Using the model of demand and supply and freight rates review and analyze the dynamic changes

in the
various shipping markets, which have occurred in response to changes in t

he world economy, international trade and the major commodity trades over the last seven (7) year
period (2013 to 2019). The major commodity trades comprise the following:

a. Oil and Gas- Crude oil, refined petroleum products, gas and chemicals and the related liquid bulk
tanker trade.

b. Main Bulks- Iron ore, grain and coal.

c. Other Dry Bulks- Bauxite/ Alumina and Phosphate.

d. Minor Bulks- Liner Shipping- Containers- All Trades

Reference readings:

 Principles of Economics, Gregory Mankiw (Sixth Edition), 2012

 Maritime Economics, Martin Stopford ( Third Edition), 2009

 Review of Maritime Transport, UNCTAD, (Annual Reports, 2013 to 2019)

 Shipping Reports- Lloyd’s Intelligence, Drewry Maritime Research, Clarksons Research, Hellenic
Shipping News, BIM

CO.
Introduction

The demand for ships is derived from the demand for the goods that they carry; that is why
economists refer to merchant shipping as a derived demand. The customer, who is usually but
not always, in a different country from the producer of the goods, wants those goods to be
delivered to him safely and at minimum cost. Speed is certainly important for some commodities
and for these there are other forms of transport such as airfreight which is ideal for small but
highly valuable items of cargo. But air freight is very costly so that it would be ridiculously
expensive to transport, say, coal or iron ore by air even if it were possible. Sea transport may be
considered a relatively slow but inexpensive form of transport and because modern ships are
capable of carrying hundreds of thousands of tones, the cost per tonne/ kilo metre adds only a
small amount to the cost of the commodity being carried. This enables bulk materials to be
moved half way around the world and still arrive at an economic price. That is why by far the
greatest volume of goods involved in international trade is carried by sea.

KEY INFLUENCES ON SUPPLY AND DEMAND

The maritime economy is enormously complex, from the many influences on the shipping
market we can select ten as being particularly important, five affecting the demand
for sea transport and five affecting the supply. As far as the demand for sea transport is concerned
the ‘demand function the five variables are the world economy, seaborne commodity trades,
average haul, random shocks and transport costs. To explain the supply of shipping services the
‘supply function, we focus on the world fleet, fleet productivity, shipbuilding deliveries,
scrapping and freight revenues. The way in which these variables fit together into a simple model
of the shipping market is shown in Figure 1. This model has three components, demand
(module A), supply (module B), and the freight market (module C) which links the demand and
supply by regulating the cashflow flowing from one sector to another. How does the model
work? The mechanics are very simple. In the demand module (A) the world economy, through
business cycles and regional growth trends, determines the broad volume of goods traded by sea.

Figure 1 The shipping market supply and demand model

Source: Martin Stopford, 2008
Freight Revenue

The supply of sea transport is 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 their services in the
long term. In the shipping industry there are two main pricing regimes, the freight
market and the liner market. Liner shipping provides transport for small quantities of
cargo for many customers and is essentially a retail shipping business16, accepting cargo
from a wide range of customers and a very competitive one. In contrast bulk shipping
is a wholesale operation, selling transport for shiploads of cargo to a small number of
industrial customers at individually negotiated prices.
Markets regulate and manage the cash flow from one sector to the other which drives the
continuous supply-demand adjustment.
Forward freight agreement. Derivatives market and hedging.
Contract of Affreightment. Longer Term. Five (5) to ten (10) year time periods.
Time charter market. Medium term. One (1) to five (5) year time periods
Spot market or Voyage charter market. Short term.
Demand for Sea Transport-The World Economy
Average haul