Change strategy and management organization of Shipping Company as respond to severe market conditions

¦ Credit Crunch: The Financial Crisis has led to a Credit crunch because of the risk aversion policy adopted by Global banks to bolster or maintain Capital reserves, whereby it is still extremely difficult to raise new debt particularly from the International Banks who have been traditional Lenders to the Shipping Industry. If this situation continues further for a sustained period, the Company may not be able to raise new credit facilities or renew existing credit facilities required by the Company for capital expenditure, i.e. for purchase of ships to maintain or expand the Company's fleet of ships. As explained hereinabove, the Company already has credit facilities in place to fund the newbuilding orders and is also in discussions with for renewal (extension of availability period) of existing credit facilities (and has also recently secured a new credit facility with a longer availability period) to fund additional second-hand vessels which the Company may want to buy.

Formation of crisis management strategy by PSL

Precious Shipping PCL continues to own and operate its ships on a tramp-shipping basis in the small handy size sector of the Dry Bulk International Shipping market. PSL has continued its business strategy started from year 2004 to enter into long term time charters (Period Charters) at reasonably high freight rates, whenever possible, for periods ranging from 3 months to 5 years at opportune times. This policy was successfully applied right until the third quarter of 2008 after which the market dropped sharply due to which it was not possible to renew or enter into new period charters thereafter. During the year 2009, the Company has managed to enter into period charters for a few existing ships. However, the Company has fixed the newly acquired secondhand ship, Rojarek Naree which joined PSL fleet on 22nd December 2009 for a minimum period of 12 months to a maximum period of 28 months depending upon an option to be exercised by the Charterer within 90 days from the commencement of the Time Charter. The Company has also signed contracts for 3 definite and 1 optional new custom-built cement carriers. As a result of the sustained strategy of entering into long term charters with solid Charterers, the Company's forward book still looks very healthy as under (Figure 7).

Figure 7. PSL 's forward book

Total Days in above chart is based on existing fleet of 25 ships as at the end of the year 2009. The Company has not assumed any ships acquired except the new ships ordered by the Company (and the 3 cement carriers) which are assumed to be added in the fleet from their respective delivery dates. However 4 old ships which are more than 25 years old are assumed to be sold / scrapped in year 2010.

It will be observed from the above chart that there has been a continuous reduction in world fleet size until 2003. However, during the year 2004, a net increase of one ship to the world fleet took place as compared to that at the end of year 2003. During the years 2005, 2006, 2007 and 2008 46 ships, 9 Ships, 80 ships and 55 ships respectively were added to the world fleet. This is on account of a slowdown in the scrapping rate, the reason for which, was the higher rates witnessed in the freight markets during the years 2004-2008, as compared to the immediately preceding years. However it is to be noted that since the 4th quarter of 2008 the scrapping rate increased due to the sharp downturn in the shipping market, thereby reducing the supply rate and only net 55 ships were added in 2008 as compared to 80 ships in year 2007. During 2009, as expected, scrapping rate increased considerably and there was a net reduction of 93 ships in the world fleet size thereby reducing it to 3,126 ships at the end of 2009. Shipyards have received very few orders for new buildings in 2009 as compared to 2008 and a number of orders were cancelled. There was an increase in average slippage between projected and actual delivery of new buildings during 2009 as compared to 2008.

Although for the year 2010, the supply of new ships is slated to be marginally stronger than the immediate past but in the next three years just about 5% more new ships have been contracted to be delivered as against the existing fleet, which has 49.75% of the fleet over 27 years of age. Therefore, the supply side in sector appears to be quite favorable as explained hereunder.

Over 54% of the world fleet in PSL's sector being greater than 20 years of age, very low scrapping during the most recent super-cycle until 2008 has resulted in an overhang of old tonnage still in operation. This has left the average scrapping age in recent years closer to 30 years rather than 27 years of age. Therefore, it is expected that the scrapping rate should pick up pace if new building ships start adding to the active fleet at a higher rate and the freight markets remain depressed for any significant period of time, thereby, providing a natural self-correcting factor to balance supply and demand, consequently putting resistance to a continuous and sustained fall in freight rates as witnessed during the latter part of year 2009.

