1.

Explain what shipping market cycle is, its role in shipping Economics and the

characteristics of each stage.

The shipping cycle is an economic concept that explains how shipping companies
and freight charges respond to supply and demand. It examines how and why ships build
up in sea trading ports. The cycle also seeks to explain what affects the selling price of
ship fleets and what types of ships sell during slow business periods. The four stages of
the shipping cycle, all based on customer demand, are peak-up, peak, downturn and
trough.

Market cycles are the driving force behind shipping investment and
chartering. They are the heartbeat of the shipping market, pumping cash in and out of the
business. By forcing companies to compete with each other for a share of this wealth, the
market lures them in the direction needed to give the most efficient use of resources.

Trough

The first stage of the shipping cycle is called a trough. An excess in capacity
characterizes a trough. Ships begin to accumulate at trading ports, while others slow
down shipments by delaying their arrivals at full ports. Ships still carrying goods also slow
down to save on fuel costs. In a trough, freight costs tend to start falling. Freight costs will
typically decrease to the equivalent of vessel operating costs. Shipping companies start
to experience a negative cash flow, which prompts the selling of inefficient fleet. Selling
prices for ships tend to be lower, with some fleet exchanged at salvage rates.

Recovery

Recovery is the second stage of the shipping cycle. In this stage, supply and
demand move toward equilibrium, meaning both supply and demand levels match each
other closely. Freight charges begin to increase, eventually surpassing operating costs.
Shipping containers begin to move out of the trading ports, as demand stimulates new
orders. During this stage, optimism about the market remains shaky. The opinion
pendulum swings back and forth between optimism and pessimism, resulting in volatility
for trade volume. Cash flow tends to improve steadily during the recovery stage.

Peak

When all the surplus has been absorbed the market enters a phase where supply
and demand are in tight balance. Freight rates are high, often two or three times operating
costs. The peak may last a few weeks or several years, depending on the balance of
supply/demand pressures. Only untradeable ships are laid up; the fleet operates at full
speed; owners become very liquid; banks are keen to lend; the press report the
prosperous shipping business; there are public flotations of shipping companies. Second
hand prices move above ‘book value’ and prompt modern ships may sell for more than
the newbuilding price. The shipbuilding order book expands, slowly at first, then more
rapidly.

Collapse

The fourth stage of the shipping cycle, collapse, occurs when supply levels begin
to exceed demand. Freight rates begin to decline during a collapse. Shipping containers
and fleet begin to accumulate in trading ports once again. Although the cash flow of
shipping companies may remain at high levels, ships begin to slow down their operations.
They may take longer to deliver goods, and inefficient fleets may not ship goods for some
time.

2. Discuss the concept of FLAG OF CONVENIENCE and SECOND REGISTRY.

FLAG OF CONVENIENCE

The term “flag of convenience” refers to registering a ship in a sovereign state

different from that of the ship's owners. Ships registered under flags of convenience can
often reduce operating costs or avoid the regulations of the owner's country. To do so, a
vessel owner will find a nation with an open registry, or a nation that allows registration of
vessels owned by foreign entities. A ship operates under the laws of its flag state, so
vessel owners often register in other nations to take advantages of reduced regulation,
lower administrative fees, and greater numbers of friendly ports.

CONCEPT OF SECOND REGISTRY

In second registry, the ships would still fly the national flag of the ship-owner’s
country, or the flag of a semi-sovereign offshore dependency. The new registry would
allow different manning rules, reducing or eliminating the provision that seamen aboard
the ship had to be nationals of the home nation. Laws that would guarantee labor union
representation of ship-board workers were relaxed or eliminated in some cases. And a
new taxation code, both for corporate and income taxes, was drafted for the new second
registry. All of these measures meant that the second registers would allow the ship owner
to keep his ships under the national flag of the home state or under that of an overseas
dependency. At the same time, the owner could operate his ships at costs that were
competitive on the world market. This was especially the case because the new second
registries allowed the hiring of all or most of the crew on an international basis, often from
low-income states like the Philippines. In most cases, but not all, domestic labor unions
as well as the ITF found the creation of second registries a highly anti-union practice.
However, in some few cases, organized labor actually endorsed the new systems.3

3. Define “FREEDOM OF THE SEA”. Discuss exhaustively the reasons for the
erosions of “FREEDOM OF THE SEA”. Formulate your own definition of “freedom
of the sea”. Defend your concept.

