Bacaan Ekonomi Maritim - 90an

By
Ma Shuo
World Maritime University

1999
Maritime Economics
LECTURES
QUESTIONS page
1. Introduction to maritime economics

Why is maritime
transport needed ? 1.1 Economics and maritime transport 1
1.2 World economy, trade and maritime transport 7
2. Demand of maritime transport

What does this need
look like? 2.1 World sea-borne trade 25
2.2 Maritime geography 37
How is the maritime

3. Supply of maritime transport
demand satisfied? 3.1 World merchant fleet 53
3.2 Major maritime transport countries 63
How is the maritime

4. Types of shipping organisations
supply organized? 4.1 Types of shipping organizations 77
4.2 Tramp shipping and liner shipping 80
Where do the demand

5. Other service inputs to the shipping
and supply meet? 5.1 The role of ports in maritime transport 94
5.2 Brokers, agents and freight forwarders 102
6. Maritime transport cost

What does it cost to
undertake shipping? 6.1 The capital cost of maritime transport 112
6.2 Financing ships 114
7. Cost analysis and principles of pricing

How does the market
7.1 Optimal size of maritime transport 125
mechanism work?
7.2 Maritime pricing mechanism 137
8. Maritime freight market

How are the costs
covered? 8.1 Chartering market 144
8.2 Liner freight market 150
What are the rules of

9. Regulatory framework for shipping
the game? 9.1 National and international organisations 160
9.2 Economics of quality, safety & environment protection 167
Where is the 10. Transport and shipping industry in transition

shipping industry 10.1 Transport economics 183
10.2 Future development trend in shipping 189
List of references and extra reading 195
Annexes 198
Chapter 1
INTRODUCTION TO
MARITIME ECONOMICS
Chapter objectives:
To understand the basic concerns of maritime economics

To discuss the relationship among economy, trade and shipping
WORLD MARITIME UNIVERSITY MARITIME ECONOMICS
1.1 ECONOMICS AND MARITIME TRANSPORT
As defined in an economics textbook (Lipsey 1992), economics concerns:

1. The allocation of a societys resources among alternative uses and the
distribution of the societys output among individuals and groups at a point in
time;
2. The ways in which allocation and distribution change over time;
3. The efficiencies and inefficiencies of economic systems.
Economics can also be broadly divided into two branches: microeconomics and
macroeconomics. The difference between them is at the level of aggregation used.
Microeconomics deals with the determination of prices and quantities in individual
markets and with the relations among these markets. On the other hand
macroeconomics focuses on much broader aggregates by looking at e.g. total
number of people employed, the total national output and consumption, the balance
of trade of a country, every level of prices and its changes. One may also conclude
that microeconomics is about economic questions (e.g. allocation of resources) of
an industry, a sector, a firm, a family or a person. Whilst macroeconomics is about
economic decision of a country, a region or the world. Maritime transport is a
service sector. Therefore maritime economics belongs to the scope of
microeconomics.
Maritime economics described
The questions that maritime economics covers are, for instance:

How many ships are needed in the market
What are the influential factors on the tonnage required
Why the prices of transport services go up and down
What are the sub-division of maritime market
Why some people do better than others
What is the impact of outside changes on the shipping sector
What is the optimal size of a ship or a shipping company
The following are some abstracts picked up freely from the maritime press.
Japans Mitsui OSK Lines and Navix Line are to merge next April to create one of
the worlds largest shipowners (with a fleet of 498 ships totaling 33.5m tonnes) in an
attempt to blunt the impact of the Asian economic crisis.one international broker
familiar with Navixs dry cargo operation indicated that less than 50% of the 92-ship
dry fleet (of Navix) was covered for charter-hire next year,trading on the spot
market with a fleet that size, I think they were looking into a big black hole. (Lloyds
List November 21 1998)
Why should the shipping company be so big? Why is the size important for
surviving in difficult times? What is spot market? Why shouldnt that many ships in
the spot market? What is the impact of such a merger on my business?
The scientists in Norway have been looking at a way to turn natural gas into a
solid.(now the project is ready to go ahead) and the first ship could be designed,
CHAPTER 1 2 INTRODUCTION TO MARITIME ECONOMICS

