1. Jan.Hoffmann@UNCTAD.org Geneva, May 2009 Determinants of Transport Costs

2. Maritime Freights 1: Determinants 2: Fluctuations 3: What can we do?

6. Differences in maritime freights depend on…

7. 1)Distances 2)Economies of scale 3)Imbalances 4)Type & value of goods 5)Competition 6)Port characteristics

8. Differences in maritime freights depend on… 1)Distances 2)Economies of scale 3)Imbalances 4)Type & value of goods 5)Competition 6)Port characteristics

9. Freight rates and Distance in the Caribbean UNCTAD Transport Newsletter, 1st Quarter 2007 

10. Distance Doubling the distance leads to a increase of maritime transport costs (incl. insurance) by about 15-20% … averages, empirical data ECLAC, FAL 191, Wilmsmeier, Hoffmann Handbook of Maritime Economics, Kumar, Hoffmann 

11. Differences in maritime freights depend on… 1)Distances 2)Economies of scale 3)Imbalances 4)Type & value of goods 5)Competition 6)Port characteristics

12. Economies of Scale moving 10 000 tons instead of 100 (in one transaction) reduces unit costs by 40 to 50% 

13. Feb 2008 costs 1100TEU4250TEU8750TEU 13000 TEU Construction costs million USD 2877135167 Construction costs USD per TEU 25 00018 11715 43012 850 Crew15 to 17 Source: Dynamar, 2008, via Antonio Zuidwijk 

14. Economies of Scale CRS, 28 January 2009 

15. Container ship sizes 27.- US$ saving/ container/ trip using “post panamax” versus “panamax” (Drewry) 

16. Mergers of shipping companies Savings thanks to larger volumes (Roland & Berger) 

17. Port operations 12 US$ per move savings with global operators Drewry 

18. Differences in maritime freights depend on… 1)Distances 2)Economies of scale 3)Imbalances 4)Type & value of goods 5)Competition 6)Port characteristics

19. Imbalances CI-Online 28 January 2009 

20. Supply/demand Trans-Pacific trades Containerization International 

21. Imbalances In Barbados, which freight rates would you expect to be higher: Those for imports, or Those for exports ? 

22. Differences in maritime freights depend on… 1)Distances 2)Economies of scale 3)Imbalances 4)Type & value of goods 5)Competition 6)Port characteristics

23. Merchandize type and value Increase the value by 1% implies an increase of transport and insurance costs by around 0.3 – 0.4% 

24. Differences in maritime freights depend on… 1)Distances 2)Economies of scale 3)Imbalances 4)Type & value of goods 5)Competition 6)Port characteristics

25. Competition with land transport If countries are neighbours, with paved roads, maritime transport costs are around 10% lower Fotos: Jan Hoffmann 

26. Competition between carriers Receiving 20 instead of 5 companies freights go down by around 12% 

27. Competition between carriers Case study Caribbean If the company itself has no direct service (i.e. it only has a service with transshipment): This company’s freight rate + $650 If other, competing, companies do provide a direct service: This companies freight rate - $425 

28. Source: Hoffmann, Wilmsmeier, IAME 2007 Competition between carriers Case study Caribbean 

29. Differences in maritime freights depend on… 1)Distances 2)Economies of scale 3)Imbalances 4)Type & value of goods 5)Competition 6)Port characteristics

30. Port reform Difference between “best” and “worst” case in Latin America: 25% of worst case 

31. Port reform 

32. Dependent variable: maritime transport costs per tonne of containerizable cargo Wilmsmeier, Hoffmann, Sanchez, in: Porteconomics, 2006 

33. Dependent variable: maritime transport costs per tonne of containerizable cargo Better port infrastructure reduces maritime transport costs 

34. Dependent variable: maritime transport costs per tonne of containerizable cargo Better (perceived)port efficiency reduces maritime transport costs Better (perceived) port efficiency reduces maritime transport costs 

35. Dependent variable: maritime transport costs per tonne of containerizable cargo Better general transport infrastructure does NOT reduce maritime transport costs 

36. Dependent variable: maritime transport costs per tonne of containerizable cargo Port privatization in the EXPORTING country reduces maritime transport costs 

37. Dependent variable: maritime transport costs per tonne of containerizable cargo Trade facilitation in the IMPORTING country reduces maritime transport costs 

38. Dependent variable: maritime transport costs per tonne of containerizable cargo Better connectivity between ports/ more competition among carriers reduces maritime transport costs 

39. To sum up: Differences in maritime freights depend on… Distances Type & value of goods Imbalances Competition Economies of scale Port characteristics

40. Lower Transport Costs -> More trade -> Economies of scale -> Lower Transport Costs

41. Maritime Freights 1: Determinants 2: Fluctuations 3: What can we do?

42. Bulker Spot Earnings $/day Source: Clarksons Research, 27 March 2009

43. Containership charter rates $/day Source: Clarksons Research, 27 March 2009

44. Causes of the (increased) volatility ?

45. 1)Fluctuations in demand 2)The pig cycle 3)Speculation 4)Lower variable costs 5)The oil price (?) 6)Trying to avoid future volatility…

46. Less trust – less demand “If, for instance, an Indian importer wants to buy grain from the US, the exporter might not trust you and then the deal will not be done.” Martin Sommerseth Jaer, shipping analyst at Arctic Securities in Oslo, as quoted in Fairplay on-line, October 2008. 

