The Nature of Demand for Shipping
The Nature of Demand for Shipping
The shipping industry is engaged in the production of water borne transport of goods and people. This industry can be defined as a group of individual industries or sectors operating within different markets and reacting to different economic conditions. The primary economic function of shipping services is, like all transport, to bridge the gap which exists between producer and consumer. Shipping is an expanding, global business which carries most of the world's traded goods; it is relatively free of capacity constraints, and less harmful to the environment than other transport modes. The future offers substantial opportunities for the shipping industry, bringing with them the potential for significant inward investment and wider economic benefits for the world. For example if we look in to the economic contribution of shipping in UK we can see
Efficient shipping is vital to our economic well-being: 95% of our external trade by weight (77% by value) and 7% of domestic freight tonnage (but around 25% in terms of tonne kilometres), moves by water. 1
So when we will judge the nature of demand for shipping we have to look into the traditional demand supply rules of economic theory. Human wants are the core of all economic activities. This is the core of economic analysis that how people choose what needs they are going to satisfy through the use of which resources. In economics, demand means 'effective demand' or demand that is backed by ability to pay. The demand for shipping is effective demand because it has actually been satisfied by the world fleet.2
Generally demands for transport results from demand for goods. Without the demand for goods there would be no demand for transport. Here 'transport' itself is not the primary demand, it's the secondary one. Where it (the demand for transport) derives from the need of goods to be transported. That's why the demand of the mode of transport, here 'shipping', is a derived demand. So shipping demand is determined by the final consumers for the Product. Here the level of sea borne trade determines the number of shipping and cargo space required. For Example, after 02nd world war ,the rapid world wide industrialization, resulted in concentrated centres of production and consumption, which led to rapid growth of world trade and particularly shipping.3
So Shipping is directly related to world trade. And world trade is directly related to world output or production.
Here industrial economic development is the central factor in the volume of sea borne trade, but the volume can also be influenced by technological development and political factors. And this demand for shipping is mainly derived from two sources, the demand for the commodities for industrial utilisation and demand for those commodities for final consumption. As said before that shipping demand is an effective demand because the demand for the quantity of an economic good which can be transported by ships at each and every possible price during a given time period. And also because the shipping of commodities creates utility because it creates user value in a number of ways like 4
. The Utility of Place and Location : Shipping makes it the availability of goods in a certain place where they are wanted. For example Australian apple or Costarican banana is available in the UK super market.
2.The Utility of Time : Shipping makes the availability of goods when they are required heating oil during the winter.
3.The Utility of Form :Shipping services contribute to make the change in the material or physical form of a good in such a way to increase its ability to satisfy wants. For example ,middle east crude oil converted to ...
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. The Utility of Place and Location : Shipping makes it the availability of goods in a certain place where they are wanted. For example Australian apple or Costarican banana is available in the UK super market.
2.The Utility of Time : Shipping makes the availability of goods when they are required heating oil during the winter.
3.The Utility of Form :Shipping services contribute to make the change in the material or physical form of a good in such a way to increase its ability to satisfy wants. For example ,middle east crude oil converted to gas or petroleum in refineries adjacent to consumer markets.
4. Intangibles: Like other services, shipping service is also intangible in that it does not result in the physical production of a commodity.
" The growth rates of 1999 had been strongly distorted by the Asian crisis. In 2000 a sound recovery took place. Both world trade growth of 8.0 per cent and the world output growth of 3.0 per cent represent favourable values, but did not entirely approach to the higher levels in 1994, 1995 and 1997. For the years 2000 and 2001, OECD and other international organisations expect a growth rate of real world output of 4.3 per cent and 3.8 per cent, respectively, with clearly higher rates for world trade, namely about 10 per cent and more than 8 per cent, respectively. This will boost especially world container shipping towards even higher growth rates"5
Table 01: World Output, World trade and shipping trend 1993 to 2010.
(IMF/World Bank - ISL-Estimates)
Source: "ISL Shipping Statistics and Market Review 2000"
Table 02: World merchant fleet - Annual tonnage changes as of January 1st, 1987-2001 (dwt-% change)
Source: "ISL Shipping Statistics and Market Review 2000"
As in table 02 we can see that there is a signinificant ups and down in shipping demand and this demand is depends on Several factors, which are explained below 6
A.Price: Freight cost is always important, but the greater the proportion of freight cost in the overall cost equation , the more emphasis shipper are likely to place on it.
B. Speed : Time in transit incurs an inventory cost which have direct effect on overall cost. So shippers of high value commodities have to value speed factor.
C.Reliability: With the growing importance of supply chain management system where 'just in time' stock control is vital for todays business, transport reliability has gained new significance . Some shippers may be prepared to pay more for a service which is guranteed to operate on time and provide the promised service.
D.Security: Loss or damage in transit is an insurable risk but raises many difficulties for the shipper who may well be prepared to pay more for the secured transportation of the product.
If we look in to the nature of the goods transported by sea then we will be able to understand more of its derived demand nature in the world economics. Those commodities which are traded by the sea are-7
.Energy : This accounts for 45% of seaborne trade whuch comprises crude oil, oil products,liquefied gas and coal. Energy is vital player of every economy so its naturally dominates the shipping demand.