proposed and perhaps built by 2003 in 1996 a feasibility study started to

produce and move about 4bn m3 of gaz per year. Now the results of the project
shows that the estimated saving is 24% as compared to an equivalent LNG
chain... The current trading LNG fleet stands at 116 vessels, built at prices
between USD180m and USD250m. 21 units are on order representing about
USD4.5bn. (Fairplay 25 Feb. 1999)
What is it all about? Does it mean that the extremely expensive ships worth billions
of dollars will become obsolete upon delivery? What is the impact of this on the
freight rates? What is the impact on shipbuilding industry?
As compared to the same period in 1997, the third quarter of 1998 has seen
different movement of the freight rates per TEU. from US to Asia the percentage
change is 30% but from Asia to US the rate increased by 14%. (Containerisation
International December 1998)
Why do the rates change in such a strange way? Why do they change so much in 1
year? What is the major influence of this situation on the liner shipping business?
How about the ports?
Glancing over the current maritime press headlines, one will encounter numerous
stories happening in the industry that are comprehensible only with the help of
maritime economic knowledge.
Grouping maritime economics into the sphere of microeconomics does not exclude
its relationship with macroeconomics. On the contrary, a good understanding of
macroeconomics is vital to appreciate maritime transport sector and to make better
decision within the sector. In fact because of the particular characteristics of
maritime transport, shipping industry has a quite special position at macroeconomic
level. Not only many countries formulate their proper dedicated maritime policy,
there are often specialized government departments set up to deal with various
matters related to maritime transport.
Maritime transport markets
What is a shipping market? Literally a market is a physical place where

commodities are sold and bought. However, in a modern and extended sense, a
market can be defined as an area over which buyers and sellers negotiate the
exchange of a well-defined commodity. It must be possible for buyers and sellers to
communicate with each other and to make meaningful deals over the whole market
(Lipsey 1993). Shipping market can therefore be physically tangible place such as
Londons Baltic Exchange. Or somewhere intangible but good communication
between sellers and buyers is available.
Markets are separated from each other by the commodity (or service) sold, by
natural economic barriers and by barriers created by the authorities. There is no
doubt that shipping is different from other service sectors or economic activities,
therefore it is operating in a separated market. Yet an impression may be given that
maritime transport is a single homogeneous market block in which shipping
services are sold and bought to move cargo from A to B. There is a reason for this.
Shipping is one of the most ancient economic activities of human being. At the

beginning, it was homogeneous in the sense that there were not many types of
ships and the transport requirements were quite simple and identical whenever the
transport took place. However, as trade increases, cargo volume grows and market
expands, with an economic motivation for higher productivity, during the last
century, a specialization process happened in the shipping sector with new types of
ships being introduced to carry particular kinds of cargo. To mention just a few
examples in the recent period: containerization started in the 1950s and 1960s;
Pure Car Carriers in the 1960s; LNG (liquefied natural gas) carriers in the 1960s.
Subsequently, the shipping today consists of many distinct markets. It is wrong and
meaningless to talk and discuss shipping as an activity. There is not one shipping
market but there are several markets differentiated by ship type, trade requirements
and geographical location (Helmut Sohmen 1986). As a matter of fact the transport of
crude oil has little to do with the transport of car, similarly the regular shipping
service between, say, New Zealand and Australia should not be seen as the same
sea transport between the Caribbean islands. Consequently, shipping market
should be divided into different categories according to ship type (oil tanker, bulk
carrier, container ships, car carriers, etc.), shipping requirements (liner, tramp, etc.)
or geographical location of the market (intra-Asia, Baltic sea, West Africa-Europe
etc.)
Scope of maritime economics
Maritime is a word with a broad meaning covering many aspects related to the sea
often beyond purely the transport. However, the maritime economics, which is
referred to and discussed hereafter, is exclusively, limited to transport and/or the
directly related activities. It should therefore be called: Maritime Transport
Economics.
Fishing is not included in our discussion, although fishing boats make up, in number
of ships, about 38% of the world total. This is because our discussion is restricted to
transport only. Tug boats, scientific ships and other similar crafts are excluded for
the same reason. Passenger shipping (which makes up about 2.2% of the world
total tonnage), which is extremely important in some countries and regions is not
covered specifically. Passenger shipping can also be divided into two groups: short
sea/coastal ferry shipping and cruise shipping. Technically passenger shipping,
especially cruise shipping, is similar to freight shipping, but commercially it is more
close to hotel and entertainment business on board ships and to tourism activities
ashore.
Maritime transport is a complex system, which can be subdivided into several

