Factors Affecting Demand And Supply In The Shipping Freight Market

Types of Cargos

Question:

Discuss about the Game Theoretic Modeling and Optimization.

The paper seeks to delve into demand and supply in the shipping freight market in the world. The paper has three sections, the first deals with the factors effecting demand and supply in the shipping market, the second section studies the freight rate in tamp shipping market while the third section applies three types of equilibrium to the shipping to study this demand and supply. The factors impacting the demand and supply are issues related to cargo, vessels, sailing, ports and international relations. The tramp freight section delves into diverse terms like contracts of affreightment and time charter. The final section delves into three types of equilibrium namely, momentary equilibrium, short-run equilibrium and long-run equilibrium. The section discusses each of these three equilibrium conditions and interprets from the view of the shipping industry Management. The assignment has been provided with graphs and charts to make the research more substantial and strong. Graphs, figures and charts from several reliable sources like the European Union, the Baltic Dry Exchange, S & P Global Platts and the World Shipping Council, which has, strengthen the quality of the data manifold. The author before embarking on explaining the three sections has given a brief idea on the types of cargos. A brief idea about the main logistics hubs, the hub and spoke concept and the main international shipping has also been given. This would help the reader to comprehend the various aspects of the shipping freight market.

There are several factors affecting supply and demand in shipping freight market internationally like cargo related issues and vessel related issues. The goods transported using freight carriers can be of five types namely, container cargo, liquid bulk, dry bulk, break-bulk and Ro-Ro.

The container cargo consists of materials, which are transported in containers and are easily breakable. They consist of FMCG products, electronic goods and food products, which are packaged before transporting.

The liquid bulk consists of liquid raw materials like crude oil and finished products like wine, which are transported in bulk. This type of cargo mostly consists of oils of various types like petrol, kerosene and even vegetable oil.

The dry bulk cargos are transported from one port to another in huge bulks. The dry bulk freight consists of dry commodities like metals , coals, grain, sand , sugar, salt and even yeasts used for making alcoholic drinks.

Cargo Related Issues

Break bulk cargo consists of commodities, which are broken into parts and racks to enable easy transport across ports. The category consists of freight goods like paper, wood, bags of cocoa, rolls of steel and components of heavy machinery like turbines.

The roll on/roll off (Ro-Ro) consists of cargo which are loaded and off-loaded easily. They consist of automobile products like cars, buses, agricultural vehicles like tractors and threshers and construction vehicles like cranes.

The above-mentioned categories of shipping freight are transported from one port to another and constitute a large percentage of international trade. Demand and supply plays a very important role in the shipping freight industry. the following are the factors which effect the demand and supply in the shipping freight industry:

Cargo related issues are one of the most important factors affecting demand and supply in the shipping freight industry. According to the World Shipping Council, the shipping freights across oceans constitute sixty percent of the international trade. The quantity of goods commercial container ships carry amount to about $ 12 trillion in 2017  (Worldshipping.org. 2017). The cargo ships are now capable of carrying 246 million deadweight of goods, as per the graph below. The council reports show that the countries exporting majority of the freights are from the Asia, Europe, North America, South America and Australia. These markets also account for producing majority of the commodities, which traded in the freight market. Many commodities like agricultural products are seasonal in nature. For example, the second figure shows variable wheat export by Ukraine in three years namely, 2015-16, 2016-17 and 2017-18.  Considering the fact that Ukraine is one of the leading exporters of wheat, the seasonal nature of wheat export means the vessels carrying wheat freight would be in demand only during certain time of the year.

Some countries may require importing certain commodities during a specific time of the year, which creates high demand on the shipping freight. For example, there are heavy demands for luxury goods in countries during the festival times since the upper class of the society around the world demand these goods. This creates high demands for the vessels carrying luxury goods. The figure below shows the Baltic Dry Index, which indicates the amount of raw materials moving across the ocean. The rising and falling movements of the graph shows that there are higher flows of goods across the seas during some time of the year.  One can construe that the changing graph actually projects changes in demand and supply of certain raw materials. For example, export of meat or food items creates demands for vessels with refrigeration facilities while metal exporters demand bulky vessels. Again, food oils require cleaner vessels compared to transport of petrol. This also shows that there is more demand for particular kinds of vehicles during certain parts of the year. This discussion shows that shifting demands for vessels create cargo related issues in the shipping freight market management.

