Chapter 7: An Investigation into the Effect of Risk Management on the Profitability of Shipping Investment and Operations
Amir H. Alizadeh and Nikos Nomikos 7.1 Introduction Shipping is an integral part of the transportation and logistics network and has always been considered as one of the most volatile industries, where agents are exposed to substantial financial and business risks. These risks emanate from fluctuations in freight rates, bunker prices, the price of the vessels, and even from fluctuations in the level of interest rates and exchange rates. All these factors affect the cash flows of shipping investment and operations and, as such, have a profound impact on the profitability of shipping companies, as well as their business viability.1 The key to long-term survival in the volatile and uncertain environment of shipping markets is financial performance and, in particular, the stability of cash flows from operations, over the different phases of the shipping cycle. During prosperous periods for shipping – when freight rates are at high levels and owners earn premium rates for chartering their ships – there is always an availability of excess cash. The challenge in this case is to invest the cash wisely for future growth and a commercial return on capital. In recessions, the challenge is to keep control of the business when the market is trying to force surplus capacity out of the system by controlling the costs more tightly and monitoring the cash flows carefully (Stopford, 2008). Although shipowners have very little control over the freight rate they receive in the market – which is determined by market forces – there are various ways of securing a...
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