groups of activities around and supporting the core activity: the sea transport.
These activities are vital to the shipping industry but they are independently
operated on their own rights. These activities are basically either related to the ship
or cargo. Maritime economics is interested in those activities as well. The following
Graph shows the relationship between the sea transport and the related maritime
activities and between shipping companies and the various organizations.

Graph 1.1
Main relationships within maritime industry
Ship registration and National and Shipbuilding

flag state control international regulations industry
regulatory financial
Ports of call and port Banks, shipyard credit,
state control stock exchanges
Forwarders, Shipping
shippers commercial companies legal Maritime court, lawyers
and arbitration
Brokers, agents
Ship repair/maintenance
Ports call and
berthing operational technical
Ship survey and
Cargo handling classification
Bunkering, provision Insurance, Second-hand market,

mutuality ship scraping
Source: Ma Shuo (1999)
Maritime economics concentrates on the economic decisions of shipping

companies. It has, however, to touch upon other maritime related activities and
sectors, on which the decisions are dependent to various degrees. Maritime
economics is a tool, which can be used to enable decision makers to understand
the relationship between economic variables within the shipping company and
outside it with other relevant organizations, so that the limited resources can be
best utilized for achieving the corporate goal. Although the relationship between a
shipping company and other shipping related activities could be legal, technical or
operational, the discussions in this and the following chapters will only be made
from economic point of view. This means that the focus is placed on the
understanding of the production and pricing mechanism for the purpose of better
use available resources.
Special features of shipping industry
The particularity of international shipping industry as compared to many other

activities often shore-based is the primary reason why maritime economics exists.
By simply applying the general economic principles to the sector, as it is the case in
great many other economic activities, it is not sufficient for people to understand the
pricing and production changes of the shipping industry. Such particularity of
shipping can be observed from various angles, mainly the following four.
1. First of all, maritime transport is a service sector with a derived demand from
trade, or often, foreign trade which itself is generated by economic activities

of a country or a region. In other words, shipping does not have its own
demand, its demand is derived from trade. It is quite important for those who
work in maritime transport to know and fully understand that people do not
need shipping, they need trade. Shipping becomes interesting just because
it is part of trade chain.
The dependence of shipping on world trade results in maritime transport

having a fluctuating demand. It also justifies a study of trade when maritime
economics is discussed. As a transport sector, shipping has those typical
characteristics of transport industry too. As a means of transport, its output is
the movement of cargo or people. Such an output can not be stored. When
the capacity is built, it is there and the lions share of total cost is fixed.
Shipping is a highly capital intensive sector. Not only modern and
increasingly specialised ships are expensive to construct, the maritime
transport system requires huge investment in port facilities and in other
aspects such as communication.
2. Openness and freedom is the second feature of maritime transport.

