Maritime Economics Work Book
THE SHIPPING MARKET
STUDY GUIDE AND WORKBOOK
Dr Martin Stopford, MA PhD
This workbook is designed to be used with Maritime Economics. You can use it to test yourself and see if you really have the facts and theories correctly memorised. The benefits you will obtain from this workbook will, to some extent, depend on your own situation and experience. Some students will be far more familiar with the business side of shipping than others.
It is important that all students gain this understanding. If you fall into this category, then some of the simple knowledge-testing exercises could be skipped. But we suggest you don't skip the ones which make you think about the implications of the various occurrences in the shipping market — even if they don't seem immediately relevant to your own sector of the industry.
There are many connections and comparisons which can be made. How well could you explain your own industry in terms which would be meaningful, for example to economists, or potential investors, partners or cadets? It may well be something you re asked to do one day.
So a major objective is that you will be able to make an interesting and informed presentation on current developments in the shipping market. We're looking at the business aspects of your industry and the main chapters of 'Maritime Economics' we are going to study is Chapter 2.
The aim of this module is to provide you with a thorough understanding of the deep sea merchant shipping business.
After completing this module you will be able to use models as a basis for analysing the shipping market derive lessons from graphs and statistics; discuss the factors influencing supply and demand simulate the making of major strategic decisions view the shipping market in global terms assess the impact of containerisation on the world shipping market; examine the role of liner conferences identify requirements for transporting specific cargoes in bulk prepare an interesting presentation on the current state of the shipping market.
CHAPTER 2: THE SHIPPING MARKET CYCLE
Shipping is still one of the businesses where you can make (or lose) millions of dollars in a few months by 'playing the cycles' — buying at the bottom and selling at the top. In this chapter we look at market cycles and try to understand how they work.
Read Sections 2.1 to 2.3, Pages 38 to 48. In these sections we concentrate on the theoretical functioning of market cycles. Be sure to read Box 2.1.
SELF-ASSESSMENT TEST 1
- What are the characteristics of a recovery in the shipping market?
- Why do you think that market sentiment plays an important part in determining the structure of cycles?
- How does Schumpeter explain Kondratieffis long cycle theory of the world economy?
- Where in the shipping cycle is the market at the moment?
Read Section 2.4 and 2.5, Pages 48 to 56. In these sections we will be studying the market cycles between 1869 and the end of World War 2. You may find it useful to look at Figures 2.3 and 2.7.
SELF-ASSESSMENT TEST 2
- Which factors were the most influential in developing the shipping market in the forty five years leading up to the First World War?
- Summarise the effect of the Great Depression on shipping.
Read Section 2.6, Pages 56 to 67. Here we will be looking at the development of shipping since World War 11. We will be looking at the dry (bulk carrier) and wet (tanker) markets individually. The questions concentrate on applying supply and demand theory to the practical situations that arose in this period. Again, you may find it useful to look at Figures 2.3 and 2.7.
SELF-ASSESSMENT TEST 3
- On page 61, Tugenhadt says 'when the canal was closed and tankers had to be re-routed round the Cape of Good Hope there were not enough available to carry the oil that was needed'. Why was this?
- What were the effects of the closure of the Suez Canal on the tanker Market?
- How did the impact on the tanker market of the second closure of Suez in 1967 differ from the first?
- What drove the 'Sanko' ordering boom, and what were the subsequent effects?
CHAPTER 3: THE FOUR SHIPPING MARKETS
This chapter looks at the four markets that make up the shipping market. The freight market determines the cost and volume of transport, The sale and purchase market concerns the sale of existing ships. The newbuilding and demolition markets determine the overall supply of vessels.
Read Section 3.3, Pages 81 to 96. This section looks at the freight market. You may find it useful to read market reports in Lloyd's List or other trade publications and discuss these with fellow students.
Now answer the question opposite.
SELF-ASSESSMENT TEST 4
1. Explain the following terms:
- Voyage Charter
- Bare boat charter
2. Look at the Dry Cargo market report on p.90 and the Tanker market report on p.91:
- Which company is chartering the Protector 2?
- What is the quoted speed of the Tonins Spirit?
- What is the average rate for a voyage from the Caribbean to the US Gulf?
3. What is the Worldscale index?
Read Section 3.4., Pages 96 to 107. This is a short but important section concerning the market for second-hand ships.
SELF-ASSESSMENT TEST 5
- What factors influence the second-hand prices for ships?
- You own a 5 year old 30,000 dwt geared bulk carrier. How much is it worth and why? Would you sell it now, or if not, how long would you expect to keep it for?
Read Section 3.5 and 3.6. These sections deal with the newbuilding and demolition markets, which are further considered in Chapter 4.
SELF-ASSESSMENT TEST 6
- You want to buy a 3,000 car capacity pure car carrier (a vessel that carries brand new cars from the factory to the sale market). Will you build it or buy on the secondhand market?
- What functions does the demolition market fulfil? Try to think of at least 4:
CHAPTER 4: SUPPLY, DEMAND AND FREIGHT RATES
In this chapter we look at the supply of ships, the demand for them, and how these two factors influence the earnings of vessels.
