17/10/12 DEMAND AND SUPPLY IN SHIPPING

DEMAND Refers to desire of a customer or buyer to obtain a quantity of good and services, supported by the willingness or ability to purchase and pay for the goods or services at a particular price in a given period of time. 17/10/12

DERIVED DEMAND A critical feature of the demand for most shipping services is that it is a derived demand. Discuss with the aid of examples, the implications that this feature creates both for ship owners and for shipping management. INTRODUCTION Derived demand is a sort of demand for a service or goods that depends on the demands for the outputs - so in the case of shipping demand, it depends on demand in the world for the goods being shipped (e.g. as demand for grain trade increases, so demand for shipping grows with it). Shipping is a derived demand, which means that shipping as an industry depending on people who are willing to trade by sea using ships. The efficiency of it stimulates sea trade and even though there are numerous factors that have their effect on shipping, ultimately it reacts to demand and therefore grows in proportion with world trade.

Fleet

The demand for sea borne trade is influenced by the 5 factors listed below, as Martin Stopford suggests (Stopford, 1991): * The world economy * Seaborne commodity trades * Average haul * Transport costs * Political events However, it is wrong to think that ship owners themselves do not influence the supply and demand balance - on the contrary, sometimes ships can be slowed or extra ports called on, repairs may be delayed or sped up (e.g. tanker companies tend to decelerate their trips in slow-moving summer season as that is when demand is at its lowest point). `

THE WORLD ECONOMY The world economy is the most influential factor for shipping demand. However, there is more to the statement above than meets the eye - one of the facts about world economy is that it has,what is known as ‘business cycles’ (Stopford, 1991 ). Their definition being that world economy moves in cycles of 4 to 5 years, with alterations of increases and decreases in the degree of economic growth. This results in shipping demand developing not smoothly but in chains of periods of high and low advance. For example, until the early 1970s speed of growth of industrial output was lower than speed of growth of shipping trade; whereas in 1970s the shipping trade increased more gradually. Another interesting factor about world economy’s influence is that industrial growth causes changes in demand for bulk commodities (e.g. iron ore). Industrial growth may be influenced in future by new number of countries - as new countries will come into view or some countries may weaken in significance. Japan is an example of such a process - it came out as an industrial economy during 1960s, which resulted in Japanese imports generating 54% of the increase of the world deep sea dry cargo trade between (Stopford, 1991). One of the possible future trends in shipping industry would to be to expand and improve its waterways - one of the examples that will affect future of the industry, is Russia. Russia is about to open up its enormous and abandoned river navigation system to Western shipping. These news have already attracted much attention from Western ship owners - they are waiting to develop opportunities of various Caspian trade and in the longer run to participate in Russia’s industrial future potential (Thomas Orsz&Land, 1999).

2. 2 SEABORNE COMMODITY TRADES Effect of sea borne commodity trades on the demand in shipping industry can be either short or long-term. The short- term type is influenced by seasonal stimulus and stock building. When seasonal effects take place it is usually agricultural commodities that are the subject of change (during harvest time). For example, in grain, trade exports from US Gulf decline during summer and rise in September - when the crop is harvested; therefore achieving 50% of increase in shipping activity between September and December. Another example is oil trade which has its series of seasonable variations due to changes in energy use in Northern hemisphere - resulting in more oil being shipped in autumn and early in winter than during summer and spring seasons. The other type of short-term component is stock building, meaning that any particular industry accumulates stock in case of future scarcity or rise in prices. For example, mini tanker booms in 1979 and instigated by brief stock building in the world oil industry. One of the examples of long-term influence is that of the OPEC (Organisation for Petroleum Exporting Countries) oil price hike in 1973, when tanker industry has been running at a loss (and dry cargo had short phases of success) right till the 1990s’ recovery. Corporate performance of shipping management companies during that time was low, which resulted in bad news for shareholders and providers of debt. Some well known names in the industry have even gone bankrupt. As a result, most of the ownership was transferred from single owner operators and private family companies to banks, cargo movers and governments (Spruyt, 1990).

2.3 AVERAGE HAUL Meaning that the demand for shipping is generated by the distance over which the goods are transporte d. For example, a ton of crude oil shipped from the Middle East area to USA, generates a higher demand for shipping then the same ton going to Europe. So that, crude oil cargoes from Middle East going to powerhouses in Japan, USA and Europe increased tonnage carried by sea. Long haul steam coal and ore cargoes from South America, South Africa and Australia to industrial consumers had similar effect. 2.4 TRANSPORT COSTS The transport cost factor is of a very important nature to the whole shipping industry, as according to European Commission (1985), transport costs added up to 20% of the cost of dry bulk cargo within Europe. Due to the new technologies, bigger ships and therefore better efficiency, transport cost has been considerably reduced over the last century. 2.5 POLITICAL EVENTS Political changes tend to affect demand in shipping very abruptly and without warning. Events like that may range from war and revolution to non-straightforward governmental decisions. One of the non-violent examples of political problems: developing countries - members of UNCTAD (United Nations Conference on Trade and Development) had attempted to take control over local shipping, affecting local freight taxes and therefore changing freight patterns and increasing complication. However, not all events have direct effect on shipping industry - usually indirect influence is more important. Example being Suez Canal proximity to Israel and Egypt wars and significance of this route to the course of trading.

Dec, 2008

Development of World Seaborne Trade (selected years in millions of tons loaded)

In January 2011, there were 103,392 commercial ships in service with a combined tonnage of 1,396 million dwt. Looking at individual sectors, oil tankers accounted for 475 million dwt and dry bulk carriers for 532 million dwt, representing an annual increase of 5.5 % and 16.5 % respectively; The c ontainership fleet reached 184 million dwt in January 2011 (8.7% over 2010). The fleet of general cargo ships stabilised at 109 million dwt. The tonnage of liquefied gas carriers continued to grow, reaching 43 million dwt (an increase of 6.6%). ( Source: UNCTAD Review of Maritime Transport 2011, p. 36)

Development of world fleet by millions of dwt* Source: UNCTAD

CONTINUED SUPPLY OF NEW TONNAGE ORDERED IN THE PRE-CRISIS YEARS.

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