New ship building contracts

The Company entered into 12 contracts for construction of 12 handysize bulk carriers of a design deadweight size of 32,000 DWT (these ships are actually allowed to carry 34,000 DWT and therefore, these ships are classified as 34,000 DWT size) with ABG Shipyard Limited, India (ABG or Builder) on 20th July 2007. Each ship is a modern semi box-shape, open hatch, and double hull type, bulk/log carrier. The Ships, including machinery and equipment, will be constructed in accordance with the rules and regulations of Nippon Kaiji Kyokai ("NKK" or "Classification Society"). The Company also entered into 3 contracts for construction of 3 Supramax bulk carriers of size 54,000 DWT with ABG Shipyard Limited, India on 14th September 2007. Further to the orders of 15 ships explained above, the Company also entered into 3 more contracts for construction of 3 Supramax bulk carriers of size 54,000 DWT with ABG Shipyard Limited, India on 11th February 2008. Each ship is a modern double hull type bulk carrier. The Ships, including machinery and equipment, will be constructed in accordance with the rules and regulations of the American Bureau of Shipping ("ABS" or "Classification Society"). The Classification Society has assigned a representative to the shipyard for supervising the construction of the Ships. Final decision on seaworthiness of ships and adherence to specifications will be determined and certified by the Classification Society. The Company also has its full time designated employees at the shipyard to monitor progress of the construction.

The details of cost, schedule of installments, drawdown of loan (as explained in 6.3 hereunder) and expected date of deliveries are as follows (table 9)

Table 9 - New ship building contracts

Aggregate price of approximately USD 588.00 million (or approximately USD 30.00 million per handysize vessel and USD 38.00 million per supramax vessel). The contract price will be paid in 5 installments of 20% each, with each installment (except the fifth) paid only on the submission of a bank guarantee in favour of the Company, guaranteeing the refund of each installment (with interest at 7.5% per annum) in case of a failure by the shipbuilder to perform per the contract. The vessels are expected to be delivered in the years 2010 to 2013. However, if the shipbuilder can deliver the vessels earlier, the Company has to pay an aggregate sum of incentive amount not exceeding USD 18.52 million to the shipbuilder for all the 18 vessels.

During the year 2009. the Company made payment of installments to the shipbuilder, amounting to USD 86.00 million or approximately Baht 3.007.34 million (2008: USD 44.00 million or approximately Baht 1.468.44 million). All of these have been financed by overseas and local commercial banks and the amount of borrowing costs capitalised during the year ended 31 December 2009 was approximately Baht 63.73 million (2008: Baht 6.96 million). The weighted average capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation was 1.45% - 2.02% (2008: 4.74%- 5.14%).

Details of installments due according to the stage of completion of 32K DWT and 54K DWT Ship are represented in table 10.

Table 10 - Details of installments

Each of the above installments (except the last installment) shall be paid only on the receipt of a Bank Guarantee from a reputed bank, for an equivalent amount, to guarantee the refund of the installments in case of a default by the Builder.

Cement Carrier Contracts:

MOU and Time Charter Contracts with Ultratech Cement Limited.

The Company signed a Memorandum of Understanding (MOU) on 14th October 2009 and Long Term Time Charter Contracts (the "Charters") on 2nd December 2009 with Ultratech Cement Limited, Mumbai, India (the "Charterer") for 4 (3 definite ships, plus an additional ship at Charterer's option) new cement Carriers (the "Ships") to be delivered per details hereunder:

Delivery Schedule:

1st Ship - between 30 July 2011 and 15 August 2011.

2nd Ship - between 1 November 2012 and 31 January 2013.

3rd Ship - between 1 November 2013 and 31 January 2014.

4th Ship (if option exercised by the Charterer) - between 1 February 2014 and 30 April 2014.

Description of the Charters:

The Company or its nominee (the "Owners") will own and charter 3 definite Ships, plus the additional Ship (at the Charterer's option to be exercised within 30 April 2011), to the Charterer for a period of 15 years, plus in the Charterer's option, for an additional 5 years' period and further, in the Charterer's option, another 5 years' period (15+5+5=25 years) for each Ship.

Ships:

The Ships shall be new custom-built cement carriers built according to the specifications as laid down and agreed with the Charterer.

