Maritime Economics - History of Sea Trade PDF

Maritime Economics ================== As productivity increases and businesses produce more goods than they are able to sell locally, they usually begin to seek new markets, on top of providing this, shipping also is more efficient, allowing for economies of scale and exploiting of the integrated transport systems which we now have today. Ships now travel at speeds that land transport cannot match due to its own limitations ( traffic etc.) The commercial centre of maritime trade has moved west, moving from the Mediterranean / Indian Ocean to the North Atlantic, to the Pacific and finally to the China Sea. At each step , there was an economic struggle between adjacent shipping super centres as the old centre gave way to the new one The first sea trade network was developed 5000 years ago between Mesopotamia, Bahrain and the Indus River in Western India, A river system is an area which supports a particular population of people. Next was the opening of the Mediterranean trade, where Tyre in Lebanon, located at the crossroads between the East and West was the next maritime Super city. The trading network stretched from Memphis in Egypt through to Babylon on the Euphrates about 55 miles south of Baghdad, Tyre lay at the crossroads of this axis and thus grew rich and powerful from maritime trade. - As local resources were slowly depleted they travelled further for trading goods and after discovery of Spain and the settlement of Sades around 1000 BC , the Iberian peninsula became a major source of metal for the economies of the eastern mediterranean, consolidating Tyre's commercial domination in the Orient - The domestication of camels made it possible to establish trace routes between the Mediterranean and the Arabian gulf and the red sea, linking with the sea trade between the Ganges and the Persian gulf. In 500BC, King Darius of Persia was keen on encouraging trade and ordered the first Suez canal to be dug so that his ships could sail direct from the Nile to Persia. Slowly, the more centrally placed Greeks with their market economy took the place of the Phoenician merchants and as Athens expanded, the city imported grain to feed its population. And 200 years later became an active trading area dominated by the 4 principal towns of Athens, Rhodes, Antioch, and Alexandria with the latter 2 growing strong thanks to the trading links to the East through the Red Sea and the Arabian Gulf. - The discovery of silver in Laurion paid for the navy which triumphed at Salamis, liberating the Ionians and guaranteeing safe passage to grain ships from the Black Sea Trade then slowly moved to Rome, as the Roman empire built a widespread trade network, importing minerals from spain and grain from Nothern Africa, to carry this trade a fleet of special grain ships were built. The Byzantine Empire, this was the Eastern Roman Empire with its new capital of Constantinople growing into the Byzantine empire, this was more stable than the fragmented Western Roman Empire and thus it controlled an empire from Siciliy in the West to Greece and Turkey in the East. - Eventually the Arab Caliphate controlled the southern and eastern shores of the mediterranean and since their trade was by land, passage through the mediterranean became safer, re-establishing the sea trade ( This is a clear demonstration of how much shipping and trade depend on political stability. ) Not long after North Europe begun to grow again, the wool industry in England and the textile industry in Flanders and towns began to prosper and thus the rise of Venice and Genoa in the Mediterranean and the Hanseatic League in the Baltic, ( can read up more if interested ) By the 15^th^ century there were 4 developed areas of the world, **China, Japan, India and Europe** with large populations but the only thing which linked them were the tenuous silk and spice routes through Constantinople and Tabriz to China and the spice route through Cairo and the Red Sea from India - Chinese sial technology was way more advanced and they were unrivalled in terms of their wealth and economic development Eventually the Chinese decided not to explore and trade with the world, this left the way open for European seafarers to develop the global sea transport system we have today, shifting the global trade as the nations of Northwest Europe (whose route to the East was blocked by the Ottoman Empire) discovered a route around the Cape. They used their naval superiority to create and control global trade routes. Europe laid the foundation for the global sea trade network, they found a sea route to Asia which was then the source of spices and silk. Christopher Columbus eventually reached the Bahamas ( by sailing west ) which they thought was Asia, the Portuguese which were trying to reach Asia for nearly a century redoubled their efforts The Portuguese established strongholds on the East African coast and in 1510 seized the town of Goa, and Malacca a vital spice emporium and Hormuz on the doorstep of the Persian Gulf, the trickle of trade between the East and West turned into a torrent as cargo ships each carrying a few hundred tons of cargo plied the new trade route around the Cape of Good Hope Later Europe decided to establish sea routes to every part of the globe and turned these discoveries to its advantage, the discoveries allowed for the improving of navigational techniques and purchasing superior weapons, the Americas which were easily reached from Europe by exploiting the Trade winds added a new dimension to the trade revolution which was taking place. The next maritime capital was Antwerp on the River Scheldt, Portuguese who were carrying the huge cost of sending ships to the Indies preferred to leave the wholesale distribution to the established Antwerp merchants who already handled the Venetian trade, other trades followed suit such as the English Merchants, German Bankers , Spanish Merchants , Antwerp thus grew into a financial centre - Once the city was sacked by Spanish troops and the Scheldt was blocked by the Dutch, merchants fled to Amsterdam which rapidly took over as the maritime capital - New raw materials were introduced with the 2 most important being coal, and cotton In the 18^th^ century, London took over with its growing exports of manufactures and a range of financial and shipping services, although the long haul Asian trade was still controlled by the English and Dutch East India Company. Eventually there was a rise in independent ship owning and this change was accompanied by a rise in the number of shipbrokers, marine underwriters and insurance brokers. Whose business was involved in shipping In the 19^th^ century, shipping changed more than the previous 2 millennia, the ships were bigger with better sails and the navigation techniques improved but they were still using wooden sailing ships. There was an industrial revolution in Great Britain and Europe at this time as manufacturing productivity increased in textiles, output could not be consumed locally and trade became a necessary part of the new industrial society, the engineering technology which transformed textile manufacturing also produced a new transport system to carry the manufactures to new markets and to bring in the raw materials and foodstuffs that the growing industrial population required 1. Steam engines freed ships from the dependence of wind 2. Iron Hulls protected cargo and allowed much larger vessels to be built 3. Screw propellers made merchant ships more seaworthy (good enough to sail on sea) 4. Deep sea cable network allowed traders and shipowners to communicate across the world. The shipping industry developed into a new transport system which raised transport speed and efficiency to new heights, the new system had 3 parts 1. Passenger Liners 2. Cargo Liners 3. Tramp Shipping Industrial cargoes appeared on the market in very large quantities and the most important was the coal trade as for many years the coal had been shipped from the northeast of England as a domestic fuel, but in the 19^th^ century large quantities started to be used by industry and as bunkers for steamships/ - The trade in textile fibres, notably cotton, wool, jute also grew rapidly to supply the new textile industries of industrial Britain - After the repealing of the Corn Laws in 1847, the grain trade also increased 17.3 million from 1842 to 1887. The trade initially came from the Black Seas but as railways opened up North and South America, the trades with the US East Coast, the Gulf and South America especially River Plate became equally important - Timber and the trades with the Baltic also grew in 1887 - Global trade not only developed, so did the passenger traffic and mail and there was a tremendous commercial pressure toe speed up these services Steamship technology improved dramatically, the first half of the century sail set the pace and competition between shipyards and the US to produce some of the most efficient merchant sailing ships ever built. This was seen in terms of the fuel consumption ( which was coal back then ) and this would take up the cargo space ( on the Atlantic crossing this would be 40% of the cargo space ). As a result steamers were too inefficient to be economic on the deep sea routes. The opening of the Suez canal in 1869 was well timed to generate a surge of investment innovation. The 650 ton John Bowes built in Jarrow, loaded 650 tons of coal In 4 hours and in 48 hours she arrived in London, she took 24 hours to discharge her cargo and in 48 hours was back in the River Tyne, this was in comparison with the 5 weeks taken by a sailing ship, achieving a 600% increase in productivity. - The iron hulls were more consistently water-tight, reducing cargo damage - The cargo payload was 25% bigger than a wooden ship By the end of the century, ships of 4600 GRT were commonplace. This phase of technical progress peaked In the early decades of the 20^th^ century. Steamships however were expensive to build and operate despite their productivity advantage, the triple expansion steam engines managed to solve the problem by reducing the fuel consumption, steel hulls also allowed for even bigger ships to be built and the opening of the Suez Canal shortened the vital sea route between the East and Europe by 4000 miles with plenty of bunkering stations giving the steamships a major advantage. Of equal importance was the undersea cable network linking the continents, until 1860s international communications were by letter and little was heard of a ship until she actually returned, ships could sit for weeks waiting for return cargo and businesses needed better information about the availability of ships and cargoes and invested heavily in trying to achieve this. 1855 the first Atlantic cable was laid and the signal was feeble and it stopped working after 40 days, this however gave them hope that it could be done, a land cable across Siberia to Bombay was opened in 1865 but messages took 10 days to pass along the staging posts. In 1865 the first successful transatlantic cable was laid by the iron steamship Great Eastern, on the first expedition in 1865 the cable parted in mid-ocean and was lost with \$3 million of investors money ( \$180 million ) - In 1866 the crew laid a new cable, retrieving and repairing the 1865 cable and within a decade a network of cables linked the major cities of the world, by 1897 162,000 nautical miles of cable had been laid , with London being the heart of the network. - This allowed for transport to be planned for the first time As trade grew the complexity of the transportation increased and the market gradually divided into the 3 segments mentioned above, including Tramp Shipping, Cargo Liners, Passenger Liners, Cargo Liners and Passenger liners operated on a fixed schedule and were often designed for specific routes, - Tramps however carried bulk cargo such as coal on a voyage by voyage basis they were of a basic design and often only had a single tween deck and an economical speed and cargo handling gear but were versatile enough to carry general cargo and