Defined FREEDOM OF THE SEA.

The Freedom of the Seas was based upon the premise that the open or high seas
provide a necessary means of communication between nations and that free use of it is
indispensable for international trade and commerce. Ownership of the open seas is
common to all and cannot be held other than by all nations; or whether the high seas are
such that they cannot be owned at all (res nullius). The high seas have to be distinguished
from those parts of the sea over which it is accepted that the coastal states have a degree
of control and jurisdiction.

My concept of Freedom of the sea

Freedom of the seas is the ability for all to navigate the oceans and to enter and
leave ports of other nations without let or hindrance. There is also the much wider
connotation, namely, the freedom to trade one’s ships without interference in commercial
operations by others, particularly foreign governments.

4. Discuss exhaustively the following doctrines and effects in relation to collision:

a. Doctrine of “in extremis” – it means that the action of the burdened vessel alone can
no longer avert collision. Positive action by the privileged vessel is necessary.

The in extremis doctrine is commonly thought to include three concepts:

(1) a rough definition of the “in extremis situation,” by which is meant a situation where
two vessels have approached so closely that collision can no longer be avoided by one
ship acting alone;

(2) a release from strict compliance with the Collision Regulations when necessary to
avoid immediate danger, and

(3) the more lenient standard of care applied in the subsequent legal proceedings to an
innocent vessel that was confronted with a sudden emergency, which did not allow time
for a carefully considered decision before taking avoiding action. It should be noted that
the second and third consequences do not follow in all extremis situations. Collision might
be avoided while still complying with the rules, obviating a departure (particularly where
the rule itself is qualified by language such as “if the circumstances of the case admit”).
Second, it might be the case that neither of the vessels were “innocent” or lacked the time
necessary for a reasoned decision, thus disqualifying both from the more lenient standard
of care.

b. Doctrine of moderate speed – it means the speed of the vessel which allows to

stop half the distance of visibility.

c. Doctrine of Good Seamanship - diligence or precaution required by the ordinary

practice of seafarer such as compliance to the rules. Violation of rules is poor

seamanship. According to consistent jurisprudence. “No man is infallible; there are

certain errors for which the law does not hold a navigator liable; but he is liable for an

error of judgment which a careful and prudent navigator would not have made”.

It has been often said that rules need to be followed more in the spirit rather than in

the letter. The same is true about the sea rules of the road and there is a rule known as

Rule 2, which is an overriding rule, often called the "Rule of Good Seamanship". It says

that in addition to all the Rules, the customary practices of good seamanship must be

followed, especially when there are special circumstances, when it allows a departure

from the strict language of the Rules to avoid immediate danger – the avoidance of

collision being of prime importance. Strict literal compliance with the Rules may not be a

defense if a collision occurs. The rules primarily lay down the responsibilities between

vessels when they meet at sea, i.e. which vessel should keep out of the way of the
other (the give way vessel) and which should do nothing except maintain its course and

speed (the stand on vessel). This responsibility also extends to type of vessels in the

encounter when a risk of collision may exist- e.g., a normal power driven merchant ship

should keep out of the way of a vessel restricted in her ability to man oeuvre for any

reason.

d. Doctrine of last Clear Chance – where negligent acts of two parties are not
contemporaneous since negligence of one party succeeds the negligence of another by
appreciable interval, then the law is that the person who has the last fair chance to avoid
the accident fails to do so thereby chargeable of the consequence without reference to
the prior negligence of the other. This is not applicable to vessels for reason of Article 827
of the code of commerce.

5. What are the factors for the increased demand for shipping services? what are
the determinants of the supply of shipping services? Discuss comprehensively.

The factors for the increased demand for shipping services are:

1. THE WORLD ECONOMY

The world economy is the most influential factor for shipping demand. However,
there is more to the statement above than meets the eye - one of the facts about world
economy is that it has, what is known as business cycles (Stopford, 1991). Their definition
being that world economy moves in cycles of 4 to 5 years, with alterations of increases
and decreases in the degree of economic growth. This results in shipping demand
developing not smoothly but in chains of periods of high and low advance. For example,
until the early 1970s speed of growth of industrial output was lower than speed of growth
of shipping trade; whereas in 1970s the shipping trade increased more gradually.
 Another interesting factor about world economy’s influence is that industrial growth
causes changes in demand for bulk commodities (e.g. iron ore). Industrial growth may be
influenced in future by new number of countries - as new countries will come into view or
some countries may weaken in significance. Japan is an example of such a process - it
came out as an industrial economy during 1960s, which resulted in Japanese imports
generating 54% of the increase of the world deep sea dry cargo trade between 1965-
1972 (Stopford, 1991).