Vessel Related Issues

Vessel related issues comprise of several factors relating to the demand and supply of vessels. The number of vessels at the service of the exporters and importers differs from one part of the year to the other. These demands for vessels differ with the demand and supply of the commodities they carry. For example, the import of crude oil in the European Union according to the figure increased between 2010 and 2015 compared to 2005 and 2010. This shows that the demand for the vessels carrying bulk cargo like petroleum also increased with response to the increase in petroleum demand in the EU.

The increase in demand of a particular type of vessel like vessel with refrigeration facilities results in demand for new vessels. The graph below shows the major ship building nations, which supplies ships to the shipping freight market in response to this demand.

Advancement of shipbuilding technology and use of prefabrication method to manufacture ships has led to replacement old vessels by the new ones.  The new containers vessels flooded ship markets in the world. The recent ship market is dominated by China followed by South Korea and Japan. This increase in number of ships leads to more supply of ships compared to demand. This results in falling of freight rates as more ships enter the fleet serving the international marine trade. Thus vessel related issue in the shipping freight industry in relation to demand and supply have two problems. First, demand of a particular category of ship encourages increase in supply of that category of vessels. Second, increase in supply of modern ships has led to fall in the freight rates.

The sailing related issues refer to the varying conditions of sailing, which favours demand for particular types of vessels and consequently leads to increase in their freights.  For example, icebreakers enable the cargo ships to accede the ports of Europe and North America in the winter season to load and unload freights. One must also note that the ports of North America like Vancouver, New York and New Jersey and the European ports of Antwerp and hamburger are among the busiest ports in the world handling a huge bulk of international trade but remain blocked with ice for months. The icebreakers help the cargo ships to reach these ports and are in great demand. This increase in demand leads to increase in the freights rates of the icebreakers and ships carrying goods to and from those ports. Again some portions of oceans and rivers are relatively less deep which allow smaller ships to accede to them. As a result, these ships increase their freight rates taking advantage of their high demand. This discussion shows that special sailing conditions like icy ports lead to increase of demand for a specific type of vessel like icebreakers, which make ways through ice. These sailing condition related issues lead to increase in demand of these special ships, which lead to increase in their rates.

Sailing Related Issues

Port related issues refer to attributes of some ports, which influence demand and rates of freights of ships operating between those ports. For example, the ports like Shanghai, Singapore and Rotterdam are the highly congested due to the immense volume of cargo traded through them. As a result, ships commuting between these ports often charge higher rates than the ones travelling to less important ports like Karachi and Chittagong (brighthubengineering.com 2017). According to the World Shipping Council, the busiest ports of the world are concentrated in the developed markets of North America, Europe and Australia and the emerging markets of Asia and South America. Thus, major ports in these countries remain congested and handle huge volume of merchandise on daily basis. The vessels carrying cargo to and from these ports charge higher freight rates taking advantage of their higher demand. This shows that the conditions of the ports like position and amount of cargo handled have impact on the demand for vessels, which in turn affect the rates,   they charge.

International trade agreements between nations act as one of the main factors in the freight rates. Institutionalisation and technological advancements have emerged as one of the major factors operating the shipping freight market (Dillinger 2017). The liberalisation of the major market economies, institutions like the World Trade Organization and the European Union have fuelled global trade. This increase in the global trade led to huge exchange of goods between the countries. The advent of economical air travel rates led to majority of the international passengers opting for air travel over ships. Today, the ships handle a bulk of the international trade. The countries usually enter into agreements among themselves to arrange free trade between them. This has led to free trade between countries who are parties to certain bilateral agreements (Worldoceanreview.com. 2017). These bilateral free trade agreements between countries have deep impact on shipping freight markets.