Charter Rate:

The Charter rate for the first 15 years' period shall be USD 15,000 per day for each Ship and shall be reduced thereafter by USD 2,000 per day for each Ship, for each block of the 5 years' option period if exercised by the Charterer. Accordingly, if the option for an additional 5 years' period is exercised by the Charterer, the Charter rate for this 5 years' period commencing from the 16th year upto the end of the 20th year shall be USD 13,000 per day for each Ship. Thereafter, if the option for a further 5 years' period is also exercised by the Charterer, the Charter rate shall be USD 11,000 per day for each Ship for this 5 years' period commencing from the 21st year upto the end of the 25th year.

However, in case the Charterer requires the Ships to be registered (flagged) in India, the Owners shall agree to do so, but, in such case, the charter rate shall be increased by USD 2,000 per day for each Ship in each of the above periods as may be applicable. Accordingly, the charter rate in such case shall then be USD 17,000 per day for each Ship for the first 15 years' period and this shall be reduced thereafter by USD 2,000 per day for each Ship, for each block of the 5 years' option periods.

Liquidated Damages:

If the Owners fail to deliver the Ships within the agreed respective delivery schedules as above, liquidated damages of USD 4,250 per Ship for each day of delay shall be payable by the Owners.

Joint Venture with PFS Shipping (Singapore) Pte. Limited (part of the ABG Group):

The Company has entered into a Joint Venture agreement with PFS Shipping (Singapore) Pte. Limited ("PFS") which is a Company incorporated under the laws of the Republic of Singapore and wholly owned by PFS Shipping (India) Ltd., which is part of the ABG Group from India for the purpose of execution and performance of the MOU and the Time Charters as well as other similar business of owning and operating cement carriers in India on equal sharing basis.

Objectives of the Joint Venture Agreement:

For the purpose of execution and performance of the MOU and the Time Charters as well as other similar business of owning and operating cement carriers in India, PSL and the ABG Group (through its group Company, PFS) have entered into the Joint Venture Agreement. It is also expected that the strong position and standing of the ABG Group in India shall allow PSL to secure similar business from other cement manufacturers in India in the future and the ABG Group could provide ready access to a reputed shipbuilder in India (namely, ABG Shipyard Limited, India ("ABG"), which is part of the ABG Group) to build the purpose-built specialised Ships (cement carriers) required for the performance of these and similar future contracts.

Material Terms and Conditions of the Joint Venture Agreement:

PSL and PFS shall incorporate with equal ownership, a special purpose joint venture Company in Singapore with the name "Associated Bulk Carriers Pte. Ltd." (the "JV Company"). The MOU shall be novated from PSL to the JV Company.

The JV Company shall order the Ships from ABG at an expected price of USD 28.5 million per Ship. In this regard, the JV Company and ABG shall enter into a newbuilding agreement on the standard and normal terms and conditions customary for this kind of transaction.

The JV Company shall form wholly owned special purpose companies in Singapore (the "SPV") (if required) to own and operate each of the Ships on delivery. The respective SPV shall be nominated as the ship owner under the Time Charters as and when the Ships are delivered and the performance under the Time Charters takes effect.

The entire management of the affairs and business of the JV Company, the SPV and the Ships shall be the responsibility of PSL.

In the event that the extension option(s) under the MOU and/or the Time Charters is (are) not exercised by the Charterer, PFS (or its nominees) shall then charter the relevant Ship(s) at a daily charter rate reduced by USD 2,000 per day per Ship, which is lower than that would have been otherwise payable by the Charterer if the options were exercised. If the extension option(s) is (are) not exercised, PFS shall also have the right to purchase the Ship(s) at a purchase value based on the net present value of future cashflows computed at the aforesaid charter rate.

The Ships are expected to be funded by bank debt to the maximum extent possible with the balance to be contributed by both PSL and PFS equally.

PSL or its nominees shall have a right to charge the JV Company (or the relevant owning SPV) an all-inclusive Ship management fee at the rate specified in the Joint Venture Agreement plus actual cost of management. Further, while the Ships are under construction, a certain sum shall also be charged by PSL (or its nominees) as supervision fee at the rate specified in the Joint Venture Agreement over the construction period.