be chartered by liner companies when they were short of capacity. Eventually hull construction switched from wood to iron in the 1850s and from iron to steel in the 1880s, whilst paddle propulsion was replaced by screws driven by steam engines and triple expansion steam engines arrived in the 1880s and turbines from the 1900s. - Speed increased and fuel consumption significantly improved in terms of thermal efficiency. The shipping industry designed to transport the complex mix of passengers, mail and cargoes appearing in the international economy supported by tramp ships carrying the bulkier cargo and supplemented by liners when the need arose. They were the backbone of world trade, providing a reliable, and flexible outward transport for general cargo and often returned with cargo too topped up with passengers and whatever specialist cargoes they could pick up. From the 1870s a network of liner services spread across the world especially between Europe and its colonies served by a generation of steam cargo liners they were less elaborate and slower than the passenger liners, built for moderate speed and had several decks for stacking general cargo, bottom holds where the bulk cargoes could be stowed and special features such as refrigerated golds, and deep well tank for oils. There was often accommodation for some passengers but by the end of the century many cargo liners did not carry a Board of Trade Passenger Certificate. The liner trades were complicated by the need for multi-port loading and discharge as well as the need for the service operator to offer trans-shipment to other ports not served directly by the liner. These made the job of stowing and discharging cargo more complicated than a simple tramping operation. - Trans-shipment is basically when the cargo is transferred from one ship to another in order to reach the final destination, it adds another layer of complexity as it requires careful coordination and planning to ensure that the cargo is properly transferred between the ships without delays or mistakes. - The ship operator also needs to ensure that the cargo bound for the first port of discharge is easily accessible without needing to unload and reload cargo bound for later ports, they must account for cargo weights to ensure that the ship remains balanced throughout the voyage. Which is much more complex for a tramp ship which loads and discharges all of the cargo at a single location. The tramps filled the gaps in the transport system, carrying the bulk and general cargoes not catered for by the liner services. In 1894, communicating with outlying areas such as South and East Africa cost over \$1.25 per word, this favoured a central marketplace where cargoes could be fixed by local brokers and agents and the terms communicated to their clients by cable, London was at the heart of the cable network and the Baltic exchange became the marketplace where trade was done. Large tramp companies would sometimes establish liners services if they spotted a gap in the market and the liner companies would sometimes engage in tramping, however most of the tramp business was carried on by small companies, these were small, relying heavily on outsourcing skilled tasks. Towards the end of the 19^th^ century, the Greek shipowners who had built up thriving cargo shipping businesses on the commerce of the black sea and the mediterranean started to set up offices in London and soon they became an important part of the international tramp shipping scene At each leg, shipbrokers and shipowners worked furiously to find the best cargo for the next leg and cable instructions to the ship's master, this showed why the Baltic Exchange played such an important part in coordinating the activities of the tramp fleet. When not tramping, they would often be chartered to cargo liner companies in need of extra capacity, providing a link between the bulk and liner businesses. As the shipping business grew, so did the regulations imposed by the insurance industry, governments also became involved in the regulation of the shipping industry. Although immensely flexible, the liner and tramp system was far too labour intensive to survive the 1950s and onward, this was due to rising labour costs which made mechanisation inevitable, replacing expensive labour with cheaper capital equipment and increasing the size of transport operations to take advantage of economies of scale. The new transport system was made up of the : - Bulk Shipping - Specialised Shipping - Container Shipping - Air Freight The new system reduced costs by replacing expensive labour with cheaper and more efficient capital equipment by treating sea transport as part of an integrated through-transport system, the standardisation , automation of cargo handling, economies of scale and the development in ship designs adapted for efficient cargo stowage and handling all played a part in this process. Airlines took over the passenger and mail trades from the passenger liners and the European empires were dismantled, removing two of the liner companies' most important revenue streams, American, European and Japanese multinationals relying on imported raw materials actively encouraged the new bulk shipping industry by offering time charters, and with this security it was easy to access investment funds from the emerging Eurodollar market. Improved communications like telex, fax, direct dial phone calls and later email and cheap interregional air travel, all helped to create an even mor efficient global market place for shipping services. In July 1941, the US argued that to achieve free access to global markets and raw materials, the world needed financial institutions capable of stabilising currencies and facilitating programmes of capital invesmtne in backward and underdeveloped regions, the ground work was laid for the General Agreement on Tariffs and Trade ( GATT ) , this had a profound impact on the maritime industry, by the 1970s, almost all of the European colonies were given independence and they were encouraged to open borders and transform their economies from self-sufficiency to export production, trade agreements negotiated through GATT opened economies in the North and the South to the free movement of goods and money Capital flows were liberalised, and Multinational Corporations (MNCs) systematically developed raw materials, manufacturing capacity and local consumer markets, since the whole system depended on trade, efficient shipping played a central part in the creation of the global economy. During the same period, the airlines became serious competitors for passenger and mail markets, one of the mainstays of the liner system the economics were very much in favour of the airlines industry, with lesser crew and lesser fuel in a shorter period of time. Europe and Japan were both badly damaged during the war and set about the reconstruction of their economies, released from their colonial empires the European multinationals set about post-war reconstruction and the expansion of heavy industries such as steel and aluminium combined with substitution of imported oil for domestic coal in power stations, railway locomotive sand rising car ownership all produced rapidly growing imports particularly of bulk commodities. Japan's leading industries like shipbuilding , motor vehicles, steel and shipping were selected by the Ministry Of International Trade and Industry which coordinated growth for development and thus the Japanese economy embarked on a programme of growth making it the world's leading maritime nation. South Korea embarked on a programme of industrial growth, emulating Japan and rapidly expanded its heavy industries such as steel, shipbuilding and motor vehicles. The Chinese economy also opened its doors to capitalism and trade and from here there was a period of remarkable economic growth coupled with a move towards a more westernised capitalist economic system The world economy thus entered a new consumer driven era and the flow of a host of goods increased very rapidly and the framework of trade widened bringing in Asian economies to a more extensive trade with Africa and South America, turning it into a complex network connecting the 3 industrial centres in the temperate latitudes of the Northern Hemisphere, North America, Western Europe, Japan, which generated 60% of the trade and drawing in raw materials and exporting manufactures. The new bulk shipping industry was mainly masterminded by the multinationals especially the oil companies and steel mills, as markets grew the strategy changed to shipping crude in large volumes to refineries located near the market and this allowed for much bigger ships to be used, at the same time, the steel mills were moving to coastal sites and developing overseas iron ore and coalmines to supply them. The only restrictions was the size of cargo parcels and the depth of water at the terminals both of which increased rapidly. Many built deep water terminals with automated cargo handling systems. Builk shipping benefitted from technical improvements, cargo handling gear, navigation equipment and improvement in communications, the position of the Baltic exchange was undermined by the improvement in communication including direct dial telephony, broadcast telex, fax and email Multinationals gradually reduced their owned and chartered fleets and relied more on independent shipowners and the rapidly growing charter market, as the information technology began to improve, the market also started to segment by ship type. Teams of specialist brokers developed an in depth knowledge of their sector, its ships, charterers, ports and cargoes and the soft information from the daily networking to gain a negotiating leverage When containerisation arrived in the 1960s, only large companies could afford the mainframe computer systems needed to run a container service, so the dominance of the mainframe computer development of data bases and rationalisation of systems predicated central control for a major operator Forst products, chemicals, refrigerated cargo, cars and wheeled vehicles and liquefied gases were the focus for specialised shipping operations and were previously carried on liners or tramps, often with the help of special equipment. The difference here is that the ship is specialised to carry one and one type of cargo only... Large multinational oil companies, steel mills and aluminium producers needed raw materials available in Africa, south America and Australasia and that meant cheap sea transport, whilst the established and cash rich shipping companies were not attracted to this risky, low return business, the independents were the only ones willing - Using time charters from the multinationals as security to raise finance, they rapidly built up the fleets of tankers, bulk carriers and specialised ships that were needed, since the charters were subject to intense competition, to keep costs low they used the flag of convenience by registering the ships in a country like Panama or Liberia only paying a fixed registration fee and no further taxes payable. Ships are the industry's main asset, they are physically mobile, and international flags allow for shipping companies to choose their legal jurisdiction and with it their tax and financial environment, The Maritime business is divided into 5 groups - **Vessel operations** (Merchant shipping, Naval shipping, Cruises, Ports) - **Shipbuilding** (Merchant shipbuilding, Naval shipbuilding, Marine Equipment) - **Marine engineering** (Offshore oil and gas, Renewable energy, Minerals and aggregates) - **Marine resources** (Marine Fishing, Marine Aquaculture, Seaweed, Seafood processing) - **Others** (Maritime tourism, R&D, Marine Services, Marine IT, Marine Biotech, ocean Survey, Education and training, Submarine telecoms) Modern transport systems consist of roads, railways, inland waterways, shipping lines and air freight services, each using different vehicles, they often fall into 3 zones 1. Inter-regional Transport (Deep Sea Shipping, Air Freight) 2. Short-Sea Shipping (Short distance transport) 