¡¡¡¡Shipping companies often expand their capacity through ship purchases or by taking out chartering agreements. However, the debate over which is the most cost-effective strategy has continued for several decades.

¡¡¡¡Charters: More flexible

¡¡¡¡As the popular saying goes: "Buying a ship is better than building one, but neither option is as wise as chartering." Largely because of their flexibility, charter agreements have become gradually accepted by shipping companies, who are switching their influence over the market from ownership to controlling actual capacity. Both COSCO and China Shipping Group are now both advocates of the practice.
¡¡¡¡By Feb. 28th, 2007, COSCO's fleet was in control of approx. 45 million dwt of capacity, of which 22.39 million dwt was owned by the company. For the first time the majority of capacity, some 22.58 million dwt, was being leased. By Feb. 2008, self-owned capacity had dropped further to 22 million dwt out of the 52 million dwt total. According to Wei Jiafu, President of COSCO, last year COSCO's independently-run fleets had double the number of chartered vessels compared with those in self-owned fleets, while charter profits made by independently-run fleets comprise 70% of COSCO's entire main operating profits. The idea of changing from ownership to 'control' was proposed nine years ago by COSCO, when the goal was year by year to increase the company's proportion of ship chartering, to assure an ultimate chartered capacity accounting for two-thirds of the total. Today, the company has not only rapidly enlarged the size of its fleets, but also has achieved significant economic benefits.
¡¡¡¡As for China Shipping Group, it is now devoted to fuelling its ship leasing business to optimise fleet structure, expand its fleet size as well as improve its overall fleet strength.
¡¡¡¡Why makes ship chartering so popular in the current market? A Clarksons professional said that compared with the huge input into buying boats, chartering makes it possible to increase capacity with significantly less capital invested, lowering the financial pressure on many companies.

¡¡¡¡Purchasing: Value-Adding

¡¡¡¡Many shipping companies are now keen on chartering, yet they are the equally competitive in purchasing as well as shipbuilding.
¡¡¡¡And the trend prevailing in the market is that most companies would rather be a direct owner than simply be a charterer.
¡¡¡¡North China Shipping Co. Ltd. (North Shipping) was founded in Hong Kong in 1992. Originally a small charter broker, it has since developed into a shipping operator specialising in international bulk cargo transport. As a shipowner, North Shipping is the charter department of its parent company Hebei Ocean Shipping Co., Ltd. (HOSCO) and, as a ship operator, there is close contact with worldwide shipowners from both the prompt charter and the long-term charter business. With North Shipping¡¯s successful market operations, HOSCO now keeps in control more than 100 ships, together accounting for more than 10 million dwt.
¡¡¡¡Clarksons has its own comments: in the current market, the constant competition between buyers and charterers has pushed higher first rents then shipping prices, conversely, higher prices also accelerate soaring rents. In the short term, chartering requires less investment but returns considerably more income, which charterers may deem relatively economical. But under such circumstances, the value-added fixed assets for boat owners would be something to which chartering can never compare.

¡¡¡¡Charter or purchase?

¡¡¡¡Firstly, the answer to this question cannot be separated from an analysis of the fixed costs involved. In the cost of a self-owned ship, fixed costs take up the larger proportion. Take dry bulk carriers for example, where fixed costs usually account for 70% or more of the total, and of which more than 60% is for loan interest, ship depreciation, and similar capital-related costs. Such a higher fixed cost results in a bigger coefficient in ship operating and a higher risk in business.
¡¡¡¡After the daily assets cost of purchasing a ship is calculated, shipping companies will compare it together with the curves of regular ship rents as well as the average regular ship rents, then they will be able to see the difference between purchasing and chartering. Weighing the pros and cons, they will make appropriate decisions.
¡¡¡¡According to statistics, about 48% of the regularly leased ships have higher regular day-to-day costs than those self-owned ones, and the reverse situation is true for the remaining 52%, put it another way: regular leasing offers more advantages, and is therefore more appealing to shipping companies who intend to expand their fleet capacity.
¡¡¡¡Nevertheless, before chartering, other factors including ship size, type, container capacity and tonnage need to be considered as well. Observers in the container carrier leasing market have pointed out that it is easier to keep balance of average daily costs for a smaller container carrier, however as the carriers¡¯ models grow this may become increasingly difficult. Evidently, to charter lower-capacity container carriers will be beneficial for container liners. Meanwhile, the more capacity a container carrier has the more daily cost will be saved for those buyers.

¡¡¡¡However, there are still other factors to be considered.

¡¡¡¡For a shipping company, to possess more ships does good for maintaining stable fleets of their own. In a positive market situation, shipping companies have a large degree of autonomy and thus enhance their competitiveness; on the other hand, in the low shipping market, self-owned ships will probably lead to operational difficulties due to the high production cost as well as maintenance costs.
¡¡¡¡Another factor to be careful about is the number of ships supplied in particular periods.
¡¡¡¡Market demand is ever-changing, when there is growing volume of goods, shipping companies have to accept more and more expensive ship rent to meet customers' increasing demand for capacity. Meanwhile, self-owned capacity by shipping companies can struggle to meet changing market demand, in spite of the fact that, from a financial point of view, using as many self-owned ships as possible would be more beneficial. This is also because it is impossible to predict precisely the growth rate regarding demand on availability. So from the perspective of capital operation, a number of shipping companies will sell out some of their own ships by auction, and then a small portion of the funds collected will be used to lease the same number or even more of ships. As a result, rather than being reduced, the total fleet capacity can be increased.