Buying of secondhand ships:

The Company has sold and delivered 20 Ships in 2009 as explained in 3.4. This has resulted in a decrease in capacity and if the Company wants to maintain capacity in terms of fleet size and age, the Company has to continuously follow a program of replacement of its older (scrapped or sold) ships. In line with the rejuvenation plan, the Company has bought one secondhand ship in 2009 per following details:

Details of vessel: The Name of the ship was M.V. "ROSELLA" which is renamed as the Rojarek Naree. The vessel is a 29,870 Deadweight Tonnes (DWT), bulk carrier, built in Japan in 2005. This vessel was delivered on 22nd December 2009.

Purchase price of Vessel: The purchase price of the vessel is USD 22.15 million or about Baht 734.27 million.

Sale of old Ships:

Ships have a finite life and as and when the ships reach a certain age, they need to be scrapped. Accordingly, the Company sold 21 Ships out of which 20 ships have been delivered to its buyers in year 2009 and 1 ship was delivered in January 2010.

The details of 20 Ships sold and delivered are as follows (table 11)

Table 11. The details of 20 Ships sold and delivered

Future Fleet Rejuvenation plan

The Company's short/medium term plans for ordering new ships or buying second-hand ships after this are opportunistic. The Company would continue to pursue attractively priced secondhand ships as and when opportunities present themselves. Accordingly, the Company has already bought one ship as explained above. In the meantime, the Company intends to sell/scrap 4 more of its older vessels still remaining after the sale of 21 ships explained in 3.4 (aged over 20 years) as and when they become free from their respective period charters in order to avoid any negative cashflows from these old ships in the present market conditions. At the same time, it appears that the Company should now get some opportunities to buy very reasonably priced second-hand ships and to this end, the Company is constantly on the look out for younger, better geared, modern Ships.

Discussion of Findings

2009 year was ushered in with the Global banking crisis in full swing. Lehman Brothers collapse was followed by the banking system suffering what was tantamount to a coronary attack. Banks refused to lend to each other and consequently their loans to companies froze. By February, the financial crisis had become a severe global recession, with a collapse in trade finance and a precarious environment reminiscent of the 1930s Great Depression. Central banks poured liquidity into the banking system and Governments accepted fiscal deficits of an unimaginable magnitude to pump prime their respective economies. Decline in global trade reached its nadir in February and March. Dry bulk shipping felt the direct impact of this financial melt-down in what has been the most brutal year for shipping in recent memory. However, the hunger for commodities from China due to the massive fiscal stimulus package of USD 586 Billion has, almost single-handedly, helped keep the dry bulk market afloat throughout most of the year and led to a rebound in rates. In Ship Finance, 2009 could be categorized as the year of procrastination. As a result, the huge problem of semi-financed, yet over-ordered, new buildings will be passed on to 2010 for some tough decision making. Ship owners, bankers, and shipyards have hovered in a state of inaction, resisting the downward re-pricing of existing new buildings to reflect current market conditions. Bankers have been in a particular quandary, not wishing to enforce loan-to-value covenants in the worry that they will cripple the weakest of ship owners. The hope, of course, is that waiting will be a sound strategy, and that re-pricing will begin once the market commences an upward trajectory. The waiting has had the effect of stalling any discovery of a market bottom in terms of ship-pricing. This 'delay and pray* attitude has been ably supported by the unexpected strength in the BDI with the 'delaying* of hard decisions looking very wise with hind-sight.

The Baltic Dry Index (BDI) ended the year at 3,005 points, about 390% higher than from where it had started the year at 773 points, after having peaked twice at 4,291 points on tne 3'c June 2009 and at 4,661 po;nts on the 19th November 2009. The main reasons for the strength of the index can be attributed to the huge increase in Iron Ore demand from China (-42% above 2008) resulting in inordinate amount of congestion (by the end of 2009, global port congestion had reached record levels with nearly 8% of the entire dry bulk fleet at anchorage) especially in the Capesize sector. Coupled with the almost 100 MMT of Coal that China imported and the ton-mile impact of this change, from being an exporter to becoming a very large importer, was another factor supporting the index. Finally, the dogged financial systems resulting in trade imbalances being exacerbated leading to under-utilization of ships was the unexpected item that helped support the index. It would be remiss not to mention the slower than expected delivery of new ships from yards which gave a big helping hand in supporting the index.