3. Inland Transport (Road, Rail, River, Canal) For high volume, inter-regional cargoes, deep-sea shipping is the only economic transport between the continental landmasses, traffic is heavy on the routes between the major industrial regions ( Asia, Europe, North America) there are a range of services with the global industrial network covering thousands of ports and is now very extensive. Air Freight is often used for high value commodities, often competing with liner services for premium cargo. - Liner services operate on fixed schedules and routes similar to how airlines operate by offering regular and predictable services between major ports, ideal for shippers who need a consistent and reliable way to move their goods. The main thing that makes liner services the main competitor is the speed at which it can deliver the goods and the predictability of the availability of a ship to carry the cargo. - Tramp ships although in theory may sound better just like how a "taxi is faster and more customisable than a bus" in reality it is often not predictable if the "taxi" would even be found, this is a key aspect which many shippers of high value cargoes value, the predictability of being able to find a ship for their cargo. - Tramp ships also focus a lot on bulk cargo and project cargo, capable of filling up the entire ship. Short sea shipping provides transport within regions distributing the cargo delivered to regional centres like Hong Kong or Rotterdam by deep sea vessels providing a port-to-port service often in direct competition with land-based transport such as rail. (They essentially distribute from the major port which received a large portion of the cargo, to smaller, less significant ports ) therefore they expect to receive a wide range of goods and thus are designed to accommodate many different kinds of cargo - The characteristics here are that they have short trips and with short trips, comes the need for higher cargo handling etc. this also requires good planning skills and organisational skills - It requires a knowledge of the precise capabilities of the ships involved whilst having the flexibility to arrange the disposition of vessels so that customer requirements are met in an efficient and economical way. - Minimisation of ballast legs, avoiding being caught over weekends or holidays and accurate readings of the markets are crucial for survival The inland transport system consists of an extensive network of roads, railways and waterways using trucks, railways and barges. It interfaces with the shipping system through ports and specialists terminals. - Modern transport logistics is required to integrate these transport systems so that cargo flows smoothly and with minimum manual handling from one part of the system to another - This can only be achieved with international standardisation of cargo units, investing in integrated handling systems and designing the vehicles to integrate with these facilities. Sometimes costs are not the only factor there exists practical considerations such as that for perishable goods which need to be refrigerated etc. Each component in the transport system has to fit seamlessly with others by developing ports and terminals designed for efficient cargo storage and transfer from one mode to another. The modal points in the transport system are usually automated allowing for seamless transference At the end of the day we can summarise the shipping business as one of Cost ( How Cheap your transport is ) and Service (How well your service performs, how many needs does it fit) Different groups of customers have different requirements based on the type of cargo they are shipping and based on their own individual needs, as such, the shipping industry has evolved such that it is not one homogenous glob but rather a well-diversified industry with different types of ships and services to serve different groups of customers' - Though there is some degree of market segmentation, this does not mean that it is a rule for a shipper to stick to one segment of the market, he can switch the ship he charters as he deems fit. Raw Materials: 1. **Energy** (Oil, Gas (LPG, LNG), Coal & Coke, Molten Sulphur, Biofuels) 2. **Mining** (Iron Ore, Scrap Steel, Manganese Ore, Bauxite, Alumina, Non-Ferrous Metal Ores. Salt, Sulphur, Limestone, Sand & Gravel) 3. **Agriculture** (Wheat, Coarse Grains, Manioc, Oilseeds and Cake, Animal Feeds, Rubber, Skins,\ Fruits and Vegetables, Meat and Fish,\ Vegetable Oils, Wine, Fruit Juices, Molasses\ Live Animals) 4. **Forestry** (Logs, Lumber, Wood Chips ) Types of Shipping used : Liquid Bulk ( Oils, Fats, Coal, Coke, Crude Oil, Gas) ; Dry Bulk ; Unit Load ( For Forestry only ) Processing: 1. Oil Refining ( LPG, Naphtha,\ Gasoline, Gas Oil ) ' 2. Chemicals ( Organic, Inorganic) 3. Steel (Pig Iron, Steel Ingots, Steel Products) Manufacturing: 1. Motor Vehicles (Cars and trucks, Farm Vehicles) 2. Light engineering (White goods, Electrical Goods) 3. Food processing (Meat and Dairy, Sugar refining ) 4. Textiles, Shoes, Clothing 5. Wood and Paper ( Pulp, paper) End User: 1. Power Generation 2. Transport 3. Construction End Markets: 1. Companies 2. Consumers Deficit trades occur when there is a physical shortage of a product in one area and a surplus in another, leading to a trade flow which fills the gap in the importing country, this is common in the raw materials and semi manufactures trades On the other hand there is competitive trade where the country can produce it but it would be more expensive than if they were to just get it from overseas. They may also wish for greater diversity in the products Cyclical trades also occur in times of temporary shortages such as that of poor harvests or business cycles leading to temporary trade flows. Iron ore is used to make steel the setting up of more steel mills would thus increase steel production and thus increase the need for iron ore, this would usually increase the iron ore imports or reduce the iron ore exports if the country is a predominant iron ore exporter, and this would result in increased value added steel imports. The energy trades dominate the bulk shipping these fuel sources compete with each other and non-traded energy commodities such as nuclear power, their level of substitutability is important to study Other cargoes include cement, salt, gypsum, mineral sands, chemicals and many others such as textiles , machinery, capital goods and vehicles and they often have high values so their share of the shipping industry in terms of value is very large as opposed to the volume they contribute to the industry. Parcel size distribution is a range of the recorded cargo sizes for a given commodity to see the variability of the parcel size for any given commodity ( what's the potential range the parcel size can fall into?) Product differentiation in shipping boils down to 4 factors in which shippers can differentiate their products: 1. **Price** -- the freight cost is important but the greater the proportion of freight in the overall cost equation, obviously the more emphasis the shippers would pay to it. 2. **Speed** -- time in transit incurs inventory costs so those with high value commodities prefer fast deliveries and more frequent ones. 3. **Reliability** -- some shippers may be prepared to pay more for a service which is guarantee dot operate to time and provides the services which have been promised. 4. **Security** -- loss or damage in transit is an insurable risk but raises many difficulties in the process and especially when the parcel are high in value and fragile Segmentations of the Shipping Market ==================================== 1. Bulk Shipping 2. Specialised Shipping 3. Liner Shipping Each carries a different task and has a very different character, depending on the PSD functions for the commodity and the service requirements of each cargo parcel, the parcels would be sorted into bulk parcels, specialised parcels and general cargo parcels respectively. Bulk Parcels -- Large homogenous parcels, transported by bulk shippers. Small Parcels -- transported by liners Specialised Cargoes -- shipped in large volumes, transported by specialised shipping segment The big difference between **bulk shipping** and liner shipping for instance is that bulk vessels handle few transactions every year as they often go for long voyages with an estimate of 6 voyages with a single cargo each year the annual revenue ultimately depends on half a dozen negotiations per ship each year. The service levels required are also usually low and thus little overhead is required to run the ships and organise the cargo. - The downsides are the increased significance of each voyage and thus risk it holds and thus the need to minimise the cost and provide safe transport - On top of this the need to invest in the expensive ships is also another problem. On the other hand, **liner services** have many smaller parcels of general cargo and would handle 10,000-50,000 transactions per year, this significantly larger number of transactions implies that it is a very organisation intensive business, the transport leg often forms part of an integrated production operation so speed reliability and high service levels are valued. - Regardless of the segment of the industry, one thing is always common the cost of the shipping! **Specialised shipping** involve motor cars, forest products, refrigerated cargo, chemicals and liquefied gas, they fall between the bulk and the liner. Service providers invest in specialised ships and offer higher service levels than bulk shipping companies and some of the operators become involved in terminals to improve the integration of the cargo-handling operations whilst working with shippers to rationalise and streamline the distribution chain ### Bulk Shipping: Most of bulk cargoes are drawn from the raw material trades and are often described as bulk commodities on the assumption that all of that particular material is shipped in bulk, although not always true, its just a way in which people classify the types of cargo. - Liquid bulk requires tanker transportation - 5 major bulks include Iron Ore, Grain, Coal, Phosphates, Bauxite - Minor Bulks cover many other commodities travelling in shiploads including steel products, steel scrap, cement, gypsum, non-ferrous metal ores, sugar, salt, sulphur, forest products, wood chips and chemicals ### Liner Shipping: General cargo consignments are too small to justify setting up a bulk shipping operation and often times these general cargo consignments are of high value and/or are delicate requiring an increased service level. Shippers of these kind prefer fixed tariffs and there are no rules as to what constitutes general cargo: - Loose Cargo - Containerised Cargo - Palletised Cargo - Pre-Slung Cargo - Liquid Cargo - Refrigerated Cargo - Heavy and Awkward Cargo Until the mid 1960s most general cargo travelled loose and each item had to be packed in the hold of a cargo liner using dunnage, this was a slow, expensive and labour intensive process and the risk of damage or pilferage was high, this thus increased the time the vessel spent at the port and thus squeezed profit margins ### Specialised Shipping: Sits between the bulk and liner trades and the dividing line is not particularly well defined, ships are often designed to carry a specific cargo type and provide a service which is targeted at a particular customer group. - Buying a specialised ship is risky - Motor Vehicles -- Car Carriers, Pure Car and Truck Carriers ( PCTCs) - Forest products -- Carriers with holds designed around the lumber size with adequate cargo handling gear - Refrigerated Foods -- Reefer operators and the Liner operators who use refrigerated holds or refrigerated containers - Liquid Gas -- Requires specially built tankers and high levels of operation - Chemical Parcels -- Need special handling and can be carried more efficiently in large tankers with large, segregated tanks. Each tank must have its own cargo handling system making it complex There exists a practical issue when considering these market