Read Section 4.2, Pages 117 to 128.
SELF-ASSESSMENT TEST 7
- What are tonne miles?
- Why does the trade elasticity of regions change over time?
- What factors influence short and long term market volatility?
Read Section 4.3, Pages 128 to 139.
SELF-ASSESSMENT TEST 8
- Why are banks important in determining the supply of ships?
- What factors influence the productivity of ships?
- The volume and type of ships delivered by shipyards varies greatly from year to year. Why do you think this is?
- What factors influence the shipowner's decision to scrap a ship?
Read Section 4.4, Pages 139 to 147. Here we look at the theoretical mechanism by which freight rates are determined.
SELF-ASSESSMENT TEST 9
- Why does the short term demand curve for shipment of bulk cargoes tend to be vertical?
- Explain why freight rates for ships 'prompt' in the Gulf can be very volatile in the very short term.
CHAPTER 7: THE ECONOMIC PRINCIPLES OF MARITIME TRADE
In this chapter we look at several different theoretical explanations of differences in countries' trade patterns. This should help you understand the actual practical differences which are discussed in Chapter 8.
Read up to Section 7.5, Pages 226 to 243.
SELF-ASSESSMENT TEST 10
- What factors influence the level of trade of the Netherlands?
- What is the Hekscher Ohlin theory?
- What are the stages of the trade development cycle? Where in the cycle is the UK?
Read Section 7.6, Pages 243 to 247. This is a short section which you may find difficult if you have not studied economic theory before.
SELF-ASSESSMENT TEST 11
- What is substitution?
- List some possible substitutes for the following bulk cargoes:
You may like to refer to chapter 9.
CHAPTER 8: THE GLOBAL PATTERN OF MARITIME TRADE
In this chapter we look at the actual structure of trade in the world, and the geographical factors which influence this structure. The knowledge of theory you have from studying chapter 7 should come in useful. The idea is to find out the volume of trade generated by each region, whether the trade is imports or exports, what kind of commodities are traded, what influences trade.
We will discuss each region in turn. Try to think of the trade in terms of the type of shipping services the region will receive — bulk, liner or specialist? Later we will discuss these markets in more detail, but for the present the aim is to start building up a picture in your mind of the global network of trade. Read Sections 8.3 to 8.6, Pages 264 to 284.
SELF-ASSESSMENT TEST 12
- Why do you think West Europe has more trade than North America. Is the trade export or import driven?
- Why does Japan have nearly as much trade as North America?
- Who are the main exporters?
- How do the geographical differences between the Atlantic and the Pacific impact on trade in these areas?
Read Pages 143 to 150. Now look at the regions in more detail. Read the sections dealing with the trade of:
- North America
- West Europe
- South America
- West Africa
- South East Asia
- Southern Asia
- Middle East.
SELF-ASSESSMENT TEST 13
This is to start you thinking about what you have just read.
- Is it important for a major maritime trading country to have a merchant fleet? Should the Government support merchant shipping?
- Which region's trade do you think will grow faster in the late l990s? (Study Figures to 8.4 to help you answer this question).
CHAPTER 9: BULK CARGO AND THE ECONOMICS OF BULK SHIPPING
Bulk shipping is very different from the liner business we will discuss in Chapter 10. It is about moving large quantities of cargo as cheaply as possible. Section 9.1 gives you some historical background.
Read Section 9.2 to 9.4, Pages 292 to 303. This section examines some of the characteristics required of a cargo if it is to be suitable for bulk transportation. It then goes on to consider cargo handling.
SELF-ASSESSMENT TEST 14
- List the four objectives of bulk transportation.
- What are the five main groups of cargo and what types of handling would they need?
Read Section 9.5, Pages 303 to 314. This section deals with the main liquid bulk commodities: crude oil, oil products and liquefied gases.
SELF-ASSESSMENT TEST 15
- By what percentage did crude oil imports decline between 1979 and 1985?
- List three reasons why the oil trade declined between 1979 and 1985.
- Name three shipping lanes closed to ULCCs.
- List three different reasons why oil products are traded by sea.
Read Section 9.6, Pages 314 to 328. This is a long section of 16 pages discussing the five dry bulk commodities known as the 'five major bulks'. These cargoes create much of the demand for large bulk carriers. Minor bulk cargoes are also discussed.
SELF-ASSESSMENT TEST 16
- Who are the two main importers of iron ore?
- What are the two main markets for coal shipped by sea?
- Why would you expect the grain trade to behave differently from the iron ore trade?
- Describe the aluminium production process.
Read Section 9.7 to 9.9, Pages 328 to 334. This discusses some of the small trades. Although smaller in tonnage terms, these cargoes form a more demanding market. Many have special shipping requirements. The self-assessment draws on your reading of the text and on your general knowledge or experience.
SELF-ASSESSMENT TEST 17
- Make a list of the minor commodities and against each commodity list the characteristics which you think might affect the transport operation shipping service required.