Compared to any other economic sector, shipping is recognised as the most
open. This is because maritime transport is operating on the high sea or
international water. Due to this particular characteristic, on the one hand,
shipping has a long tradition to be left free (it had been so developed before the
state intervention became fashionable), on the other hand any attempt of the
authorities to regulate shipping has only limited effect. The same situation
can also be observed within the transport sector when compared with other
modes of transport. On a world-wide basis, shipping is much freer than air
transport which is heavily regulated (in terms of services, routes, schedule
and tariff, although situation varies from country to country)1. It is also more
open and internationalized than land transport which is very much dependent
on national regulations and other legal, social, commercial and physical
conditions on national and regional basis. Globalisation, which has become a
popular word only recently, happened to shipping long time ago.
3. The overwhelming sources of competitiveness of maritime transport are the

low transport cost and the possibility of achieving the economies of scale.
The extraordinarily big quantity that a ship can carry (the largest ship can
transport half a million tons of cargo at a time) puts shipping to be the most
inexpensive means of transport. Air and land transports are much more
restricted in size of transport, thus the economies of scale, by the technical
aspects of the vehicles and the infrastructure.
1
In aviation, although airplanes fly sometimes above international territories, the supply of service,
especially on international routes, is highly regulated by a so-called landing right system. No
foreign aircraft can land at any airport of a country on commercial basis prior to the authorization of
the landing right granted by the country in which the airport is located. In maritime transport, on the
contrary, such kind of restriction never existed. It is even clearly stated in the article 2 of the 1923
Convention on the International Regime of Maritime Ports that the foreign ships have the freedom
of access to the port, the use of the port, and the full enjoyment of the benefits as regards navigation
and commercial operations which it affords to vessels, their cargoes and passengers.

4. Shipping is a marvellously well-structured and well organised industry. Again,

with a long tradition, the international feature of shipping is part of the
explanation, no other industry has a comparable structure so well
established and effectively functioning within the sector. For example, the
insurance and mutuality system, the commercial practice and documentation
system, the ship classification system, and the sale and purchase system, to
mention just a few.
To study maritime economics, the above features of shipping industry have to be

taken into full account.
1.2. WORLD ECONOMY AND INTERNATIONAL TRADE
For different reasons, there is often a need to move goods from one place to
another, sometimes across the sea. There is a demand for maritime transport. This
is world trade. Maritime transport (of goods) derives from trade.
Maritime transport is a service sector totally dependent on the demand and supply
of world trade. For a shipping or a port manager whose job is to satisfy the transport
needs and whose mission is to develop his business in this highly competitive
market-place, it is paramount for him to know and understand why trade is
happening.
The logic of trade
Due to natural and economic reasons, a specialization occurs in the production of

goods and/or service. Trade is needed. The conditions of production are generally
different, to various extent, from producer to producer. Such a difference is the
major driving force for trade.
These conditions are also called factors of production. The factors of production
include:
- Labour (differences in costs, habits, regulation...)

- Capital (differences in availability, quantity, cost,...)
- Land (differences in climate, resources, location, availability, cost ...)
- Technology (differences in production and management know-how,
marketing ...)
Two attitudes towards trade
There are two opposite attitudes towards trade. The first is "unilateral benefit"
attitude which is based on the belief that one earns what the other loses (the size of
the "cake" remains constant). Hence, the less the trade, the more one is better off.
The subsequent policy of such an attitude is focused on enhancing the degree of

self- or auto-sufficiency with the aim to ensure the economic independence of

foreign countries.
The second is called "Mutual benefit" attitude which is based on the belief in
absolute and comparative advantages that can be realized through specialization
and trade. Such advantages will benefit both importers and exporter. And the
bigger the market of trade is, the broader the specialization will be and the more
countries on both sides of trade will produce and benefit.
Basic trade theory