One of the possible future trends in shipping industry would to be to expand and
improve its waterways - one of the examples that will affect future of the industry, is
Russia. Russia is about to open up its enormous and abandoned river navigation system
to Western shipping. These news have already attracted much attention from Western
ship owners - they are waiting to develop opportunities of various Caspian trade and in
the longer run to participate in Russia’s industrial future potential (Thomas Ország-
Land, 1999).

2. SEABORNE COMMODITY TRADES

Effect of sea borne commodity trades on the demand in shipping industry can be
either short or long-term.

The short-term type is influenced by seasonal stimulus and stock building. When
seasonal effects take place it is usually agricultural commodities that are the subject of
change (during harvest time). For example, in grain, trade exports from US Gulf decline
during summer and rise in September - when the crop is harvested; therefore, achieving
50% of increase in shipping activity between September and December. Another example
is oil trade which has its series of seasonable variations due to changes in energy use in
Northern hemisphere - resulting in more oil being shipped in autumn and early in winter
than during summer and spring seasons.
 The other type of short-term component is stock building, meaning that any
particular industry accumulates stock in case of future scarcity or rise in prices. For
example, mini tanker booms in 1979 and 1986 - instigated by brief stock building in the
world oil industry.

One of the examples of long-term influence is that of the OPEC (Organization for
Petroleum Exporting Countries) oil price hike in 1973, when tanker industry has been
running at a loss (and dry cargo had short phases of success) right till the 1990s recovery.
Corporate performance of shipping management companies during that time was low,
which resulted in bad news for shareholders and providers of debt. Some well-known
names in the industry have even gone bankrupt. As a result, most of the ownership was
transferred from single owner operators and private family companies to banks, cargo
movers and governments.

3. AVERAGE HAUL

Meaning that the demand for shipping is generated by the distance over which the
goods are transported. For example, a ton of crude oil shipped from the Middle East area
to USA, generates a higher demand for shipping then the same ton going to Europe. So
that, crude oil cargoes from Middle East going to powerhouses in Japan, USA and Europe
increased tonnage carried by sea. Long haul steam coal and ore cargoes from South
America, South Africa and Australia to industrial consumers had similar effect.

4. TRANSPORT COSTS

The transport cost factor is of a very important nature to the whole shipping
industry, as according to European Commission (1985), transport costs added up to 20%
of the cost of dry bulk cargo within Europe. Due to the new technologies, bigger ships
and therefore better efficiency, transport cost has been considerably reduced over the
last century.

5. POLITICAL EVENTS

Political changes tend to affect demand in shipping very abruptly and without
warning. Events like that may range from war and revolution to non-straightforward
governmental decisions. One of the non-violent examples of political problems:
developing countries - members of UNCTAD (United Nations Conference on Trade and
Development) had attempted to take control over local shipping, affecting local freight
taxes and therefore changing freight patterns and increasing complication.

However, not all events have direct effect on shipping industry - usually indirect influence
is more important. Example being Suez Canal proximity to Israel and Egypt wars and
significance of this route to the course of trading.

6. Define Special Area. What are the criteria in declaring a certain place as a special
area?

Special areas mean sea area where for recognized technical reasons in relation

to its oceanographical and ecological condition and to the particular character of its traffic

the adoption of special mandatory methods for the prevention of sea pollution by

oil/NLS/garbage is required.
Special areas for OIL:

1. The Mediterranean Sea Area

2. The Baltic Sea Area

3. The Black Sea Area

4. The Red Sea Area

5. The Gulf of Aden Area

6. The Atlantic Area

7. The North Sea and its approaches

8. The Gulf Area (Persian Gulf)

9. Irish Sea and Its approaches

10. Celtic Sea and Its Approaches

11. English Channel and Its approaches

12. Part of Northeast Atlantic immediately to the West Ireland

Special Areas for Noxious Liquid Substance:

1. Antarctic Area
Special Areas for Garbage:

1. The Mediterranean Sea area

2. The Baltic sea area

3. The Black sea area

4. The Red sea area

5. The Gulf area

6. The North Sea area

7. The Antarctic Area

8. The Wider Caribbean Region

Special areas for SEWAGE:

1. The Baltic Area