- Which commodities might benefit from building special ships for their transportation?
CHAPTER 10: GENERAL CARGO AND THE ECONOMICS OF LINER SHIPPING
In this chapter, we are going to look at the liner business in more detail. Before we start, just remind yourself of the basic features of the liner business by reading the summary on Pages 17 and 28 and look at Figure 1.4 on Page 16.
You should also read through and refer to the glossary of liner terms on pages xxvii to xxx.
The liner business is very complex with thousands of different companies and services. Although Chapter 10 covers 42 pages it is really no more than a summary of the basics. Make a point of reading Lloyd's List articles about liners when you can and see if you can understand them. (We look at liners in more depth in a separate module.) In this chapter we will study
|Section 10.2 ||The historical development of the liner system and the way conferences developed|
|Section 10.3||The economic principles of liner operation|
|Section 10.4||Looking at liner conferences and how they are regulated|
|Section 10.5||The cost components of liner services|
|Section 10.6||A cash flow model|
|Section 10.7||Analysing liner prices|
|Section 10.8||The demand for liner services|
|Section 10.9||The standard liner routes|
|Section 10.10||The liner fleet|
|Section 10.11||Ports and terminals|
|Section 10.12||Liner companies and conferences|
Now let's work through Chapter 10, taking each section in turn. First read the introduction in Section 5.1 on Page 175. Do you think running a liner business is more complicated than running an airline?
Read Section 10.2., Pages 338 to 343. Containerisation had drawbacks as well as benefits. Think about the initial problems faced by operators and how these are likely to be dealt with.
Turn back to the Glossary . Test yourself! There are a lot of new and specific terms in the container business.
Read Section 10.3, Pages 343 to 348. If you are familiar with economic theory this should be straightforward, if not it will take a little more time. Do you think that a policy of price discrimination should be prevented by legislation?
SELF-ASSESSMENT TEST 18
- Explain or define the following terms
- ISO container
- load centre.
- What are the advantages and disadvantages of containerisation?
- What is indivisibility (page 343)?
Read Section 10.4, Pages 348 to 351. Here we deal with conferences, another way of dealing with the pricing problem. Do you approve of regulation of these arrangements? Why?
Read Sections 10.5 to 10.7, Pages 351 to 360. These sections set up a model of how liner prices can be determined. You will see that is a complex job, where much can go wrong for the service provider!
SELF-ASSESSMENT TEST 19
- What are liner conferences? How does a conference system effect the pricing system?
- Would you allow liner conferences to continue?
Read Section 10.8 and 10.9, Pages 360 to 372.
Here we look at the demand for liner services, and the standard routes that liner vessels operate on.
SELF-ASSESSMENT TEST 20
- Name some low value cargoes carried by container? How else would you transport these cargoes?
- What are the six aspects of the liner service that the shipper considers most important?
- Write down the three major liner routes
- Do you think round the world services are a logical development of container services? Write down all the advantages and disadvantages you can think of.
Read Sections 10.10 to 10.12, Pages 372 to 378.
SELF-ASSESSMENT TEST 21
- What are the differences between container ships and multi purpose vessels?
- Describe the differences between a container terminal and a general cargo terminal.
- Why do you think that ownership of container vessels is much more concentrated than the ownership of bulk vessels?
By now, you should have a pretty good idea of how the shipping market works. Test yourself with the following question.
You are invited by the head teacher of a local school to give a talk to the pupils about the shipping industry. Prepare an outline for a 15 minute talk which you think would interest students of 17 to 18 years old.
SELF-ASSESSMENT: TEST 1
1. As detailed in Box 2.1, page 43, a trough is characterised by a surplus in shipping capacity. As the market moves into recovery, supply and demand moves into balance. The mechanism tends to be that freight rates begin to increase, encouraging ship operators and owners to take vessels out of lay up. Shipping sentiment, which can be all-important in determining the length and strength of the recovery, remains uncertain. Typically, sentiment will fluctuate between optimism and pessimism. As the market moves into a peak, sentiment firms and prices for second-hand and newbuilding vessels rise.
2. The answer to this question will obviously depend on your personal understanding of the dynamics of the shipping market. However, here are some suggestions:
- Market sentiment is very important in any industry, as the response of the human players, who are after all the decision-makers, will always influence the market. Such effects are most pronounced in industries where there are few players/decision makers, or where the decision-makers act together as a crowd. Shipping is a surpassingly small world!
- The response of the decision-maker to the prevailing market conditions is very influential on his final decision. For example, in a rising market the decision maker may believe that the market will continue to rise. He may refuse to sell the ship he owns, and would in any case demand a higher price for it. As a result, second-hand prices would continue to firm. Or, if he thinks that the market has peaked and is about to take a downturn, he may be more ready to part with his ship. Second-hand prices would then remain the same, or even soften a little.
3. Schumpeter argued that the explanation of long cycles could be found in technical innovation, identifying steam power, the railway, electricity and the motor car and the chemical industry and aircraft as the underlying driving forces.