segments, that is , since there are no defined rules as to what kind of cargo travels on what kind of ship, we can never accurately tell the tonnage of bulk, specialised and general cargo being shipped by sea. Types of Ships ============== There exists 4 main categories of ship types 1. Bulk 2. General Cargo 3. Specialised Cargo 4. Non-Cargo \*as with the section prior, it is important to note that there exists many grey areas Tanker Fleet: VLCCs, Suezmax, Aframax, Panamax, Handy, Small Tankers - Differ in size and operate in different trades with larger vessels usually working for the long-haul trades Dry Bulk Feet: Capesize, Panamax, Handy, Handymax - Specialised hull designs like open hatch, ore carriers, chip carriers and cement carriers - Carry homogenous dry cargoes and have steel hatch covers with hydraulic opening mechanisms - Most under 50,000dwt have cranes or derricks General Cargo Ships: Container Ships, Ro-ro, MPP, General Cargo - Box-shaped holds, cell guides so containers can be lowered securely into place without the need for locking devices making the loading process much more efficient Specialised Cargo: Reefer, Chemical Tanker, Vehicle Carrier, Liquefied Gas - Designed to increase efficiency in transporting A SPECIFIC CARGO Non-Cargo Fleet: Cruise, Ferries, Offshore, Tugs, Dredgers Each ship has to be registered under a national flag and this would determine the legal jurisdiction under which it operates, the shipowner is subject to the international conventions to which the flag of registration is a signatory and when it sails into the territorial waters of another country, it becomes subject to their laws. - Many times the flags used are mainly flags of convenience and this would allow for greater tax reductions and costs savings All ships have a lifespan, over which they deteriorate, this would result in less efficient operation and the ship "losing" to newer ships equipped with the latest technologies. These increase the cost of operating the ship and thus the costs incurred by the shipowner for providing the service - This would thus result in the freight rates charged on these less efficient, less technologically advanced ships being higher relative to the newer, more technologically advanced ships. - When an owner is done with the ship he would try to sell it, if the demand is low then it would continuously fall in value until someone bids for it, when the demand for such ships are low, the only bidder would be the demolition market To reiterate the cost of shipping and the sensitivity to it depends on the proportion of the costs it takes up, for many commodities freight is now a much smaller portion of costs than it was 30 years ago, achieved by economies of scale, technological advances, better ports, more efficient cargo handling and the use of international flags to reduce overheads. Unit Cost = **\[Capital Cost** (OF SHIP) + **Operational Cost** + **Cost of Handling Cargo\]** **/** **Parcel Size** - Unit costs escalate significantly as the parcel size falls below the size of a ship and the cargo slips into the liner transport system, there is clearly a tremendous incentive to ship in large quantities. - Again, with different segments of the market such as that of the bulk shipping segment and the liner segment, they would have different needs and cost proportions, with liner segments having more transactions annually, they would need to handle documentation, planning, ship loading and through transport operations and thus require a large shore-based administrative staff - The type of organisations involved, shipping policies and the type of people employed In different market segments are quite different! Bulk Shipping Economics: ======================== - The largest factor affecting if one is to buy a ship or not would depend very much on how worth it it would be to invest that substantial amount of capital into the shp and whether it would even be worth it cost wise. This would require a comparison with the cost of chartering a ship on a long term contract. - It would also depend on the frequency at which they receive cargo to ship, how stable and certain is the supply? If it is agricultural crops are they seasonal? How often and how predictable are the harvests? Would it be worth it by then? In specialised bulk trades, it often involved adherence to precise timetables using ships with high cargo capacities and fast handling Liner Shipping Economics: ========================= Liner services cater to cargoes too small to fill a single ship and instead group a few cargoes together to fill up the ship, they charge a fixed rate for any type of cargo and essentially focus on providing a reliable, fast and predictable service - They often offer a regular service which increases the amount of paperwork significantly - They charge individual consignments on a fixed tariff basis and this must be profitable for them - They have to load the cargoes with the end in mind, if one of the cargo is leaving first, it has to be packed such that there would be minimal disruptions when discharging the cargo - The service's schedule has to consider the possibilities of disruptions from external , uncontrollable events - They have to plan tonnage availability to service the trades like repair and maintenance and the construction of new vessels / chartering of additional vessels to meet potentially cyclical requirements! This is very much management intensive and thus the business is very much different from the bulk shipping counterpart. They have high overheads and in order to survive they would need to maintain a regular service even when a full payload of cargo is not available. Ports ===== Ports provide a crucial interface between land and sea, the time spent at these ports significantly affect the profitability of a shipping operation and one of the largest factors affecting the time spent at ports would be cargo-handling speeds. A port is a geographical area where ships are brought alongside land to load and discharge cargok, usually a sheltered deep water area such as a bay or a river mouth A port authority is the organisation responsible for providing the various maritime services to bring the ships alongside land, a port authority can have control over multiple ports simultaneously Ports may be public bodies, government organisations or private companies A terminal is a section of the port which consists of 1 or more berths devoted to a particular type of cargo handling ( Coal Terminals, Container Terminals, etc. ) They can be owned and operated either by the port authority or a shipping company which operates the terminal for its exclusive use. Not all ships are equal, some are larger than others and the ports have to take these ships into consideration if they want them to be able to discharge the cargo seamlessly, they thus need to have deep water in the approach channels and berths. Another key factor affecting the processes at the ports would be the cargo-handling gear that they have invested in, they must be able to EFFICIENTLY handle the cargo and must be able to handle a WIDE VARIETY of cargoes. - On top of this, also comes the need to store certain types of cargo, thus storage facilities have to be made for both inbound and outbound cargoes. - Modern ports also have to be integrated into port operations, railway, roads and inland waterways usually converge on ports and these links have to be managed effectively The port market is also very vibrant and competitive, often times the process of continuous improvement is a natural result of this competition... How? Because each port would compete against the other ports around in order to attract the most amount of cargo. - The level of port development usually can be told from how specialised their gear and storage facilities are, the more specialised it is with specific equipment catering to specific cargoes, the more advanced it is, the lesser the equipment and more general the purpose is, it is usually less advanced. Another indicator would be the size of the ships it can accommodate. Having all of these is usually only possible because the HIGH VOLUME of cargoes make it economic to invest heavily the above mentioned. It would only make sense for ports to cater its equipment and facilities to its individual cargo profile in the area which it is servicing, every region has its own mix of ships, cargos inbound and outbound and the ports usually adapt to these alongside any changes which present themselves along the way. Ports and terminals make money by charging the ships for the use of their facilities, just like "accommodation" for the ship, a fee has to paid and these port charges as a whole have to cover the port's unit costs, and have a fixed and variable component to them. - Shipowners can be charged an all-in rate - Shipowners can be charged a basic + add on rate ( both of these vary with volume of course) Types of Shipping Companies **Traders** who buy and sell commodities are often major charterers, another important group includes **Operators** who charter ships against cargo contracts for an arbitrage, ship brokers and managers are also involved on a day-to-day operations of the business - Traders are the ones who look for opportunities to buy a commodity at a lower price and sell it at a higher price, making a profit on the price difference, they are concerned with market movements , price trends, economics of supply and demand - Operators focus on moving and managing the logistics of the commodities, they mange the physical transportation of commodities and their focus is on arranging and optimising the logistics including the charting of vessels to move the goods from one location to another. - A trader's decision to buy or sell is often dependent on the operator's ability to move the goods at a reasonable cost, some firms may have "trader-operators" where they handle both aspects whilst in larger firms there are usually dedicated trading desks and a separate operations desk. - In summary, they both work together to complete the trading process. Suppliers including managers, ship repairers, shipbuilders, equipment manufacturers and shipbreakers all of a distinctive business with their own special culture and objectives, ship finance also forms another category with distinctive subdivisions, like ship surveying, insurance, information providers. Smaller shipping companies can increase profitability by forming pools which allow for reduction in overheads and the utilisation of market information more efficiently, and for them to compete more effectively for contracts with shippers who require high service levels. It is a fleet of similar vessel types with different owners in the care of central administration. The combination of vessels achieves economies of scale which individual small shipowners cannot achieve, better rates, leveraging discounts on fuel and the optimisation of routes allow for this. - The larger and combined fleet can be more attractive to major charterers and customers as they can offer more flexibility in terms of routes and capacities - Shipping pools help to spread the risk amongst members, this risks can be due to fluctuation of freight rates and uneven demand in certain regions - Leveraging on the numbers, along with the variations of the ships in the ship pools, more geographical areas can be covered and more needs of varying groups of customers can be met, furthermore the pool management has the ability to plan these routes more strategically with their birds eye view of all the vessels. This reduces ballast time by arranging of Contract of Affreightments ( COAs ) to cover backhaul by providing return cargo, chartering additional vessels when member ships are not available and providing performance guarantees , all out of reach without this pool. - The pool manager markets the vessels as a single fleet and collect the profit ( Earnings- Overhead Costs ) and redistribute this to pool members under a pre-determined "weighting" system reflecting each ship's revenue generating characteristics. The pool manager continuously