The BDI average for the year was 2,617 points, for a 41% decline compared to the average of 6,390 recorded in 2008. To bring all this into some sort of time perspective, tne long term average for the BDI (1985 - 2003) prior to the recent Bull Run was 1,358 points; including the Bull Run period (1985 - 2009) was 2,109; and during the Bull Run (2004 - 2009) was 4,514 points. With rate volatility increasing, long term contracts were only as good as the signature of the counterparty. Many large charterers were loath to honour these long term contracts and were using all means, legal and some not so legal or ethical, to wriggle out of their commitments. The expected large scale of bankruptcies was kept at bay thanks to the BDI's unexpected strength through the year. PSL suspect that 2010 and, maybe, 2011 will not be so kind with many entities being forced to the wall as time progresses. Describing the shipping markets as 'expecting the unexpected* may not be prescient but 'expecting the expected' over tne next two years may turn out to be a much more accurate description of the future.

To a large extent, PSL`s strategy of booking long term charters for ships, at reasonably high rates, has therefore been vindicated yet again. The earnings per day per ship during 2009 for fleet continued to refect strategy of avoiding the dramatic changes tnat would nave been tne case had earnings mimicked the BDI. For 2009, PSL averaged earnings of USD 13,459 per day per ship which was just marginally lower with forecast of USD 14,000 per day per ship. This figure compared favourably with past results prior to 2008 of USD 13,147 per day in 2007 and of USD 11.387 rar dav in 2006.

With the Freight Markets hitting all time highs and plunging to a two decade low in 2008 with 2009 emerging as a year characterized by freight market confusion, most prudent companies that have very little debt on their balance sheets and with a lot of cash in their pockets would likely consolidate the industry. This could happen through the judicious purchase of second-hand tonnage at historically low prices or via mergers and acquisitions. By whatever means consolidation takes place, it is to be welcomed, as it can only make life a bit better for the participants in this industry.

Operating Costs continued to rise during 2009 but the unprecedented plunge in the global shipping market in 2008 had a dampening effect on some of the cost components in 2009, which PSL expect will continue for some more time into 2010. Notably, Drydock, Special Survey, repairs, maintenance, stores and spares costs during 2009 have eased off somewhat for the entire industry, with the most visible effect being on the dry-docking & repair expenses. The repair yards had fewer ships coming for repairs and so the ship-owners faced minimum, if any, delays in waiting. Also, the basic cost of steel came down and that resulted in a lower repair bill. PSL expect this situation to continue at least for the first half of 2010.

Lubricating oil press remained steady n 2009 and the suppliers withstood pressures to reduce prices n the face of the difficulties brought on by the economic slump world-wide. Suppliers have already started talking of price increases in 2010.

With the overall drop in the number of ships trading, and more shipyards reporting cancellation of orders for building new ships, the demand for officers and crews has reduced. However, this did not result in any appreciable reduction in crew costs since the costs remained at 2008 levels for most owners, but a few owners, mainly whose ships are manned by third-party crewing agents, may have taken advantage of the slump in demand to beat down crew-costs. Any savings on this count is likely to be short-lived and, more importantly, may well be counterproductive since the adage you get what you pay for applies very well to this component of industry, and indiscriminate cutting down on crew costs cannot but reflect on the quality of manpower.

Vessel values remained low during 2009 which helped to control a part of the insurance premium. PSL expect values to remain at these levels, with minor variations, during 2010 as well.

Commercial pressures on owners/operators to try and keep all operational delays to a bare minimum, has only increased due to the depressed freight market conditions; this, coupled with the increasing work-load on Pilots & tugboats, has increased the likelihood of casualties, mostly collisions and groundings. While the loss/damage caused by these casualties is covered by insurance, it results in an increase in the premium payout for Company even when vessels have not had an accident. This is because of the mutuality principle of Protection & Indemnity (P&l) Insurance which is unique to the shipping industry, by which all the major P&l insurers share the costs of marine accidents through well-defined principles.

Finally, all the insurers have been impacted by the recent financial crisis and can be expected to raise premium rates to take care of the drop in their investment income. On this basis, PSL expect the insurance costs to harden, not with standing the emphasis Company place on safety of vessel operations, both, on the vessel side, as well as the environment. For 2009, average cperating costs per day per ship have gone up by about 5% over the previous year; PSL do not have figures for the industry norm, expected that they will be still higher than Company's based on past experience.