47. Less trust – less demand THE IMF predicted today a near-total standstill for the global economy in 2009, with sharply lowered trade projections. (…) world growth is expected to fall to its lowest rate since the Second World War Fairplay on-line, 28 January 2009 

48. Causes of the (increased) volatility ? 1)Fluctuations in demand 2)The pig cycle 3)Speculation 4)Lower variable costs 5)The oil price (?) 6)Trying to avoid future volatility…

49. The shipping cycle 

50. A presentation of four years ago… 

51. Pork meat is expensive: the farmer “orders” piglets Data from Clarksons Research 

52. Piglets take time to grow 

53. Pigs enter the market: Price of pork meat falls 

54. The model of a cycle ORDERS t =  CHARTERRATE t CHARTERRATE t =  (1/DELIVERIES t ) DELIVERIES t =  ORDERS t-24 

55. A “forecast”

56. “The shipping industry is now attempting to undo the self-inflicted damage of a bloated new building order book, the growth of which has encouraged a near doubling of shipbuilding capacity in the past ten years.” Lloyds List, January 2009 

57. Causes of the (increased) volatility ? 1)Fluctuations in demand 2)The pig cycle 3)“Speculation” 4)Lower variable costs 5)The oil price (?) 6)Trying to avoid future volatility…

58. More “speculation” … i.e. more traders who are not themselves users or providers of the goods or services. 

59. More traders are participating in the market who are not themselves users or providers of transport services, but purchase future positions aiming at speculative capital gains. As has been seen in other markets, such as shares, crude oil, or food commodities in early 2008, the expectation of future gains encourages traders to hold on to positions, thus further worsening the shortage of supply and increasing the prices - until the bubble bursts… 

60. Causes of the (increased) volatility ? 1)Fluctuations in demand 2)The pig cycle 3)“Speculation” 4)Lower variable costs 5)The oil price (?) 6)Trying to avoid future volatility…

61. Higher fix costs – lower variable costs 

62. Change of freight rate 

63. 

64. Causes of the (increased) volatility ? 1)Fluctuations in demand 2)The pig cycle 3)“Speculation” 4)Lower variable costs 5)The oil price (?) 6)Trying to avoid future volatility…

65. What about the oil price? 

66. Oil price and freight rates 

67. Causes of the (increased) volatility ? 1)Fluctuations in demand 2)The pig cycle 3)“Speculation” 4)Lower variable costs 5)The oil price (?) 6)Trying to avoid future volatility…

68. And if I want to protect myself…? 

69. The higher the volatility… … the more the traders and providers will want to purchase protection, i.e. future contracts (e.g. Forward Freight Contracts – FFCs)… … and the more future contracts there are, the more volatility we get. 

70. Causes of the (increased) volatility ? 1)Fluctuations in demand 2)The pig cycle 3)Speculation 4)Lower variable costs 5)The oil price (?) 6)Trying to avoid future volatility…

71. Maritime Freights 1: Determinants 2: Fluctuations 3: What can we do?

72. What can we do?

73. To reduce fluctuations of freights To reduce fluctuations of freights Carriers: Think long term

74. To reduce fluctuations of freights To reduce fluctuations of freights Carriers: Think long term Ports: invest and reform to avoid congestion

75. To reduce fluctuations of freights To reduce fluctuations of freights Carriers: Think long term Ports: invest and reform to avoid congestion Governments: Do not re-invent “national fleets”.

76. To reduce fluctuations of freights To reduce fluctuations of freights Carriers: Think long term Ports: invest and reform to avoid congestion Governments: Do not re-invent “national fleets”. this would be a pig cycle of ideas…

77. Maritime Freights 1: Determinants 2: Fluctuations 3: What can we do?

78. What UNCTAD does…

79. UNCTAD’s Trade Logistics Branch Sections: Trade FacilitationTransport Legal and Policy

80. UNCTAD’s Trade Logistics Branch Activities: Meetings and seminars Research and publications Technical cooperation projects

81. UNCTAD’s Trade Logistics Branch Meetings and seminars Activities: Meetings and seminars Research and publications Technical cooperation projects

82. “Expert Meetings”

83. Conference on ICT and Logistics

84. Workshops on WTO – Negotiations on Trade Facilitation

85. UNCTAD’s Trade Logistics Branch Activities: Meetings and seminars Research and publications Technical cooperation projects

86. Review of Maritime Transport

87. UNCTAD Transport Newsletter Quarterly Electronic distribution Articles, and news about publication and events

89. Studies e.g. on legal aspects of international trade

90. UNCTAD’s Trade Logistics Branch Meetings and seminars Activities: Meetings and seminars Research and publications Technical cooperation projects

91. Global Projects: e.g. Customs Automation

92. e.g. “Capacity Building in Trade and Transport Facilitation for Land Locked and Transit Developing Countries ” Corridor: Walvis Bay - Gaborone Corridor: Asuncion - Montevideo Corridor: Bangkok - Vientiane

93. Port Training Programme

94. Integrated country projects: e.g. Afghanistan “Emergency Customs Modernization and Trade Facilitation project”

95. Maritime Freights 1: Determinants 2: Fluctuations 3: What can we do? Thank You