Freight refers carrying of goods using ships across the ocean and rivers. Hiring refers to leasing the vessels for exporting cargos across oceans and rivers. Freight rates only refer to voyage charters, which the exporters pay to transport their goods using ships. The exporters often hire services from the shipping companies to transport their freights to other countries. The hirers can only avail the paid services of the shipping companies on pre-specified routes and time schedule. The two parties enter into contracts, which determine the terms and conditions of the usage of the shipping services.

Port Related Issues

Tramp freight shipping services refer to ships, which have no fixed schedule, or ports between which they carry goods. The tramps have no itinerary, which the clients can use to plan their transports. The ocean liners are ships, mostly big and very expensive ones, have foxed routes and time schedule according to which they transport. These oecna liners r chartered freights have schedules, which are advertised to the clients who book these ships to transport their goods.

The ocean liners are usually very expensive and provide better facilities like warehousing and cold storage facilities. The exporters have to book and enter into contract with the shipping companies in advance to avail the category of cargos appropriate for their goods. The tramp freights, tramp freighters or trampers usually are available more easily and require no advance booking.

The bareboat charter or demise charter is an agreement between the charterer and the owner of the ships where the charterer gains possession of the ships and can decide their schedule. The charterer or the customer uses his own human resources like captain and crew to operate onboard. Time or voyage is a contract between charterer and owner of ships retain ownership of the ships (Light 2016). The charterer however, can decide the course of the journey of the ship while the owner employs his human resources to operate the ships. Voyage charter contains the number of trips or voyages a particular ship would cover. The time charter or spot charter contains the loading and unloading costs (Tsvetkova et al. 2016). The time charter is discounted over a longer time-period and consider factors like port delay and bunking in the contract.

The contract of affreightment is the contract the owner of ships and the charterer enters. The ship-owner according to the contract agrees to allow the charterer hire the ships stated in the contract to carry goods specified in the contract between them. The charterer according to the contract agrees to pay a charge for the service of the ships’ owner called freight. The contract specifies the whether the ship owner would allow the charterer to use the whole ships or a portions of them (Dawood 2016).

The law pertaining to the contract of affreightment follows the general law of contract, which gives, empowers the parties to the contract to do acts, which are allowed under law. The laws also contain provisions, which allow the courts o intervene between the parties in cases of disputes between them. The parties namely, the ship owner and the charterer prepare the contract of affreightment according to the specific needs of particular shipping assignments. This to some extent allows them to minimise the chances of conflict of interests between them (steamshipmutual.com 2017).

International Relations

According to the World Economic Forum, the Strait of Malacca is one of the most important trade routes in the world whose importance is high. It is because it runs between Indonesia, Malaysia and Singapore, thus connecting Europe and Africa to Asia and America. The other two important trade routes are Suez Canal and the Panama Canal. The Atlantic Ocean is the world’s busiest oceans, which connects the developed markets of Europe and North America (Ad?sc?li?ei 2013). The Indian Ocean serves as one of the busiest marine trade routes because it connects the developed markets of the west to the emerging markets to Asia. These established trade routes run along and connect countries which export and import large amount of goods. These markets experience high demand for raw materials, finished products and intermediate products. The ships prefer travelling following these routes because there are less chance of return of goods and cancellation of orders in these markets (weforum.org. 2017). These trading routes connect trading hubs, which facilitate the international marine trades across the world. These marine logistics hubs follow spoke-hub distribution paradigm. There are feeder vessels, which transfer the materials to the main freight carriers, which transport the cargos to the destination ports.

The demand and supply in the international freight market interact with each other while determining the equilibrium prices. The following are the two types of interaction between demand and supply:

Momentary refers to situation when demand and supply equal each other. Considering the shipping industry, it can be said that in reality demand and supply can never balance each other. For example, the United States of America exported 5.2 million barrels per day petroleum to 101 countries and imported 10.1 million barrels per day from about 70 countries. This shows that the US on continuous basis creates demand and supply. The country exports petroleum to other countries in response to the demand in the international market and in turn imports more petroleum to respond to its own demand. Thus, in reality, demand and supply never meet each other and the shipping industry never gains momentary equilibrium (Eia.gov. 2017).