seeks out charter opportunities keeping the pooled vessels active and earning revenue - The pool pays all of the voyage related costs like port costs, cargo handling, and bunkers, on the other hand the owner has to pay for capital costs, manning and maintenance costs - The pool agreement is usually inclusive of a non-competition clause which prevents the participant from using other ships he owns or controls outside of the pool to compete against the vessels in the pool - Ships in the pool often follow standardised operating procedures set by the pool manager including maintenance standards, crew training and safety protocols, standardisation ensures consistent levels of service helping the pool to maintain a positive reputation and to attract more business. - There is a large amount of cooperation and understanding which must take place in a pool as differing company sizes face differing constraints and this could lead to frustrations and misunderstandings - However they must abide by competition laws which generally make it illegal for them to collude to prevent or restrict competition, in many countries agreements to fix prices ,tenders, allocate customers between pool members or carve up geographical markets are illegal - Essentially they are like a sports league, where individual teams join together to offer a stronger collective presence ,the pool can share revenues and market themselves together but cant collude to take away fair competition just like teams in a league cant fix game results or split up their fan base Typical Shipping Company Structures: 1. Private Bulk Company ( Just like if you owned a few ships, a lot of freedom ) 2. Shipping Corporate ( Major decisions by main board, major stockholders etc.) 3. Shipping Division (Shipping Division of a commodity company ) 4. Diversified Shipping Group ( Started in shipping, but later diversified their interests) 5. Semi-Public Shipping Group (Quoted on the stock exchange but largely owned by family interests) Shipping Market Cycles: Long term shipping cycles are driven by technical economic or regional change and this makes them of great importance despite them being more difficult to detect, long term technical social or political changes aree the sort of developments which also contribute to long term shipping cycles. Short cycles are characterised by a larger number of abortive recoveries, whereby the market begins to move upwards after a trough but it eventually fails to reach higher levels and continues downwards, this is characterised by optimism that came too early as the anticipation of the recovery leads to higher volumes in the form of orders, for cheaper ships, thus leading to yet another fall in freight rates. Seasonal cycles are responses to seasonal patterns of demand for sea transport, agricultural trades follow the crop's harvest and there are also seasonal cycles in the reefer trade caused by movements of fresh fruit during the harvest in the northern hemisphere Stages of a Shipping Cycle: 1. Trough : Clear signs of surplus shipping capacity with ships queuing at loading points and sea slow steaming to save fuel, freight rates fall to the operating costs of the least efficient ships which move into lay-up, financial pressures build up, distress , foreclosures and forced sales of ships by distressed companies, the demolition market comes alive 2. Recovery : Supply and demand begin to move towards balance, confidence grows and spells of optimism alternate with doubts on whether a recovery is really happening, liquidity improves and sentiment firms 3. Peak/Plateau : surplus is absorbed and supply and demand tighten only untradable ships are laid up and the fleet operates at full speed, excitement increases, high earnings generate high liquidity and banks are more willing to lend against strong asset values, over-trading and second hand markets become active and this leads to irrationally high prices 4. Collapse: Supply overtakes demand, the market moves into the collapse phase and the freight rates fall precipitately, this is reinforced by the business cycle downturn. And other factors also contribute to this such as the delivery of vessels ordered at the top of the market, oil crises etc. liquidity remains high and there are few ship sales as the market initially does not want to come to acceptance with the reality and wants to wait it out. Often times the reality of shipping is that in such a volatile market where you win and lose big, it is important to preserve earnings when times are good to save for the rainy days, when times are bad, this allows for the earnings during good times to cover the losses during the bad, usually there would be enough to sustain the company. - If not , the market works such that companies which are weak and have poor strategies will be pushed out of the market during such bad times, and only the strong ones remain. Shortage of ships High Freight Rates Over-Ordering of Ships Collapse Recession Cycles are unpredictable as it is the investors themselves who influence what happens at any point in time, human emotions influence actions and these can lead to irrationality in the markets. - This arises from fear, greed. So long as the extreme has been reached, too many decisions have been made out of emotions made worse by the fact many would have followed the crowd. Shipping cycles have a common theme, they are seen as mechanisms which weed out the weak, obsolete and incompetent parts of the industries in the form of companies, ships etc. the cycles essentially last as long as is necessary to do the job. Primary risk takers of the industry are the shipowners and the cargo owners who perform the act of adjusting supply to demand, they are on the opposite sides of the shipping risk distribution and when supply and demand are out of balance, one or the other loses money! - When cargo owners get it wrong they have too many cargoes and rates shoot above the trend - When owners get it wrong and there are too many ships , the rates shoot below the trend Shippers have the cargo and they are the ones who take the lead in the process, they are the ones who decide how they want to ship their goods, via their own fleet ? charters? Spot ? each of these options have a varying degree of risk shared amongst the Shipper and the Shipowner, spot would allocate the most risk to the shipowner, at the end of the day, this would very much depend on the shipper's sentiment about future cargo flows and how much control they want over their shipping operations. - They often go for the middle option if they are reasonably certain about future cargoes but feel that shipowners can do the job at a lower cost. However the longer the charter, the more risk the shipper takes on Charterers often negotiate well, often leaving the owner vulnerable to inflation, exchange rates, the mechanical performance of the ship and the ability of the shipper to pay his hire. \*Nevertheless, the overall risk remains the same, its just the distribution of it which is different. \*There are no firm rules about how long shipping cycles last, its too difficult to tell. Too many variables. Many external events such as wars, politics etc. will often have both short-term and long-term effects on the shipping industry, in the short term the most obvious effect would be on the freight rates which is very much dependent on the sentiment at that time, on the other hand the long term effects can be a change in trade routes, demand and supply profiles, Cargo and shipping patterns and trends , anything! Ther was an increasing trend of larger ships forcing out small obsolete vessels, there were also a series of wars and political developments which all led to disruptions in the markets There was a period in the 1950s to 1970s where an oil boom led to oil companies creating a tanker investment boom which drove the market down ???( refer to the shipping cycles chapter in the book to look for historical events which had an impact on the shipping market and thus the commodity markets) The oil increase in 1979 led to power utilities around the world switching from oil to coal, which gave a major boost to the thermal coal trade and this was reinforced by congestion, traditional port facilities in the middle east and west Africa could not cope with the flood o trade and the rates climbed further and further. Workers strikes should not be ignored as they would affect the shipping activity alongside disruptions in supply and demand for the commodity being traded. Exchange rates also play a part in the demand for new ships, if ships are bought from foreign countries, a small fluctuation In the exchange rate can lead to vastly different prices for the ship, the large cash reserves Banks and their willingness to lend ultimately depends on their view of the market, in this case the shipping market, generally when the market is doing well, the banks would be able to tell , for instance increased earnings and thus assets or cash deposits from these companies into the banks who now have more confidence and thus willingness to lend. Many times, you should always ask yourself if you are the only one who has thought of the idea, the worst thing is to be unprepared should the opposite be true, when shipowners decided to order ships to be delivered, such that it would coincide with their expected recovery periods, too many people did that and all that did was depress freight rates further. The recovery never happened. The takeaways are that shipping cycles do not occur randomly they are a result of many different factors which take place over a period of time, each player in the market must assess his opponents, taking a view on how they will play the game and work out the loser of the game. Shipping is a gambling game and the job of the shipowner it to make the best estimate he can and take a gamble, if he is wrong, he loses and this is why individuals are more successful than large companies as they are able to have decisive action which flies in the face of market sentiment, this instinct that they can act on quickly is reinforced by understanding the international economy and the up-to-date information from the international grapevine. There are many factors which influence the supply and demand, too many to provide and exhaustive list, thus we would select the top 10 most important factors, 5 of which affect the demand for sea transport and the other 5 affecting the supply 1. The World Economy 2. Seaborne Commodity Trades 3. Average Haul 4. Random Shocks 5. Transport Costs Demand\^ 1. World Fleet 2. Fleet Productivity 3. Shipbuilding Production 4. Scrapping and Losses 5. Freight Revenue Supply\^ The world economy through the business cycles and regional growth trends, determines the broad volume of goods traded by sea, developments in commodity trades will modify the growth trends and so will changes in the average haul over which the cargo Is transported. - The final demand for shipping services is usually expressed in ton miles, - The use of ton miles as a measure of demand is technically more correct than using the deadweight of cargo ships required as it avoids making a judgement about the efficiency with which ships are used. On the other side of the equation is supply, in the short term the world merchant fleet provides a fixed stock of transport capacity, when demand is low only a part if this may be used and some ships would either be laid up or used as storage spaces - The fleet can only be increased by new building and decreased by scrapping, the amount of transport this fleet provides also depends on the logistical efficiency with which ships are operated, like speed and waiting time. - This efficiency variable is referred to as the fleet's productivity and is expressed in cargo ton miles per dwt per annum - Bankers and regulators along with their relevant polices also have an impact on how the supply side of the market develops. Now to address the stakeholders, Cargo shippers : Their decisions over the sourcing of raw materials and the location of the processing plant such as oil refineries determine