Docstoc

Organization of the Shipping Market (PowerPoint)

Document Sample
Organization of the Shipping Market (PowerPoint) Powered By Docstoc
					Supply, Demand, Freight
         Rates



           Chapter 4
Martin Stopford and Bruce Hartman




            Maritime Economics
Ten Variables
              Demand             Supply
• The
 shipping     World Economy      World Fleet
 market
              Seaborne         Fleet productivity
 depends on
              commodity trades
 ten
 variables    Average Haul       Shipbuilding
                                 production
              Political Events   Scrapping and
                                 losses
              Transport Costs    Freight Rates
Measures
• Shipping services are measured in ton-miles.
• Better than using dwt, which would require an
    assumption about how full the ship is.
•   Only a part of fleet is in trade.
•   Amount provided depends on speed, waiting
    time
•   Fleet Productivity in ton-miles/dwt/year
Dynamics
Characteristics
• High volatility
• Irregular peaks and troughs
• Linked by freight rates
• Why do the variables change?
• A market regulated by supply and demand
 requires substitutable goods, free
 exchange of information to stay in
 balance.
Demand for sea transport: World
Economy
• Freight cycles follow business cycles
• External and internal factors
• Causes (review of macro)
   –   Multiplier effect
   –   Time lags between decisions and implementation
   –   Inventory buildup
   –   Mass psychology: imitative behavior
   –   Random shocks: weather, war, commodity price changes, new
       resources
• Leading indicators
   – OECD index, money supply, corporate profits, stock markets
• It’s not predictable!!
Trade elasticity

• What is elasticity?
• %change in trade / %change in Industrial
 Product (GDP)
Historical elasticity
Trade elasticity

• Why does it change?
• Balance of demand to available local
  resources changes
• New countries may generate industrial
  growth (developing countries)
Seaborne commodity trades
Short term vs Long Term
• Short term
  – Seasonality
• Long Term
  – Change in demand – crude oil
  – Change in supply source – Saudi vs North Sea
  – Change in processing location
     • 3 bauxite -> 2 alumina -> 1 aluminum
     • Can reduce volume by reducing closer to source
  – Shipper’s transport policy – own or hire?
Average Haul

• Measured in ton-miles
  – Change eg. Suez canal closure, pipelines in
    Iraq
• Example from our lives: the average food
 on a dinner plate has traveled 1500 miles
 from the source
Average Haul over time
Political Disturbances
• Suez crisis in July 1956
• Six Day War Israel-Egypt 1967
• Closure of Tap Line pipeline from Saudi Arabia
    to Mediterranean
•   Nationalization of Libyan oil assets 1973
•   Yom Kippur war of 1973 / OPEC cutback
•   Iran Revolution 1979
•   Gulf War 1990-1991 closed Dortyol pipeline
Transport Cost and the Long Run
Demand function
Supply
Decision makers
•   Owners
•   Shippers or charterers
•   Bankers or financiers
•   Regulatory agencies
    – IMO Reg 13G (1992) double hull on tankers at 30 yrs


• Behavioral decision making, not market
• Game theory, strategy, poker playing
Merchant Fleet
Growth by category
Productivity

• Ton-miles per dwt
• Depends on
  – Speed
  – Port time
  – Deadweight utilization (how full am I)
  – Loaded days at sea
Productivity
Only 137 da carrying cargo!
Shipbuilding Production

• A long-cycle business
• Order to deliver cycle is 1 to 4 years
• Based on estimates of future demand
• Note that other ship types (ferries, tugs,
 specialty carriers, container ships, roros)
 have a high work content compared to the
 others (4 to 5 times as much)
History of shipbuilding cycles
Scrapping and Losses

• Age
• Technical Obsolescence
• Scrap prices
• Expectations of future profitability
• Real Options
• Major scrapping when everyone believes
 in a downturn
Deliveries and Scrapping
Freight Rates
Supply
• In a perfectly competitive market shipowner operates
  ship at the speed at which MC = freight rate (MR)
• Relation between speed and freight rate
                    s = sqrt(R / 3pkd)
where
• s=optimum speed (mi/day)
• R=voyage freight rate
• p=price of fuel
• k=ship’s fuel constant
• d=distance
Supply And Demand
Demand
•   Almost vertical for bulk commodities
•   Mainly supposition
•   Shippers need the cargo
•   Lack of competing transport mode
•   Freight a small portion of material cost
•   ‘the market for salt’ from micro
•   Cheap rates wont induce use of more ships
Equilibrium
• The time frame is important
• Momentary
  – The deal must be done now
• Short run
  – Time to adjust for layup, reactivation, switching
    markets, or operating faster
• Long run
  – Time to take delivery of new ships, shippers can
    change supply chain
Momentary Equilibrium
• Local shortages and surpluses
• A bit like the farmer
• Options limited
• Sentiment is very important
  – What do shippers and owners believe?
  – Expectation curve
  – Eg. hide ships from charterers, but wait too
    long and can’t find a cargo
Momentary Equilibrium
Short run
Long run
• 1980 – freight rates moderate at kink in supply
• 1985 supply moved left but demand fell even
    more
    – Result – slow steaming, laid up tankers, eq way down
      span
• 1991 dd moved right, tankers used as temp
    storage (war in gulf)
•   1992 supply increased and temp storage market
    went away reducing dd
Long run
Long run prices and costs

• Very dangerous to draw any conclusions
  from long run analysis
• The idea of a natural price which covers
  costs in the long run is bogus
• It is always a trading market
• Returns tend to be rather low
Requirements for success

• Lifetime of experience
• Direct line to world political and economic
  grapevine
• Sharp eye for a bargain

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:57
posted:10/2/2011
language:English
pages:39