A short run equilibrium model refers to the situation when business organisations in the market try to supply equal to the demand generated by the consumers. The short run equilibrium is often considered as the only way of balancing demand and supply. The economists consider that there are no better ways to produce goods. The concept situation can be applied to explain the interaction of demand and supply in the maritime shipping freight industry as per the description given below. The companies try to produce goods at price p and output y. Let the firms be represented by i. If every firm i try to supply to the demand then ∑y_i  represents the supply of the firms. The total amount of demand fuelling the supply can be represented by Q_d(p). Under ideal condition, demand is equal to supply. Hence, ∑y_i  = Q_d(p).

The shipping industry has several charterer or exporters and importers who create the force of demand. The shipping companies create the force of supply in response of the demand. The shipping companies all around the world try to meet all the demands and achieve short run equilibrium. They provide shipping services so as to meet the demands of the international trade.

Long run market equilibrium takes place when the market is perfectly competitive and the demand is completely elastic.  Perfectly competitive market by definition consists of firms where every firm sells an identical product and no firm can control the market price alone.  Price elasticity refers to a large change in demand of products in response to small changes in price. In reality, perfectly competitive market is not fully feasible. As far as the freight shipping is concerned, the international organisations like the EU, the national governments of the countries and the large shipping companies have control over prices in the market. Moreover, long-run equilibrium considers only a small change in prices of goods as the determinant factors in determining the goods. However, in reality, several factors decide the demand for goods in the international freight industry like availability of goods in one market and economic conditions of the trade involved in trade. Hence, it can be summarised that, long run equilibrium is not applicable in the international freight industry.

Conclusion:

The discussion brings into light several facts about the shipping freight industry. First, there are multiple factors like vessel related issues and port related issues, which affect the demand and supply in the shipping industry. The economic position of the trading countries, their market conditions and their power to impact international trade have great influence on the international maritime trade. The trading hubs play great role in movement of freight traffic towards the places of demand. The international freight routes connect the important ports of America, Australia, Asia and Europe making them major demanders and suppliers in the international trade. There are both ocean liners for planned freights and tramps for short notice freights. The countries participating in the international marine trade keep on creating demands which the suppliers try to satisfy, in reality equilibrium market condition is not feasible.

References:

Ad?sc?li?ei, O., 2013. An Overview on the Implied Obligations in a Contract of Affreightment. Procedia-Social and Behavioral Sciences, 92, pp.7-15.

Bloomberg.com. 2017. BDIY Quote – Baltic Dry Index. [online] Available at: https://www.bloomberg.com/quote/BDIY:IND [Accessed 2 Nov. 2017].

Brighthub Engineering. 2017. The 5 Best and the 5 Worst Ports for Merchant Marine. [online] Available at: https://www.brighthubengineering.com/seafaring/122948-best-and-worst-ports-in-the-world/ [Accessed 3 Nov. 2017].

Dawood, A., 2016. Arbitration in Maritime Disputes. Journal of Shipping and Ocean Engineering, 6, pp.206-211.

Deng, J., Wang, H.B., Wang, C.M. and Zhang, G.W., 2017. A novel power market clearing model based on the equilibrium principle in microeconomics. Journal of Cleaner Production, 142, pp.1021-1027.

Dillinger, J. 2017. Exports By Country. [online] WorldAtlas. Available at: https://www.worldatlas.com/articles/exports-by-country-20-largest-exporting-countries.html [Accessed 3 Nov. 2017].

Ec.europa.eu. 2017. Oil and petroleum products – a statistical overview – Statistics Explained. [online] Available at: https://ec.europa.eu/eurostat/statistics-explained/index.php/Oil_and_petroleum_products_-_a_statistical_overview [Accessed 2 Nov. 2017].