how trade develops along with the negotiation of freight rates, time charters and FFAs. - These were predominantly the large corporations trading raw materials and manufactures but in recent years have been joined by the commodity traders and operators who hav cargo contracts which require ships Shipping Investors : They sit on the other side of the table from the cargo shippers in the freight rate negotiation and they have the crucial task of ordering new ships and scrapping old ones Imbalances between the supply and demand feeds through the freight market, freight rates are constantly adjusting in response to such changes in the supply and demand - A rule of thumb is when the earnings of the ships rise, shipping investors rush to buy more second hand ships and bid up the prices, when the second hand prices are too expensive they begin ordering new ships - The time lag of the new ships causes a temporary, continued strain on the supply and thus the freight rates continue to maintain at their high levels or even increase, naturally, cargo shippers try to switch to closer supply sources or to utilise bigger ships to cut transport costs , or even by delaying cargoes. - Once the new ships arrive, the process is reversed, rates are bid down and the shipowners draw on reserves to pay fixed costs, their reserves eventually diminish and some owners are forced to sell ships to rise cash, this results in the second hand market coming alive but the pries of these ships fall a lot, this eventually falls to the point where only the scrapyards are bidding. This gives rise to the nature of supply and demand in the market. Demand is quick to change and is volatile and unpredictable, whilst supply is slow to change with huge inertia. The world economy generates the bulk of demand for sea transport, this is in the form of imports of raw materials for manufacturing or the trade in manufactured products , the relationship between sea trade and the world industry is not to be confused to be simple or direct and there are many aspects of the world economy which may bring about a change in the demand for sea transport. - Business cycles lay the foundation for freight cycles, changes in the rate of economic growth work into seaborne trade, creating a cyclical pattern of demand for ships. If we analyses the GDP cycles and the level of sea trades they are closely correlated and thus shows the significance of business cycles. - The external factors including wards and sudden changes in commodity prices can also cause changes in the commodity prices - The main internal mechanism which creates cycles is the interplay between consumption and investment, income may be spent on investment goods or consumption goods, investments create new jobs or increases in wages which further boosts consumption. Eventually labour and capital become fully utilised, the expansion is sharply halted and the whole process sis thrown into reverse - Time lags or the delays between the economic decisions and their implementation can make cyclical fluctuations more extreme - Stock building, or the running down of stocks usually accelerate the process , in recessions stocks are run down and thus demand falls even more, and when it recovers, the demand recovers in bursts of demand from stock building accelerating the recovery - Mass psychology is also important as it affects the actions of the masses, which can cause severe disruptions. - To help predict business cycles, the statisticians have developed leading indicators to provide advanced warnings of turning points in the economy. - The economic structure of the countries generating seaborne trade would change over time, developing countries become more advanced, industrial economies mature and economic activity becomes less resource intensive and the demand switches from constructions and stocks of building durables to services like medical care and recreation, the demand for imported raw materials thus falls. - On top of this the ability of local resources of food and raw materials to meet local demand is also another consideration, when the domestic raw materials are depleted, end users turn to foreign suppliers boosting trade Seaborne commodity trade's discussion falls under the short-term or long-term analyses, an important cause of short term volatility is the seasonality of some trades, many commodities like agricultural commodities are subject to seasonal variations caused by harvests, the oil business also has a cycle reflecting the seasonal fluctuation in energy consumptions with more oil being used in the autumn and early winter than in spring and summer, it has a disproportionate effect on the spot market, the transport of seasonal agriculture is difficult to plan so these shippers rely heavily on the spot market. - In contrast to this, some commodities are not seasonal and therefore do not influence the spot market as heavily as the agricultural commodities, for instance, iron ore etc. Long term trends are best identified by studying the economic characteristics of the industries which produce and consumer the traded commodities , the **4 types of changes to look out for are the changes in the demand for the commodity, the changes in the source from which supplies of the commodity are obtained, changes due to the relocation of processing plants which changes the trade patterns, and the shipper's transport policies.** - Changes in demand can be analysed by exploring the fundamentals of the market and how it has changed, such as its price relative to substitutes, the changing role of the commodity and the applications its used for etc. - Changes in the source depends on the demand and supply dynamics again, if country A can meet the demands of country B and whether or not it has cheaper or better alternatives, the demand of country A can fluctuate as can the supply of country B which slowly (or quickly) depletes the natural resources. - Relocation of processing industrial raw materials also affect the volume of the cargo shipped by sea and the type of ship required, different forms of the commodity, prior to, or post-transformation can differ a lot in their forms and can change the shipping process by a significant amount. Such as the parcel size and the type of ship / route. It can also change the shipping requirements and the regulations under which the commodity falls under posing a new set of challenges. - The shipper's transport policy is also important as it would affect HOW the they fulfil they shipping needs, spot market? Time charters? ( changes of this type are usually large changes but don't happen overnight and you would need to be on the lookout for such changes) Ship demand is usually measured in ton miles, which are defined as the tonnage of the cargo shipped multiplied by the average distance over which it is transported. - Analysing the changes in the average haul of commodity trade can be extremely complex requiring information in the form of detailed trade matrices but very often the key issue is the balance between the long and short-haul suppliers, this is related to how much of the commodity they actually supply to the globe as these would affect how much or the commodity is transported over long or short hauls along with the ships required. Random shocks upset the stability of the economic system, weather changes, wars, new resources , commodity price changes are all candidates, they differ from cycles as they are unique and their impact on the shipping market is usually very severe. The most important are the economic shocks as they are disturbances superimposed on business cycles often with dramatic effects, this includes events like the Great Depression, the Asian Crisis, the Financial crisis ETC\ - on top of this are the political events like a war, revolution, political nationalisation of foreign assets or strikes which disrupt trade, events of this type do not necessarily impact directly on ship demand and is generally their indirect consequences that are significant - The Korean War - The Suez Crisis - The 6 Day War ( Israel and Egypt ) - Closure of Tap Line oil pipeline - Nationalisation of Libyan Oil Assets - Yom Kippur War - 1979 Iran Revolution - 1990 Gulf War - Venezuelan Oil Strike Raw materials will only be transported from distant sources if the cost of the shipping operation can be reduced to an acceptable level or some major benefit is obtained in the quality of the product. Making transport costs a significant factor for many industries. The decision makers who control supply are the shipowners, shipper's/charterers, the bankers who finance shipping and the various regulatory authorities who make rules for safety, the shipowners are the primary decision makers who order new ships and scrap old ones. - Shippers influence the shipowners by issuing time charters or can even become shipowners themselves - Bank lending influences investment and it is the banks who exert the financial pressure that leads to scrapping in a weak market - Regulators affect supply via safety or environmental regulation which affects the transport capacity of the fleet Since the supply of the shipping capacity is controlled by a small group of decision makers, the supply side relationships are behavioural. In the long run, it is scrapping and deliveries which determine the rate of fleet growth, only a small proportion of the fleet is scrapped each year as ships have long lifespans and the pace of adjustment to changes in the market is measured in years instead of months. The combined carrier fleet links the wet and dry markets, the growth of the fleet was sparked off by the closure of the Suez Canal when combined carrier owners who had previously traded dry cargo were able to take advantage of the very favourable oil freight markets In recent years, deep sea liner trades were replaced by traditional liners by cellular container ships Different ship types do not operate in separate and self contained markets although there is much specialisation in the shipping market and a high degree of substitution between ship types, in a volatile market flexibility is desirable and some ships are built with that same objective in mind. The most striking feature of the world merchant fleet during the last 30 years was the rapid escalation of ship sizes particularly in the bulk sector of the fleet, larger and more efficient ships have progressively pushed their way into the market, depressing rates for smaller sizes and the investment for specialisation in the case of car carriers and chemical tankers, played an important part in the development of the fleet. Productivity is measured in tons per deadweight, carrying cargo is ust one small part of the productivity story, we also have to consider ballast time, cargo handling and other non-trading activities like incidents, repairs, lay-ups, waiting, short-term storage and long-term storage. It thus becomes more apparent that some activities are determined by both the physical performance of the fleet and the market forces/ The productivity of the fleet of ships depends on 4 main factors, speed, port time, deadweight utilisation, and loaded days at sea. Speed, the time a vessel takes on a voyage, even in good markets ships generally operate at speeds well below their design speed, if new ships are delivered with a lower design speed, this will progressively reduce the transport capacity of the fleet, as ships age, unless they are exceptionally well maintained, they will experience hull fouling and gradually the maximum operating speed are lowered. Port-time, the physical performance of the ships and terminals set the upper limit, this depends on the organisation of the transport operation, this was made clear when containerisation was introduced, congestion produces temporary reductions in performance Deadweight utilisation refers to the cargo capacity lost owing to bunkers, stores etc. which prevent a full load from being carried, a rule of thumb estimate of 95% for bulk carriers and 96% for tankers. A vessel's time is divided between the load days at sea and the unproductive ( ballast, port or offhire ) days, a reduction of unproductive time allows for increased loaded days at sea and one can interpret changes in this variable in terms of changes in port time, vessels designed for cargo flexibility can improve their loaded time at sea as they are able to swich cargoes for backhauls. When the freight markets are depressed the first response of the merchant fleet is to generally reduce its pace of operation, to save bunker costs, owners reduce the operating speeds and since cargoes are less readily available, waiting times are increased and eventually ships that are too expensive to operate are laid up or even used as storage in ports or offshore installations. The time lag for ordering and the delivering of a new shp is 1-4 years, this is however dependent on the orderbook held by shipbuilders, orders must be placed on the basis of an estimate of future demand and these estimates have often been wrong. - Peaks and troughs in the deliveries of specific ship types have an impact on their market prospects - There was a collapse in the tanker market during the 1973 oil crisis, the tanker output fell to a trough, eventually however, the tankers which were built in the 1970s needed to replaced ( due to age ) and the trend would be reversed, this was apparent in 2006. - This does not mean that the other types of vessels are not being delivered or ordered! In fact other segments of the ship markets could be very vibrant. We cannot make the erroneous assumption that the size of the ship segment is indicative of their output and the work content, as ship types which account for a third of the total merchant shipbuilding output in deadweight terms, such as ro-ros, container ships, general cargo vessels, fishing boats, ferries, cruise liners, tugs, etc. can actually have large or even larger work contents than other fleets which may be larger in terms of deadweight. They are thus not to be looked down upon or seen as less important The rate of growth of the merchant fleet depends on the balance between deliveries of the new ships and the deletion from the fleet in the forms of scrapped or lost ships at sea. This is more complex than it sounds, the predict the age at which a ship would be scrapped, as you would have to judge the **age, technical obsolescence, scrap prices, current earnings and market expectations**. - Age is the primary factor, ships deteriorate as they grow older and the cost of routine repairs and maintenance increases, thus the owners of elderly vessels face the combination of heavier costs and more time off hire for planned and unplanned maintenance, since physical deterioration is a gradual process there is no specific age at which a ship is scrapped. - Technical obsolescence may reduce the age at which the vessel is scrapped as it is superseded by a more efficient ship type, the high scrapping rate of multi Deckers is attributable to these vessels being made obsolete by containerisation. It can also extend to the ship's machinery and gear. - Scrap prices fluctuate widely depending on the state of supply and demand in the steel industry and the availability of scrap metal from sources such as shipbreaking or the demolition of vehicles, which form the largest sources of supply. - The last and most important factor depends on the owner's expectations of the future operating profitability of the vessels and his financial position, if during a recession he believes that there are chances of a freight market boom, and that the possible earnings are so great they justify incurring a small operating loss for a period of years up to that date, he will not scrap the ship. - Old ships are usually forced out due to the cost of repairs, but where vessels are still serviceable, extensive scrapping o remove surplus capacity is only likely to occur when the shipping community as a whole believes there is no prospect of profitable employment for the older vessels in the foreseeable future or when the companies need the cash so urgently they are forced into distress sales. The supply of sea transport is also influenced by freight rates, this is the ultimate regulator which the market uses to motivate decision makers to adjust capacity in the short term and to find ways of reducing their costs and improving services in the long term. The pricing system is central to the supply of transport, in the short run the supply respond to prices as ships adjust their operation speed and move to and from lay up while liner operators adjust their services, whilst in the long run the freight rates contribute to the investment decisions which result in scrapping and ordering of ships. The supply function for an individual ship is a J shaped curve describing the amount of transport the owner provides at each level of freight rates, therefore if we are analysing multiple ships, we will see multiple J shape graphs, each representing one ship, older ships' graphs would usually represent higher costs, going into lay up at higher freight rates than newer ships - The supply function is the aggregate of the ship supply functions, the joining of each of the ship's minimum freight rate before being sent for layup The shipowner maximises his profit by operating his ship at the speed at which marginal costs equal the freight rates In reality the supply function is more complex than the simple speed freight rates relationship, speed is not the only way supply respond to freight rates, the owner may take advantage of low freight rates by putting his ship into dry dock or by fixing a short-term storage contract, at higher rates, he may decide to ballast back to the Arabian gulf through the shorter Suez canal route rather than taking the longer\ "free passage" around the cape. - Ships also have to wait for cargo in periods of surplus or accept small cargo parcels which reduce the operating revenue in just the same way as a fall in freight rates and a factor often forgotten. The fleet supply function works by moving ships in and out of service in response to freight rates, if freight rates fall below the operating cost of ship 10, it goes into lay up and the supply is reduced by 1 ship, ship 9 breaks even and the other eight ships makes a margin over their fixed expenses depending on their efficiency, if shippers only need 5 ships, they will drop their freight rate offers to the break even/ lay up point of ship 5. The slope of the short-term supply curve depends on 3 factors which determine the lay up cost of the marginal ship, old ships have higher operating costs and the lay up point will occur at a higher freight rate, secondly bigger ships have lower transport costs per ton of cargo than smaller ships, the bigger ship will usually ahvea lower lay up point than a smaller ship and thus drive the smaller ships into lay up during recessions, if the size of the ships have been increasing over time, the size and the age will be correlated and there will be quite a steep slope to the supply curve which becomes very apparent during recessions. On the other hand, should there be a lack of ship supply and a lack of competing transport modes, shippers need to ship the cargoes regardless of the costs. - Conversely, cheap rates would not tempt shippers to take on an extra ship At any instant, the prices are a blend of the present and future expectation, the short run and the long run, in the world where the price at which the buyers and sellers are prepared to trade depends on how much time they have to adjust their positions, there are 3 time periods, - Momentary equilibrium, when the deal must be done immediately - Short-Run, When there is time to adjust supply by short-term measures such as lay-up, reactivation, combined carriers switching markets or operating ships at faster speed - Long-Run, when shipowners have time to take delivery of new ships and shippers have time to rearrange supply sources. Momentary equilibrium is the freight rate negotiated for prompt ships and cargoes, the spot market that owners and Charterers deal with day to day, the ships are ready to load and the cargoes are awaiting transport with the deal having to be done. - The shipping market is highly fragmented in this time frame, falling into regions such as the Arabian Gulf, The Caribbean, the United States Atlantic Coast, The Pacific and the Atlantic, local shortages and surplus es build up creating temporary peaks and troughs which show up as spikes on the freight chart, this Is the market which owners are constantly trying to anticipate when selecting their next cargo and deciding whether or not to risk a ballast voyage to a better loading point - In such short term markets, sentiment is often the real driver, if there are a few more ships than cargoes but owners still believe that the rates are rising, they may decide to wait, this could manifest the rising of freight rates as the supply of ships would not match the cargoes - Fundamentals have the last say, if the surplus of ships persists the owners holding back may not be able to fix at all and they start to haemorrhage cash, the rates quickly collapse so when the supply and demand are roughly balanced, the shape of the supply curve is determined by sentiment rather than fundamentals a problem that sometimes misleads analysts and traders. In the short run, there is more time for owners and charterers to respond to price changes by moving ships into and out of lay-up so the analysis is a little different. There are 3 possible scenarios we can consider, when many ships are currently being laid up, and there is a sudden influx in demand, the freight rates do not increase much as the laid up ships quickly come back into the market and they absorb the increase in demand. - If however the entire fleet is operational and running at full speed, then the market is now set by the oldest and least efficient ships which need very high freight rates to tempt them into service - When there are no more ships, the freight rates are bid up by the shippers and the level to which it reaches is very much dependent on their desperation for transport. This is unstable and shippers would continuously look for cheaper supply sources and high freight rates almost always trigger investment activity by owners and shippers In the long run, when the size of the fleet can be adjusted by ordering new ships and scrapping old ones ,the longer term adjustment mechanism adjusts the balance in the supply and demand through the 3 other markets, the sales and purchase market, the newbuilding market and the demolition market. - When freight rates fall the profitability of ships and thus the second-hand value all fall, ships are scrapped, removing them from the fleet permanently and thus this reduces surplus - Falling second hand prices make new uses of the surplus tonnage financially viable, for instance it can be used as storage or used for other types of cargo. ( These would increase the demand for the ships, whilst the supply would remain the same, which would lead to higher freight rates ceteris paribus ) - The opposite is true for high freight rates, second hand ships become more expensive than the new buildings and the shipowners turn to the newbuilding markets and the order book expands rapidly. The combination of volatile demand and the significant time lag before the supply adjusts to demand creates the framework for the shipping market cycles, shipowners tend to base investment on the current state of the market , ordering more when freight rates are high and fewer when the freight rates are low, however the delay in the delivery of ships means that demand may have changed by the time the ships are delivered and the cyclical tendency is amplified. In years of recession the negotiation goes in the charterers favour, whilst in the boom the owners get the upper hand, during a sequence of good and bad years, the prevailing sentiment becomes part of the supply curve and continues to determine its shape until something changes the sentiment. Our tasks as economists is to reduce this apparently disorganised jumble of causes and effects to a more