Conclusions and Recommendations

With the changed business climate of demand for shipping having virtually fallen off a cliff the environment for the next 2 years is going to be extremely challenging. PSL's strategy of having booked longer term contracts in the past is worth its weight in gold today. The demand destruction, that has taken place in large part due to the snaky position of the financial infrastructure of the world, has been reversed to a large extent by the massive and globally coordinated Government bailouts as well as stimulus packages liberally employed during 2009. Most importantly, banks need to reopen to the world their collective windows on trade finance which they had shut at the peak of the financial crisis in the middle of 2008, and which have still some way to go before they could be termed as 'normal'. The danger marker is, of course, the reaction of the world GDP when the life-support-drug to the economy of massive coordinated Governmental stimulus starts to wear off. The fear, which is still largely in the beckground, is that the world GDP may stumble into a double-dip recession which would have an adverse impact on demand growth. These will be the key trigger points to watch out for and that will indicate if better times are just around the corner.

Due to the extremely favourable freight markets of the last 5 years, most ship-owners have kept their older ships operating well beyond their useful economic life. Under normal freight market conditions, approximately 20 to 25% of the existing world fleet should have been scrapped. Under the present market conditions, this figure could rise substantially and would only be constrained by the available scrapping capacity in the world. Those ships that are too young to be consigned to the scrap heap will be laid up.

With respect to the approximately 57.3% of brand new Dry Bulk ships scheduled to be delivered over the next 4 years to end of 2013, the financial crisis has, if to believe the various press reports on this subject, already eliminated approximately half that number. The balance half would be subject to delays that would not be considered normal by any standards. An indication of what could expected is evident from the slippage figures of 28.4% in 2008 increasing to 47% for 2009 and expected to cross the 50% mark quite easily in 2010.

The supply side looks about ready to come into balance with the demand side of the equation in a couple of years time just about when the banks should have got their act together and could see another bull run in the freight markets post 2011. 2010 and 2011 will therefore remain extremely challenging years where even the most astute and conservative ship-owners' best laid plans will be sorely tested.

Fund raising will be one of, if not, the biggest challenge that ship-owners will have to face during 2010 and 2011. In the past 5 years, shipping banks have assisted ship-owners to purchase something like USD 160 to 175 Billion worth of secondhand ships. Due to the rapid fall off in values, these ships have lost around 50 to 60% of their values from the peak reached in the first quarter of 2008. Most, if not all, such loans would have breached their loan to value covenants. This would allow the banks to call such loans into default and accelerate the prepayment of all outstanding loans. If such ships have got ong term charters attacned with good quality counterparties, then the banks may hesitate to call these loans into default though they would try and garner all the cashflow from such contracts to normalise the loan to va.je covenants as soon as possible. If such ships are also exposed to the spot markets, the banks would be in serious trouble with cashflows being unable to cover interest and principal repayment and the loan to value covenants having been breached.

Financial procrastination which characterised 2009 with a "see no defaults, do no foreclosures, hear of no defaults" attitude may be something that will change dramatically in 2010 and 2011. This is when the banks would call such loans into default, seize and auction the ships at the best possible price to recoup some part of the loans that they had made to the ship-owner during the purchase. This would stress out the balance sheet of the banks and, most likely, make the ship-owner go bust. If such a ship-owner has new ship buildings on order, which is more likely than not, and has got funding commitment from his banks, all such financial support would evaporate leaving the contract to build the new ships invalid and the financial stress would pass on to the shoulders of the shipyards and their banks. The shipping industry at present is just seeing the emergence of its own version of sub-prime toxic waste that threatens to engulf ship-owners, their banks, the shipyards and their tanks.

This financial stress in the maritime world is what has given rise to the myriad of press statements emanating from ship-owners and shipping analysts around the world that the mountain of new ships on order for delivery between now and the end of 2013 could be just a mirage as more than half of them have already been cancelled. This might be the silver lining to the dark clouds threatening to engulf entire Industry.

Sources

Chan Kim, W. & Mauborgne, R. (2004) Blue Ocean Strategy. Boston: Harvard Business School Press.

Crisis in shipping. Keeping your portfolio afloat. October 2009 from Web site

De Monie (2009) Intermodal Terminals, Mega Ports and Mega Logistics. Dordrecht, The Netherlands: Kluwer Academic Publishers.