4.This is a tough question and of course the answer depends on the point in time at which you are doing this self-assessment test. The questions to ask yourself are:-
- Are freight rates and prices very high?
- Is the world economy at the top of a business cycle?
- Are there a lot of new ships on order?
The answers to these questions will give you a rough idea about where you are in the cycle. However, you should remember that the shipping market does not operate in terms of neat and regular cycles — in the last resort it's a simple matter of supply and demand.
SELF-ASSESSMENT: TEST 2
1 . The technological development in ship design had a tremendous impact in this period. Shipyards increasingly moved into steel shipbuilding. The size and speed of ships increased rapidly, as did the number of ships built. The effect of this was increased efficiency of carriage of goods at sea by steam ship. It is sobering to think that in 1913 ships were being built with a maximum speed of 23 knots, comparable to the fast ferries, freight ships and reefers of today. We identify 4 short cycles as well as the long-term trend to greater efficiency. Note also the cycles in shipbuilding, as shown in Figure 2.4 — in 1906 launches peaked at about 380,000 gt; 2 years later they had dropped to 80,000 gt.
2. In the late 1920's the volume of sea trade began to fall rapidly. Freight rates dropped (see Figure 2.5), and the volume of ships in lay up rose rapidly, reaching 21% of the fleet by June 1932. Second-hand prices of ships also fell rapidly to a fraction of their post war value. Banks played their part in driving down prices and forcing shipowners to sell their ships. At these very low prices there was tremendous sale and purchase activity. During the Depression, about 8% of the world fleet was scrapped. Trade picked up again in 1936, leading to a short-lived recovery in freight rates.
SELF-ASSESSMENT: TEST 3
1 . This is a tricky question if you are not familiar with trade patterns. The Suez Canal is a 'short cut' especially for tankers transporting oil out of the Middle East. When the Canal closed, tankers were re-routed around the Cape of Good Hope. In some cases this would more than double the journey time. We can look at the supply of tonnage both in terms of the physical number of ships available, and also in terms of what these ships can do. Supply of tonnage is influenced by ship speed, and also by the route taken. The closure of the Canal therefore had the effect of decreasing the supply of tonnage, as ships took longer to transport oil form A to B. This of course had a knock-on effect on freight rates.
2. Part of the answer to this question is given in the answer to question 1 above. The increase in average haul had a knock-on effect on rates, which rose dramatically. Owners expected the re-routing of vessels round the Cape to be a permanent feature of trade. Tanker supply was perceived as being too low, and so owners set about building new vessels. This led to a boom in building. However, the Canal reopened before the investment boom orderbook was delivered. Therefore, as the orderbook was delivered, it was to a tanker market in oversupply.
3. The surplus of tankers delivered after the Suez Crisis were mainly converted to other trades in order to find employment. These vessels were flexible enough to trade wet or dry (combined carriers) so when the Canal closed a second time, they came out of trading 'dry', to trade in oil. This switch provided the necessary increase in supply of tankers to prevent the astronomical rise in freight rates experienced at the first closure. Owners were also older and wiser, and tended to charter vessels for shorter periods, so they were not hit by the punitive cost consequences experienced in 1957.
4. The 'Sanko' ordering boom occurred in a downturn in the dry market. Owners were cash rich following good earnings in recent years, and banks were keen to lend money. The shipyards were struggling to win orders, so there was a lot of building capacity available and newbuilding prices were low. The owners' expectations were that they would take delivery in the upswing of the next cycle. However, many owners had the same idea, with the consequence that deliveries were very heavy. Earnings in the oil market were also failing, and combined carriers came out of trading wet, further increasing the supply of dry tonnage. Dry earnings collapsed, leading to distress sales of vessels and banks foreclosing on a number of companies.
SELF-ASSESSMENT: TEST 4
1 . Shipper: the company or individual who owns a cargo that he needs to transport. Do not confuse this term with the owner or charterer of the ship! Voyage charter: the transport of a given cargo from A to B. In such a charter a whole ship is chartered just for one voyage.
Bare boat charter: in this arrangement there is usually a nominal owner of the ship, such as a bank, who legally owns the vessel but takes no further interest in it. The bare boat charterer arranges everything from trading the vessel to employing the crew.
F.o.b: free on board. In a free on board contract the importer makes his own arrangements for carriage and insurance. There are many different types of free on board contracts, some with such additional services they do not differ much from c.i.f. contracts.
- Cobelfret, to transport coal
- 13.5 knots
- The rate had risen from W1 15 at the start of the week to W125 at the time of the report.
3. The Worldscale index is the cost of transporting a metric tonne of cargo on the Worldscale standard vessel (currently a 75,000 dwt tanker) on a round voyage, for each of the published routes. This cost in US Dollars equals W100. All of the costs are re-calculated from time to time. The point of Worldscale is to allow easy comparison between operating on different routes.