2.Agricultural Products : A total of 12 commodities, accounting for 13 % of sea trade. These are products or raw material of agricultural industry.
3.Metal Industry : This major commodity group, which accounts for 25% of sea trade, represent the third building block of modern industrial society.
4.Forest Product : Forest products are primarily materials used for the manufacture of paper,paper board and in the manufactur industry.
5.Other Industrial Material : There are a wide range of other important industrial materials such as , asbestos,cement,gypsam, mineral sands and many others.
6.Other Manufactures : The final trade group comprises manufacture goods such as textile, machinery, capital goods, vehicles etc. this comprises 3% of total tonnage of sea transport but these are high value commodities ,so its share in value is nearly 50%.
The most important technical development was the unitization of the liner shipping business. The shipping industry has been so successful at exploiting this technical development that the cost of sea transport has hardly increased. Coal and Oil cost little more to transport in the mid 1990s than in 1940s.
Those important causes which are mostly affecting the demand for sea transport are 8
The World Economy : As it was discussed before that world economy with its output and trade is the most important single factor to generate demand for shipping and any crisis in the world economy reflects in the demand for shipping. In table 01 its clear that ups and downs of shipping demand is also proportionate to world trade. There are 03 different aspects of the world economy that may bring about change in the demand for sea transport ,which are-
The Business Cycle: The business cycle lays the foundation for freight cycles. Fluctuation in the rate of economic growth work through in to the sea borne trade, creating a cycle pattern of demand for ships. For example, two major recession in shipping business in 1975 and 1981-1983 ,which co-incited with the recession of the world economy. This economic cycles arise from a combination of external and internal factors. The external factors include events such as wars or sudden changes in commodity prices such as crude oil, which cause a sudden change in demand. Internal factors refer to the dynamic structure of the world economy itself, which it is argued, leads naturally to a cyclical rather than linear growth path. Five of the most common business cycles are-
I. The Multiplier and accelerator : The main internal mechanism which creates cycles is the interplay between consumption and investment.
II. Time-lags: The delays between economic decision and their implementation can make cyclical fluctuation more extreme. The shipping markets provides and excellent example for this. During a shipping market boom, ship owners order ships that are not delivered until the market has gone into recession. When the arrival of the new ships at a time when there is already a surplus, further discourages new ordering just at the time when shipbuilders are running out of work.The result of their time lags is to make booms and recession more extreme and cyclical.
III. Stock building : It produces sudden burst of demand as industries adjust their stocks during the business cycle. On several occasion shipping boom have been driven by short-term stock building by industry in anticipation of future shortage or price rises. Examples are the Korean war in 1952-53, the dry cargo boom of 1974-75, mini tankers boom in 1979 and summer 1986.Tanker booms were caused by temporary stock building by the world oil industry.
IV. Mass psychology : If people act in an imitative manner a particular trend will build up to a level where they can affect the whole economic system. Their periods of optimism and pessimism become self fulfilling through the medium of stock exchanges, financial booms and the behaviour of investment.
V. Random shocks : Random shocks such as wars, weather changes, new resources, commodity price changes, which upset the stability of economic system may contribute to the cyclical process. Its impact on the shipping market is often very severe ,for example ,1930s depression which followed by the wall street crash of 1929.
Other two aspects are The 'trade elasticity' and The 'trade development cycle'-which are correlated to business cycle.
Other factors which have very strong influence on shipping demand are Transport cost. Transport cost are an element in the costs of production and If transport Costs are low ,its possible for domestic commodities to be substituted for the cheaper goods supplied over great distances, which will create business opportunities for shipping.
The globalisation of the world economy has reinforced the inherent and unique internationalism and fluidity of the shipping industry, while over the same period the industry has become vastly more productive, with very much larger, faster ships and new techniques such as containerisation. 09
By understanding and exploiting world economic activities and trade pattern along with all the other factors stated above, which are mostly controlling the shipping demand, ship owners and shipping management can achieve maximum business profit. From table one it is clear that the future growth of world trade and out put will definitely create more demand for shipping. Thus the 'derived demand' nature of 'shipping demand' creating huge opportunity for ship owners and shipping management to profit from the ups and downs of world trade.
References
. whitepaper of DTLR on British Shipping Charting a New Course ,para-9,obtained from www.shipping.dtlr.gov.uk/cnc/index.html ,or menu-whitepaper, october2001.
2. Chrzanowski I, 1985, An Introduction To Shipping Economics, Fairplay Publications.
3. Abrahamsson B J, 1980,International Ocean Shipping: Current Concepts and Principal, WestView Press.
4. McConville J,1999,Economics of Maritime Tansport,p42,The Institute of Chartered Shipbrokers, London
5. www.isl.org/english/ Executive Summary - SSMR Market Analysis No 12, Majore shipping nations, or menu--fact database. Visited-october2001.
6. Stopford M, 1997, Maritime Economics, (02nd ed),P10, Routledge
7. Stopford M, 1997, Maritime Economics, (02nd ed),P11-13, Routledge
8. Stopford M, 1997, Maritime Economics, (02nd ed),P114-127, Routledge
9. whitepaper of DTLR titled British Shipping Charting a New Course ,para-34,obtained from www.shipping.dtlr.gov.uk/cnc/index.html , october2001.