Eia.gov. 2017. How much petroleum does the United States import and export? – FAQ – U.S. Energy Information Administration (EIA). [online] Available at: https://www.eia.gov/tools/faqs/faq.php?id=727&t=6 [Accessed 3 Nov. 2017].

Gain.fas.usda.gov. 2017. Cite a Website – Cite This For Me. [online] Available at: https://gain.fas.usda.gov/Recent%20GAIN%20Publications/Grain%20and%20Feed%20Update_Kiev_Ukraine_10-12-2017.pdf [Accessed 2 Nov. 2017].

Garg, J., Mehta, R., Sohoni, M. and Vazirani, V.V., 2015. A complementary pivot algorithm for market equilibrium under separable, piecewise-linear concave utilities. SIAM Journal on Computing, 44(6), pp.1820-1847.

https://www.statista.com/statistics/267603/capacity-of-container-ships-in-the-global-seaborne-trade/ [Accessed 2 Nov. 2017].

Jiménez, F., 2015. General context of carrier obligations in contracts of carriage of goods by sea-reference to Spanish and Colombian law. Vniversitas, (131), pp.363-390.

Light, D.A., 2016. Effects of Charter Party Arbitration Clauses Under the New Turkish Commercial Code. Journal of International Trade, Logistics and Law, 2(1), pp.21-26.

Luo, Y. and Lu, C., 2015. The New Explanation of Market Equilibrium Based on Theory of Labor Value. Asian Agricultural Research, 7(5), p.21.

Platts.com. 2017. Coal market data and price analysis products | Platts. [online] Available at: https://www.platts.com/product-list/coal/all [Accessed 3 Nov. 2017].

Rao, B.B., Kwesigabo, E.M., Rao, K.G. and Chandan, K., 2017. Secondary Users Market Equilibrium Pricing with an Opportunistic Perspective in Cognitive Radio Networks. International Journal of Networks and Communications, 7(3), pp.63-70.

Reserve Bank of Australia. 2017. Korea’s Manufacturing Sector and Imports from Australia | Bulletin – December Quarter 2013 | RBA. [online] Available at: https://www.rba.gov.au/publications/bulletin/2013/dec/2.html [Accessed 2 Nov. 2017].

Steamshipmutual.com. 2017. Steamship Mutual – Contracts of Affreightment – Nomination Terms. [online] Available at: https://www.steamshipmutual.com/publications/Articles/COANomination0107.asp [Accessed 3 Nov. 2017].

Stiglitz, J.E. and Rosengard, J.K., 2015. Economics of the Public Sector: Fourth International Student Edition. WW Norton & Company.

Tham, C.K. and Luo, T., 2015. Quality of contributed service and market equilibrium for participatory sensing. IEEE Transactions on Mobile Computing, 14(4), pp.829-842.

Tsvetkova, A., Eriksson, K., Levitt, R.E. and Wikström, K., 2016, June. Governing workflows in Business Ecosystems: The Case of Baltic Short Sea Shipping. In Proceedings of Engineering Project Organization Conference, Cle Elum, WA, USA (pp. 28-30).

World Economic Forum. 2017. The world’s most important trade route?. [online] Available at: https://www.weforum.org/agenda/2014/05/world-most-important-trade-route/ [Accessed 3 Nov. 2017].

Worldoceanreview.com. 2017. Global shipping « World Ocean Review. [online] Available at: https://worldoceanreview.com/en/wor-1/transport/global-shipping/ [Accessed 3 Nov. 2017].

Worldshipping.org. 2017. Trade Statistics | World Shipping Council. [online] Available at: https://www.worldshipping.org/about-the-industry/global-trade/trade-statistics [Accessed 2 Nov. 2017].

Xiao, J. and Ju, H., 2014. Market Equilibrium and the Environmental Effects of Tax Adjustments in China’s Automobile Industry. Review of Economics and Statistics, 96(2), pp.306-317.

Yue, D. and You, F., 2014. Game-theoretic modeling and optimization of multi-echelon supply chain design and operation under Stackelberg game and market equilibrium. Computers & Chemical Engineering, 71, pp.347-361.