SELF-ASSESSMENT: TEST 5
1 . The influences on the price a ship will achieve at sale are both due to the general influence of the market, and also due to the individual features of the given vessel. Market factors such as freight rates, market expectations, inflation and legislation all have their influence. More indirectly, the state of the newbuilding market also effects second-hand prices, as sometimes the shipowner will be deciding between buying a new or a second-hand ship. The age, condition, quality, design features and legal obligations (e.g. whether it is under a long term charter agreement) also influence the price.
3. The answer to this question clearly depends on the time at which you are answering it and asks you to pull together a number of theoretical considerations. In valuing it now, do not forget that the vessel is geared — this has a significant effect on the price you should expect. Use market publications such as Lloyd's List and Clarkson's Shipping Intelligence Weekly to try to find sales of similar vessels.
In deciding whether to sell the vessel you could consider:-
- Recent trends in prices and freight rates.
- Your expectations for market development over the next twelve months.
Don't forget to look at the order book to see how much new tonnage is to be delivered over the next couple of years. If you look in the Clarkson's Review, Table 8, you will see a projection of the world fleet which will help you to predict the supply side of the market. All you have to do is figure how much you think demand is going to increase and you should be able to form a view on whether the supply/demand balance will tighten (in which case you should keep the vessel) or slacken (in which case you should sell it).
If you decide to keep the vessel you should repeat the exercise to try and work out when you think the supply/demand balance will slacken. Don't worry if you find this difficult — there is no right answer; what matters is understanding why you reach your answer.
SELF-ASSESSMENT TEST 6
1 .The factors influencing this decision will include:
- The availability of suitable tonnage on the second-hand market
- The age and condition of that tonnage
- The price of second-hand tonnage
- Whether you need a specialised design
- The availability of newbuilding yard capacity
- The delivery date a yard can offer
- The newbuilding price
For example, if you are planning a car factory in East Europe to supply cars to the North American market, you will have plenty of time to order a newbuilding. Conversely, if you own a car factory that makes all-terrain vehicles, and demand has just taken off in the Middle East, you may feel you need to get into the market quickly. If you cannot find a suitable vessel on the second-hand market, you may consider converting a Ro-Ro ferry (e.g. by fitting the moveable decks you need in order to fit in high sided vehicles efficiently).
2. The demolition market:
- Provides for the (relatively) safe disposal of old and no longer viable tonnage, for example as an alternative to scuttling the vessel.
- Reduces over-supply of vessels in the market — this is particularly noticeable when vessels that are physically capable of continuing trading are scrapped.
- Supplies scrap metal. This is particularly important for the developing economies that use scrap metal particularly in construction — a lot of demolition takes place in the Indian Sub Continent, and until recently, China.
- Supplies spare parts. The engine, propeller, bell and anchor of the vessel are often reused.
SELF-ASSESSMENT TEST 7
1. Tonne Miles: This is a unit of measurements used to record the demand for sea transport. It consists of the tonnage of cargo transported, multiplied by the distance over which it is transported. For example, if 1,000 tonnes of grain is shipped 4,000 miles from the US Gulf to Europe, the resulting demand for sea transportation is 4,000,000 tonne miles. As you can see, tonne mile statistics tend to have a lot of zeros in them!
2. The factors influencing this are:
- The balance of local demand and supply — e.g. as home resources are depleted, or local tastes change.
- Maturity of the economy.
3. In the short term, the most prominent influence is seasonal fluctuations. Don't forget that this applies not only to goods that are harvested but to oil and coal — more is demanded in cold times as people need more heating! Long term influences are changes in demand, changes in supply sources, the relocation of intermediary export points such as processing plants, and the transport policy of the government.
SELF-ASSESSMENT TEST 8
1 . The role that banks typically have in the shipping market is as the providers of finance. As such, banks can influence shipping by:
- Deciding whether to make loans for certain types of projects. This involves the bank in assessing the risk of making such a loan — recently companies have had trouble obtaining financing for FPSO projects (a way of extracting oil from offshore sites) as these were thought to be risky.
- Deciding who they will lend to. Lending only to established companies, or industrial groups, influences the structure of ship ownership in a country.
- Calling in loans. When a bank decides to call in a loan early it is not unusual for the company to be unable to repay the money without selling (or scrapping) the ship.
2. Amongst other things, ship productivity is influenced by speed, the time spent in port, the amount of the cargo-carrying capacity which is utilised on each voyage, and the amount of time that the vessel is unproductive for. As you will see, some of these factors are beyond the control of the owner (such as port time), some are design features (carriage space, speed) and some are partially determined by what is the most sensible thing to do in the prevailing market (speed again, and doing part laden voyages.)
3. The type and volume of ships delivered is of course influenced by demand side factors (the type of ships that owners want to order and can get financing for) and supply side factors (the availability of yard space, and the type of yard space available). As newbuilding orders are placed often 18 months to 2 years before the vessel will be delivered, ordering will also be influenced by the perception owners have of the likely state of the market when the ship will be delivered. This complicates the decision tremendously, with owners second guessing the decisions of other owners and the likely level of world trade. As we saw in test 3, this can be disastrous.
