1. Supply Freight S 1 Tonnage
In the short term, supply is finite. Supply curve goes straight up
Freight
Low Demand: Owners lay up least efficient ships and slow steam
Potential tonnage has been put into play, ships operate at full speed
S 1
As rates rise, Owners bring ships out of layup and increase speed
Tonnage 1
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2. Demand is inelastic. If you need a ship, you pay the going rate.
Freight
D 1
Demand is inelastic. If you need a ship, you pay the going rate.
S 1
But – if freight goes to “zero”, you will not charter all available tonnage.
Tonnage 2
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3. Supply and Demand Freight S 1 Tonnage D 3
Even with VLCCs at $200k/day – there are still no more ships in the short run.
D 1
D 2
Freight
As increased demand pushes returns above operating costs, Owners bring more tonnage to market
Further demand puts you past the “kink”, rates get volatile due to vertical nature of both supply and demand curve
S 1
…but rates move slowly
Tonnage 3
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4. Supply Curve Shifts Freight
D 2
D 1
Freight
If supply and demand curves meet in this range, rates could remain strong, but….
…an outward shift in the supply curve could bring rates down to the stable, but soft, portion of the curve.
S 2
S 1
Tonnage 4
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