structured form which helps us to analyse the influences on cycles. The world economic model provides the main stimulus to the shipping cycles, shipping is about sea transport and the main purpose of the shipping cycle is to adjust the fleet to changes in the volume and composition of world seaborne trade, we must thus recognise the factors which influence the demand for a product - Firstly this consists of business cycles, which give rise to short-term changes in the demand for sea transport and is a major contributor to shipping cycles - Secondly it consists of economic shocks, they generally produce major changes of trend and extreme changes in shipping demand, including wars, political crisis, and the sudden changes in the economics of some major commodity such as oil. - Lastly, secular trends are major economic changes of the direction which may accompany the development of new technology or the emergence of a new major region, so secular trends are the ones which underly the long-term cycles and is perhaps the most neglected of the 3 - On the other hand, if they decide to use the charter market, then they will not make the long term commitment to shipping - Ultimately this segment will affect the structure of the markets There are 4 aspects of the adjustment process which result in a complex process, 1. Shipbuilding time lag complicates the adjustment process, orders placed at the top of the cycle when rates are very profitable, have no effect on current rates, so investors keep ordering new ships which are then delivered a couple of years later, this surge of supply thus drives rates down encouraging owners to under-order/ 2. During the delivery time lag, ship demand often changes in a direction which ship investors do not anticipate when they placed their orders for new ships, thus when the new ships are eventually delivered, they would upset the balanced even more 3. Peaks and troughs are filled with emotion, there is thus a tendency for the investors to react to the violent and often unexpected swings in freight rates 4. A major crisis, which happens every now and then, would create the need for a much greater adjustment in the supply of ships that can be achieved by these minor adjustments in the tonnage of ships delivered or scrapped There are 4 shipping markets for a owner to consider: 1. Newbuilding Market 2. Freight Market ( Where ships are chartered and FFAs are concluded) 3. Sale and Purchase Markets 4. Demolition Market A Contract of Affreightment ( COA ) is when the shipowner undertakes to carrying quantities of a specific cargo on a particular route or routes over a given period of time using ships of his choice within specified regions Bare boat charters are when the owner of the ship contracts to another party for its operation, the ship is operated by the second party as if he owned it. Laytime is the period of time agreed between the party to a voyage charter during which the owner will make the ship available for loading or discharging the cargo, during the laytime, this loading and/or discharging time is free Demurrage is the money payable to the shipowner for delays which the owner is not responsible for, when the laytime is exceeded, the owner has to be compensated for this time delay. Despatch is the money payable to the shipper, which the shipowner had agreed to pay when the ship is loaded and discharged faster than the laytime. C.i.f. is the purchase price of the goods by the importer including payment of insurances and freight which is arranged by the exporter f.o.b. is when goods are purchased at cost and the importer is responsible for making his own arrangement for insurance and freight the same shipowners are usually trading in all 4 of the markets we had mentioned previously and thus their activities are closely correlated, when the freight rates rise or fall, the changing sentiment ripples through into the sale and purchase market and from there into the newbuilding market, with the balance sheets of the companies trading in the different markets acting as a llink The freight market provides freight revenue, the main source of cash for the shipping companies, there are 3 sectors to this market 1. Voyage market -- Transport for a single voyage 2. Time charter market -- Hires the ship for a defined period 3. Freight derivatives market -- Forward contracts settled against an index The freight rates are the primary motivating force driving the activities of shipping investors, the other cash inflow comes from the demolition market, where old or obsolete vessel are scraped and this is a useful source of cash especially during recession The purchase and sales markets is a more subtle market, money will change hands when a ship is bought or sold, between the shipowner and the future shipowner, but the actual amount of cash held by the industry does not change. The only real source of wealth is trading cargo in the freight market Cash spent on new ships on the other hand flows out of the shipping industry as it is used to pay for materials, labour and profit. As a rule of thumb, during recessions, the cash strapped shipowners would try to sell their ships, and no one would be willing to buy at high prices, thus at the end of it, only the demolition market would be willing to bid for it, at low prices. - This would lead to a reversal of the trend as the supply falls and the freight rates rise again. The market, just like squeezing old and inefficient ships out of the market during troughs and bringing in new and replacing them with more efficient and newer ships, also do the same thing for shipping companies, the true survivors of peaks and troughs in the market, are companies which have good and solid strategies and are truly competent, the incompetent ones are squeezed out of the market and newer more competent ones who want market share replace them There are separate markets for different ships in the freight market, what happens in one sector however would eventually ripple through into the others, owing to the fact that the same broad group of traders are usually behind the trading activity It takes time for ships to move around the world, thus there are separate regional markets too which are only accessible to ships ready to load cargo in that area When a ship is chartered or a freight rate is agreed, the ship is said to be fixed, these are arranged in much the same way as any major international hiring or subcontracting operation, shipowners have vessels, charterers have cargo, and they are put together by brokers. - The quantity, timing , and physical characteristics of the cargo will determine the type of shipping contract required, the broker's task is to discover what cargoes or ships are available, the expectations the owners and charterers have about what they will be paid or pay and what is reasonable given the current state of the market. They thus negotiate a deal for their client in tense competition with other brokers Brokers also offer other services like post-fixture processing, dealing with disputes and providing accounting services in respect of freight, demurrage, etc. this is carried out by some owners or shippers themselves but requires a staff and management that owner large shipping companies can justify Under a Voyage Charter, the shipowner contracts to carry a specific cargo in a specific ship for a negotiated price per ton which covers all costs, a variant is the c.o.a in which the shipowner contracts to carry regular tonnages of cargo for an agree price per ton, covering all the costs - Similar to taxis, they transport a cargo from port A to port B, for a fixed price per ton. The broker will fix a ship for the voyage at a negotiated freight rate per ton of cargo, the terms will be set out in a charter-party and if all goes well, the ship arrives on the due date, loads the cargo and transports it. - If the voyage is not completed within the terms of the charter party, then there will be a claim, they will thus be compensated ( Demurrage, Despatch ) - Problems arise when there are disputes regarding the demurrage and despatch, as each party would argue as to why they are right or not in the wrong ( blame external circumstances out of their control etc. ). These compensations can be very large especially when the costs are high - Shipowners usually try to receive a demurrage payment equivalent to his daily hire charge The time charter is an agreement between owner and shipper to hire the ship, complete with crew for a fee per day, per month, or per year. The shipowner pays the capital costs and operating expenses whilst the charter pays the voyage costs ( Port costs; Bunkers etc.) The owner continues to manage the ship but the charterer instructs the master where to go and what cargo to load and discharge - Similar to renting a car, with a chauffeur included in the package. - Gives the charterer operational control of the ships carrying his cargo while leaving ownership and management of the vessel in the hands of the shipowner, the length of the charter may be the time for a single voyage or a standard period of months of years - The charterer directs the commercial operation of the vessel, paying bunkers, port charges and canal dues, and cargo-handling costs, the shipowner has a clear basis for preparing the ship's budget, he knows the ship operating costs from experience and is in receipt of a fixed daily or monthly charter rate. - Shipowners often use a long time charter from a major corporation as a security for a loan to purchase the ship needed for the trade - Shipowners must state the vessel's speed, fuel consumption and cargo capacity and the terms of hire would be adjusted should the ship not perform at these standards, conditions are also set out under which the vessel is regarded as 'off-hire' , where the charterer is not obligated to pay the shipowner such as during emergency repairs - Long time charters also deal with adjustment to the hire charge in the event of the vessel being laid up and will set out certain conditions under which the charterer is entitled to terminate the agreement - This arrangement is attractive if the shipper does not want to be a shipowner, it may also work out to be cheaper than buying as owners of larger fleets have lower overheads and thus lower costs as compared to someone with a small fleet, The charterer may also be a speculator anticipating a change in the market The bare boat charter hires out the ship without crew or any operational responsibilities, the owner just pays the capital costs, it's just a financing arrangement with no ship management expertise required from the owner. - A good as leasing the car, or temporarily buying the boat. - If the company wants full operational control over the ship but does not wish to own it, they arrange a bare boat charter. The period is usually 10-20 years, the charterer manages the vessel paying all operating and voyage costs - The owner, usually a financial institution such as a life insurance company is not active in the operation of a vessel and does not require specific maritime skills, its just an investment. The advantages are that the shipping company does not tie up its capital and the nominal owner may obtain a tax benefit. Capital Costs : Capital, Brokerage Operating Costs: Wages, Provisions, Maintenance, Repairs, Stores and Supplies, Lube Oil, Water, Insurance, Overheads Port Costs : Port Charges, Stevedoring Charges, Cargo Holds, Cargo Claims Others : Bunker Fuel, Canal Transit Dues Contract of Affreightments are a little more complicated, the shipowner agrees to carry a series of cargo parcels for a fixed price per ton, the single contract has an agreed price per ton and the details of each voyage are dependent on the shipowner, the shipowner thus is able to plan the use of his ships in the most efficient manner. He can switch cargo between vessels to give the best possible operating pattern and consequently a lower charter rate. He can also arrange for backhaul cargoes and improve ship utilisation - Most COAs are in the

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