4. The decision to scrap a vessel can be seen as an economic decision by the owner based on current earnings, market expectations, likely repair costs and prevailing scrap prices. For example, a ship that has become 'obsolescent' as its design is out of favour may be scrapped mush younger than the oft quoted 25 years. Likewise, government or international legislation (for example, concerning double hulls for tankers) can also influence the decision to scrap.
SELF-ASSESSMENT TEST 9
1. For most bulk cargoes there is no other option than to transport the cargo by sea — it would be prohibitively expensive to fly iron ore around the world! In the longer term other transport methods can be set up, such as installing pipelines. In the very short term it is also difficult to arrange supply of commodities from a different source, or to arrange for production using a substituted commodity.
2. It is best to explain this with reference to Figure 4.13. The supply of vessels is pretty much fixed at any given time — the vessel wouldn't be 'prompt' if it took a month to be delivered! Look at D2 (85 cargoes to carry) — the freight rate is $0.92 p.b. If the number of cargoes were to drop to 83 (this line is not shown) the freight rate would be closer to $0.60. Such is the effect of a vertical supply curve!
SELF-ASSESSMENT TEST 10
1 .In the chapter the relationship between trade and 5 different factors are considered.
- The size of the country's economy
- The level of economic development
- The country's natural resources
- The land mass
- The population
Turn to Table 7.4 — the Netherlands is the third largest trading country, yet has a population of 15m and a land mass of 4m hectares. Most of the natural resources are natural gas. Reasons for the trade position of the Netherlands include:
- The country's long maritime history
- Continuing trade with ex-colonies
- Trans-shipment of cargo through the port of Rotterdam to the rest of Northern Europe.
2.The Hekscher Ohlin theory argues that the reason why countries have different comparative advantages between the production of different types of goods and commodities is due to differences in the factors of production. For example, due to the climate and geography of the USA, it is much easier for the USA to produce wheat than it is for the UK, although it is possible to grow wheat in the UK.
3. These stages are outlined in pages 242 to 243; they are the pre industrial, transitional, mature and senile. The UK is either mature or senile — what do you think?
SELF-ASSESSMENT TEST 11
1 . Substitution is the use of a different commodity to do the job that you want to do. Some goods are easily substituted for each other (think of your diet: potatoes, rice and pasta are easily substituted, as are different types of vegetables). Some goods are not substitutes for certain purposes (meat is no substitute for nuts if you are feeding a vegetarian). Some goods are never substitutes for each other (there are few people who are prepared to eat wood, or leather … unless very hungry or pregnant).
2. Iron Ore is used to make steel. A suitable substitute is scrap metal. Coal is used to produce power. Oil or gas can also be burnt to produce electricity. Grain is predominantly used as an animal feedstuff. Substitutes would therefore be other animal feedstuffs, such as scrap food. Recently the price of animal feed in Russia was greater than that of bread — animals were therefore fed baked bread instead of grains!
SELF-ASSESSMENT: TEST 12
1 .There are several reasons why Europe has more trade that the United States. These are:
- Twice as much population.
- Fewer natural resources, due mainly to depletion over the last two hundred years.
- A history of colonial trade.
You may be able to think of some other reasons for yourself.
Imports and exports are quite closely balanced in the USA, in West Europe imports are more than twice the level of exports. Again, the level of natural resources and population probably explains this.
2. The reason that Japan has such a high volume of trade is that it has virtually no natural resources of its own. It is dependent on imports of iron ore, coal, oil, grain etc. and to pay for these it must export large amounts of manufactured goods. In contrast, North America has large domestic reserves of all of the most important raw materials — iron ore, coal, grain and crude oil. The oil reserves are now close to depletion and the US is having to import more oil.
3.To answer this question you should work through the text and refer to Table 8.3. The major exporters are:
- USA: Grain, coal and forest products.
- Middle East: Massive exporter of crude oil and products.
- South America: Major exporter of iron ore, oil, coal and bauxite from the Caribbean.
- Africa: Important mainly for its exports of oil from Libya and Nigeria and iron ore and coal from South Africa.
- Australia: A major exporter of iron ore, coal and grain.
- Japan: A major exporter of manufactured goods, particularly steel products, cement and some other fairly bulky commodities.
- Western Europe: Also a major exporter of manufactured products.
4. The Atlantic is a narrow ocean in relation to its length. Further, due to the natural slope of the continents surrounding it, a large proportion of the great rivers drain into the Atlantic. These rivers provide ready-made transport routes. In Table 8.1 we calculate that 59% of trade takes place across the Atlantic. The Pacific, however, is almost twice the size of the Atlantic, leading to much longer transit times. The countries bordering the Pacific are smaller, and have historically been less well off. Pacific trade accounts for 38% of the world total. However, this is expected to increase.
SELF-ASSESSMENT: TEST 13
1 .There are many different views on the subject of the importance of a merchant fleet. The USA took the view in the 1920's that it was important, but in Europe the maritime policy has been much more fragmentary. The key issues you could consider are:-
- How dependent is the country on maritime trade in the event of a major war?
