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KYMENLAAKSON AMMATTIKORKEAKOULU

University of Applied Sciences

Industrial Management and Logistics/Double Degree

Daria Utkina

Benefits for a Large Grain Company of Investing in Purchase of Own Vessels

Bachelors Thesis

2014

ABSTRACT

KYMENLAAKSON AMMATTIKORKEAKOULU

University of Applied Sciences

Business Logistics

Daria Utkina Benefits for a Large Grain Company of Investing in

Purchase of Own Vessels

Bachelors Thesis 35 pages + 9 pages of appendices

Supervisor Suvi Johansson, MBA

Commissioned by

December 2014

Keywords vessel, transportation, investment, freight market

The purpose of this thesis was to determine whether the worlds largest grain export

company should have its own fleet. Nowadays optimizing transportation costs is

becoming more urgent with each passing day. This problem has arisen due to the

fact that the shipping companys current fleet is aging and grain is a specific cargo

which has various restrictions and requirements for transportation. In this thesis two

alternatives were considered namely chartering and using an own vessel. The

advantages and disadvantages of the two options for the development of the

company were reviewed.

As a result it is more profitable for the company to purchase its own vessels.

TABLE OF CONTENTS

LIST OF ABBREVIATIONS

1 INTRODUCTION ...................................................................................................................... 6

2 INVESTING. .............................................................................................................................. 6

2.1 Development strategy ......................................................................................................... 8

2.2 Independence strategy ........................................................................................................ 9

2.3 Return of Investment ........................................................................................................ 10

2.3.1 Payback Period .............................................................................................................. 10

2.3.2 Discounted Payback Period .......................................................................................... 11

3 SEA TRANSPORT AND THE ORGANIZATION OF THE SHIPPING MARKET ............. 11

3.1 Modern legal regulation .................................................................................................... 13

3.2 Sea transport ..................................................................................................................... 15

3.2.1 Different types of vessels .............................................................................................. 15

3.2.2 Difference between liner and tramp ships .................................................................... 17

3.2.3 Tramp Shipping ............................................................................................................ 17

3.3 Different type of charter contract ..................................................................................... 17

3.4 Freight rates ...................................................................................................................... 18

3.5 Time Charter Equivalent .................................................................................................. 19

3.6 Chartering of vessels ........................................................................................................ 19

3.6.1 The Baltic and International Maritime Council. ........................................................... 20

3.6.2 Charter Party ................................................................................................................. 20

4 INVESTING IN OWN VESSELS ........................................................................................... 21

4.1 Grain cargo. ...................................................................................................................... 21

4.1.1 Rules of carried ............................................................................................................. 22

4.2 General purpose vessels .................................................................................................... 25

4.3 Freight traffic .................................................................................................................... 26

4.4 Example of company ........................................................................................................ 27

4.4.1 Consider areas with and freight rates ............................................................................ 28

4.5 Accounting........................................................................................................................ 29

4.5.1 Cost for freight .............................................................................................................. 29

4.5.2 Cost of vessel ................................................................................................................ 30

5 CONCLUSION ........................................................................................................................ 34

REFERENCES ................................................................................................................................ 35

APPENDIX ..................................................................................................................................... 37

Appendix 1 ................................................................................................................................... 37

Appendix 2 ................................................................................................................................... 42

Appendix 3 ................................................................................................................................... 44

Appendix 4 ................................................................................................................................... 46

LIST OF ABBREVIATIONS

OECD - Organization for Economic Co-operation and Development

(more information about http://www.oecd.org/about/membersandpartners/list-

oecd-member-countries.htm)

TCE Time Charter Equivalent

T/C Time Charter

ROI Return of Investments

DPB Discounted Pay Back

IMO International Maritime Organization

6

1 INTRODUCTION

Russia is one of the largest grain exporters to Egypt, Iran, Israel, Saudi Arabia,

South Korea and Turkey. The market is growing and there is lack of new vessels

and consequently a need to think about the benefits of acquiring own vessels.

Therefore, the main question is whether it makes sense to invest capital in

purchasing own vessels.

The purpose of this thesis was to consider the benefits of acquisition of own ships

and the structure of the freight market; how to calculate freight rates and what is

time charter equivalent. It is necessary to understand the difference between

chartering and maintenance of own fleet.

To answer the main question of the thesis considering an investment and

distribution, the benefits of investment are not only the increased the speed and

quality of transportation, but development of growth strategies and an

independence strategy of the company.

Various options for the company have been examined for answering the question.

One option was the continued use of the freight market. The other option was an

investment in own vessels. The question was to determine the need and the

benefits of buying own vessels.

2 INVESTING.

For the ordinary investor, the tramp company remains a form of investment to be

avoided. It is a very special business and at its best financed and managed by

those who are versed in its difficulties (A.W.Kirkaldie British Shipping 1913)

Definition of 'investment'

An asset or item that is purchased with the hope that it will generate income or

appreciate in the future. In an economic sense, an investment is the purchase of

goods that are not consumed today but are used in the future to create wealth. In

finance, an investment is a monetary asset purchased with the idea that the asset

will provide income in the future or appreciate and be sold at a higher price. (1)

7

A profit plays the most important role in the fund of investment.

It acts as the main form of net income of the enterprise which expresses the value

of the surplus product. Having paid taxes and other obligatory payments to the net

profit, part of this can be sent on investment. As a rule, part of the profit is target

for investment purposes and stored in the accumulation fund or other funds of

similar purpose created by the company.(2)

The state or situation in the company as a rule is described by investment climate

which is usually within a territory. Investment climate is a comprehensive

assessment with indicators such as political stability, economy, administrative

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