De Monie, G. J-P Rodrigue and T. Notteboom (2009) Economic Cycles in Maritime Shipping and Ports: The Path to the Crisis of 2008.

Kaplan R. S. & Norton D.P. (1996) The balanced scorecard: translating strategy into action.

Notteboom, T. and J-P Rodrigue (2009) The Future of Containerization: Perspectives from Maritime and Inland Freight Distribution, Geojournal, Vol. 74, No. 1, pp. 7-22.

Porter, M.E. (1979) How competitive forces shape strategy. Harvard business Review

Rodrigue, J-P, С. Comtois and B. Slack (2006) The Geography of Transport Systems. London: Routledge.

Shipping Industry Fights for Survival. Spiegel, 08/11/2009

The way ahead for transport. Norton rose, September 2009

Appendix 1 Glossary of terms

Average Daily Ship Operating expenses in USD (орех) - Average Ship Operating Expenses per day per ship is computed over a 365 days operating cycle. These exclude depreciation but include amounts amortised per accounting policy (note 4.7 of audited financial statements) for Dry-docking and Special Survey (DD/SSi) expenses and the amortization is included as "depreciation" in the financial statements. Ship operating expenses generally represent fixed costs which include crewing, repairs and maintenance, insurance, stores, lube oils, management cost and amortised portion of Dry-docking and Special survey expenses.

Ship Running Expenses - Ship running expenses in the Financials Statements refer to Ship operating expenses excluding amortised Dry-docking and Special Survey expenses.

Voyage Expenses - Voyage expenses mean all expenses related to a particular voyage including bunker fuels and voyage disbursements at the port. Voyage disbursements include port fees, cargo loading and unloading expenses, canal tolls, agency fees and other expenses at the port. Voyage costs are typically paid by the client (charterer) under Time Charter and by the Company under Voyage Charter. However, when the Company pays the voyage expenses, Company typically adds them while calculating freight rate so that the desired Time Charter rate is achieved had the Company negotiated the Voyage as a Time charter.

Total Ship Operating Cost - Total Ship Operating cost in the Financial Statements means the aggregate of Ship running expenses and voyage expenses.

Average Daily Ship Earnings in USD (TC Rate) - Average time-charter equivalent earnings per day per ship computed over a 35C days cycle. The TC rate is calculated by dividing net Ship Operating Income by 350 days per Ship.

Ship Operating Income - Ship Operating Income in the financial statements means total of Hire and Freight received. In other words, this is total income earned through Time and Voyage Charters.

Net Ship Operating Income - Net Ship Operating Income means Ship Operating Income less Voyage expenses.

Dry-docking and Special survey - The Company must periodically dry-dock each of its ships for inspection, repairs and maintenance and any modifications to comply with industry certification and or various regulations applicable to the Company's ships. Generally each ship is dry-docked every 2.5 years and 5 years to carry out intermediate and special survey, respectively. The Company capitalizes these costs and depreciates over a period of 2 years for dry-docking cost related to Intermediate survey and 4 years for dry-docking cost related to special survey. The depreciation amount of dry-docking and special survey costs is included in Depreciation and do not form part of ship operating cost in the Financial Statements. However, while calculating average Ship Operating expenses per day per ship (Орех), The Company includes amortised portion of dry-dock and special survey cost for ascertaining complete Орех.

Depreciation - The main component of depreciation cost is depreciation on Ships. It also includes amortisation of Dry-docking and Special survey cost as explained above, in the Financial Statements.

Ship Idle /Down Time - Ship idle time refers to downtime (in days) due to technical reasons only and it means the ship was "off-hire" at dry-dock or at sea or port for repairs of a routine nature or in case of breakdown.

Gross Profit - Gross Profit means Ship operating income less Ship operating costs.

Gross Profit Margin - Gross Profit margin means gross profit divided by Ship operating income denominated in percentage.

Administrative Expenses - Administrative expenses include onshore (office) personnel payroll costs, office rent, legal and professional expenses and other expenses of an administrative nature. Administrative expenses in the financial statements also include cost of personnel employed for technical management of ships. However, for calculating average Ship operating expenses per day per ship (Орех), such relevant portion of administrative expenses is considered and included in the Орех as Management Fees.

Appendix 2 PSL's corporate structure

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