- How difficult would it be to build up a large fleet from a small base and how long would it take?
- Would a modern war last long enough for the availability to matter?
- Does the availability of a domestic fleet influence the competitiveness of a country's exports, or the cost of its imports?
- What contribution does merchant shipping make to the balance of payments.
During the 1960's it was fashionable for governments to support merchant shipping, and many countries developed their own national fleets. With the long recession since 1973 this policy has resulted in considerable costs in funding loss-making shipping ventures in both the dry bulk and liner trades. As a result during the 1980's there was generally less enthusiasm for providing government support for the merchant marine — state shipping companies are being privatised and shipping benefits withdrawn. Do you think this is a good trend?
2. The answer to this question is obviously a matter of opinion. Europe and the United States are both mature economies, and it is unlikely their seaborne trade will grow very fast over the next few years. The one exception to this is US oil imports due to a run down of domestic production in the United States. Japan is also approaching a mature phase in its development and it seems probably that the growth of seaborne trade will be lower than in the past. South America has great potential, but it also faces debt and economic difficulties which could slow up the pace of change. Without doubt the region which is growing most rapidly during the second half of the 1990's is Far East Asia — countries like South Korea, Taiwan, Thailand, Malaysia and China are all very active in terms of industrial development. It seems probable that this trend will continue and will be reflected in a rapidly growing seaborne trade.
SELF-ASSESSMENT TEST 14
1. The answer to this question is given on pages 296-298. You should satisfy yourself that you understand how these objectives can be applied in practice — often they are in conflict.
2. Liquid bulk cargoes are stored in tanks and handled by pumping equipment. Dry bulk cargoes are stores in holds and handled by cranes, grabs and conveyors. Unit cargoes (such as containers and pallets) are stored in special holds or on deck, and are handled by deck or shore cranes. Wheeled cargoes (cars, containers) are stored on decks and get on to and off of ships by ramps. Refrigerated cargoes are almost always unit cargoes, but they have the additional need of refrigeration, which is provided by the whole ship, or by the container itself.
SELF-ASSESSMENT TEST 15
1. Crude oil imports declined by 42 per cent between 1979 and 1985 — you can calculate this from Figure 9.4.
2. The three reasons why the oil trade declined were:
- The major economic recession which reduced the demand for crude oil.
- Introduction of new technology which reduced the amount of oil used per unit of industrial production.
- The substitution of coal and other fuel for oil in a number of applications, particularly power stations.
- The Straits of Malacca
- The Suez Canal
- The Straits of Dover.
4. The three reasons why oil products are traded by sea are:
- Because oil is refined at source and then shipped to the market where there is consumer (e.g. refined in the Arabian Gulf and shipped to the United States).
- Because demand for different products does not precisely match the mix of products produced by the refinery. In these circumstances there is shipment of the surplus products between areas.
- Shortages of refinery capacity may occur due to high levels of economic activity or simply because the country/region does not have sufficient refinement capacity. In these circumstances oil products are imported.
SELF-ASSESSMENT TEST 16
1 . The main importers of iron ore are:
2. The two main markets for coal shipped by sea are:
3. The grain trade could be expected to behave differently from the iron ore trade because it is dependent on agricultural supply and demand. This means that the volume of trade mainly fluctuates from year-to-year depending upon the weather. In contrast iron ore transportation is an integral part of a heavy industrial process. The logistics of iron ore transportation are often planned when the steel mill is built and the ore is generally shipped to long-term contracts placed by the steel importers.
4. Bauxite is mined as a red earth-like ore which is first refined into alumina. On average it takes 5.4 tonnes of bauxite to produce two tonnes of alumina which is pure aluminium oxide. The alumina is then reduced to aluminium by electrolysis, yielding one tonne of aluminium for each two tonnes of alumina used. Sea transportation occurs with as bauxite, aiumina or as refined aluminium metal.
SELF-ASSESSMENT: TEST 17
1 . You should draw up your own answer for this question by going through the commodities discussed in the text. When doing this bear in mind the following factors:-
- The principals of bulk transportation.
- The size of cargo parcel which you think would be acceptable to the consumer industry (e.g. does anyone really want 100,000 tonnes of sugar in a single consignment?).
- Any special physical characteristics of the commodity (for example, forest products or steel products may be difficult to stack in a conventional bulk carrier).
- Any commercial factors — is the commodity agricultural and shipped regularly or is it part of an integrated production process.
- Is the commodity dangerous and subject to IMO regulations?
2. Some of the commodities which benefit from building special ships for transportation are:
- Forest Products: Wide hatches simplify loading and unloading of cargo.
- Refrigerated Cargo: Refrigeration is essential for transportation of perishables.
- Cement Carriers: Cement is a difficult cargo to load and unload in bags, and requires humidity control so that it does not set. For this reason bulk cement carriers are manufactured.
- Sulphur Carriers: Sulphur is a most unpleasant chemical and vessels are built specially for its transportation. It is often carried molten in specialised tankers which maintain a tank temperature around 180 degrees centigrade.
