

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Calculations – Returns

• Vessel’s NBV

$60,000,000

• Vessel’s Lightweight 40,000MT

• Scrap price $450/LDT

• Lifespan 15 years

• Operating Expense $6,500/day

• Charter Period 10 years

• Charter Type Time

• Offered Rate $35,000/day

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Ship Chartering 24

PV = - 60,000,000

Annual Depreciation = {60,000,000 – [(40,000 ÷1.016) x 450]} ÷ 15

= $2,818,897

FV = 60,000,000 – (2,818,897

x 10)= $31,811,023

N = 10

PMT = (35,000 – 6,500) x 365

= $10,402,500

I/Y = 18.63%

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Summary

• Difference between a salesman and a marketer lies in the ability to priceeffectively and efficiently

• Salesman Front line minions given a price and told to sell. Success attributes : Personality & Ambition

• Marketer Mid to high level executive/management whodevelops product and pricing strategies

Success attributes : Full knowledge of trade & costs

• Charterer / Freight Trader = Marketer Voyage Costs Operating Costs Capital Costs

• Quick Tool = Breakeven TCE versus Market TCE

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Ship Chartering 25

Lecture 12 - 20160408

Documents

Transcript of Lecture 12 - 20160408