- Gas Carriers
- Crude Oil Tankers
- Product Tankers
- Chemical Tankers: IMO requires that certain chemicals are carried only in special vessels.
SELF-ASSESSMENT: TEST 18
Palletisation; product is loaded on to a standard pallet and bound in place with straps and/or shrinkfilm. The pallets are designed to stack neatly within the hold of a 'pallet-friendly' ship. A recent trade which has moved to palletisation is the reefer business.
Lo-Lo: This means 'Lift on/Lift off'. It refers to any general cargo ship where cargo is loaded primarily through hatches in the weather deck (as opposed to rolling onto the vessel along a ramp).
ISO Container: A container constructed to the standards laid down by the International Standards Organisation. Details of standard containers can be found in Table 7.4.
TEU: Twenty foot equivalent unit. This is a standard used for measuring volume of container cargo.
Load centre: A central port used by container ships from which cargo is distributed by feeder vessels to smaller ports. Nowadays major liner companies generally have only one major load centre per country or coastal area.
2. The beginning of the answer to this question is on pages 342 to 343. Advantages include a door-to-door service, which would hopefully (but probably not in practice) be a cheaper and better service. A major disadvantage for the carrier was that specialised container vessels could not carry bulk cargo and so did not have the flexibility of the tramp ship. This is important when we consider pricing — containerships have fewer options for fully laden voyages. The other consequences of containerisation (e.g. the effects on the ports, ship ownership and the disappearance of companies) may be advantages or disadvantages depending on your perspective.
3. An increase in the supply of container-carrying capacity is dictated by the size of ships and the number of ships necessary to offer a service. It is often not possible for an operator to increase capacity by, say, 4% in response to an increase in demand. Why? If it takes 4 ships of 1000 TEU to offer the service ( so 4000TEU) the owner cannot just add on 160 TEU. His real decision is to add another 1000 TEU ship. The supply of container-carrying capacity comes in large, indivisible 'lumps'. This provides a particular problem for pricing and is one of the main reasons why the EU continues to allow container conferences.
SELF-ASSESSMENT TEST 19
1. Conferences are agreements between liner operators to allow the use of each other's ships operating on the same route. The way that this affects the pricing and indivisibility problem is as follows. In the above question we had one operator with 4 1000 TEU ships. If there are 4 similar operators with a total of 21 1000 TEU vessels between them, the total TEU capacity is 25,000 TEU if the operators join together in a conference. If they now want to increase capacity by 4%, they need one more 1000 TEU ship. The conference system makes responding to changes in demand much easier. The figures chosen are of course convenient, but they illustrate the point.
2. This a discussion question that requires a personal response. You may be guided by the section on regulatory control. It is also important to think about monopoly power and the abuse of monopoly power. What is important is that you understand why you reach the conclusion you reach.
SELF-ASSESSMENT TEST 20
1 . Low value container cargoes include steel products, building materials and coffee. The carrier may not want to ship these cargoes if he is operating a policy of price discrimination, as he will earn less. However, it can often be more lucrative to earn a little for carrying a container than to earn nothing. All of the above products can be carried on bulk carriers, often as part cargoes.
2. The answer to this question is on page 363.
- The North Atlantic
- The Pacific
- Europe to Far East.
4. This is a highly technical and controversial question — it is doubtful if there is a single answer with which all experts would agree. The principle advantage of the round the world services is that it allows the use of very large units, but even this can be disputed. One major disadvantage is that if a rigorous service is maintained, it is not possible to vary the capacity on each leg of the voyage. This means that the service must be geared up to the capacity required on the highest volume leg of the journey. Other disadvantages often quoted are the necessity to limit port calls, and hence the greatest reliance on feeder services which means more handling of the container. Having made these points, the round the world service has certainly had a big marketing impact and for companies such as Evergreen appears to have been commercially successful.
SELF-ASSESSMENT: TEST 21
1 . A containership has open holds with fixed cell guides. It is designed solely for the carriage of containers. Containers are lifted on and off of the vessel by deck or port cranes. A multi-purpose vessel has good container-carrying capacity and may have fixed cell guides, but this is not usual. It can carry break bulk cargoes, making it a more flexible vessel.
2. The differences in design between container terminals and traditional cargo terminals can be summarised as follows:-
- A container terminal requires a container crane capable of lifting 40 tonnes at a jetty strengthened to 80 tonnes.
- The container terminal will have a stacking area for containers, along with equipment for moving the containers within the terminal — forklift trucks, loaders, etc.
- The general cargo terminal requires covered storage warehouses facing onto the quayside in which perishable cargo can be stacked prior to loading on to the ship or after discharge.
In general, the container terminal is a high productivity unit handling a single commodity — a container. The general cargo terminal must be much more versatile, handling a whole range of different entities. Since berthing takes longer, the general cargo terminal will generally require a greater number of berths for a given tonnage of cargo handled.
This again is a discussion question requiring a personal response. However, the most obvious reason for concentration of ownership of the need to offer a regular service, which can only be practically done if you have a large number of vessels.