The differences in factors of production give some producers either ABSOLUTE or
COMPARATIVE advantages over other producers of the same products.
Absolute advantage:
Absolute advantage concerns the quantities of a single product that can be
produced using the same quantity of resources in two different places. If the same
product is made by different producers, different conditions of production will give
one producer advantages over the other producer. The one who can produce with
less cost has an absolute advantage.
For example: differences can be found in production factors such as natural

resources like oil, ore, or climate conditions, other factors like capital, people,
technology associated with products such as planes, cars, labour cost associated
with products like cloths, food, services, etc.)
We can illustrate the absolute advantage by a concrete example of paper produced

in Sweden versus wine produced in Italy. Suppose paper is produced at USD100
per ton in Sweden but at USD500 per ton in Italy, while wine is produced at
USD100 per ton in Italy but USD1,000 per ton in Sweden. What will happen with
trade and what without trade?
Without trade, Sweden needs to spend USD1,100 to have 1 ton of paper and 1 ton
of wine; Italy has to pay USD600 to have the same amount of the two products.
With trade, Sweden spends only USD200 to satisfy its needs and Italy spends
USD200 as well (assuming transport and transaction costs are zero). Both sides
gain a lot.
Comparative advantage
Even when a country can produce more efficiently EVERY (or more) product than
another country, trade can still be mutual beneficial. This is because the margin of
advantage, in most cases, differs in different commodities. For instance, if the US
can produce 20 times as much wheat as the UK by using the same quantity of
resources, but only 6 times as much cloth, the US is said to have a comparative
advantage in production of wheat and comparative disadvantage in the production
of cloth vis-a-vis the UK. And the UK should sell cloth for wheat, supposing these
two goods are the only tradable products between the two countries. As a matter of
fact, between every two products, each country can always find its comparative
advantage over another country on one product and comparative disadvantage on
another product.

If the comparative advantage rule is not applied, trade will be out of balance and
the market mechanism will force the currency exchange rate of the two countries to
alter in order to turn some advantages of one side into disadvantages and put trade
back in balance. The gains from specialization and trade depend on the pattern of
comparative, not absolute advantage.
Even when the difference in the factor of production between countries is

insignificant, specialization and trade will in most cases be mutual beneficial due to
the effects of economies of scale. For instance, Norway and Denmark do not
produce cars but Sweden does. Airbus planes do not need to be produced in each
of France, Germany, Spain and the UK. The difference in habits is also a driving
force of trade and brings mutual benefits (cloth of fashion, cognac, exotic products,
cars, ...).
Because of all above, more and more people believe in trade (and to some extent
freer trade). Statistics have shown that international trade has been the motor to
economic development in a great number of countries. There has been found a
close relationship between the attitude to trade and the general economic
development as illustrated in the following Graph.
Graph 1.2
Relationship between the Openness of Trade Regime
And the Growth in per Capita (41 countries)
Consequently, after the World War II, especially during the last 2 decades, world
trade has grown far more rapidly than the world GNP (Gross National Products).
This can be seen from the graph on the World Merchandise Trade and Output.
Why does trade stimulate, lead to and speed up economic development? To
answer this question, we have to look more closely to the various roles of the
production factors.
The free movement of factors of production is different from the free movement of
goods. Free movement of goods (and specialization of production) will increase
income of both sides of trade, and to some extent, it tends to equalize costs of
production factors. But this effect has clearly its limits.

The free movement of production factors (especially technology and also capital)
will certainly equalize the cost of the factors and allow the poorer countries to catch
up with richer ones. Among factors of production, the most important is
TECHNOLOGY. There are a lot of new products entering in the international
division of work. Those who have a comparative advantage of those new
productions, will be in a favourable position on a more sustainable basis over
others.
Nowadays, it is mainly the Graph 1.3

manufacturing activities which allow Goods in International Trade by
countries to gain sustainable Level of Technological Intensity 1976-1996
comparative advantages. Because a
chain effect in technology exists in
the production of manufactured
goods. Service is another sector
which may provide a country with
lasting comparative advantage. On
the other hand, agriculture and basic
commodities are often giving
countries only limited advantage with
declining importance in the world
GNP. They are even sometimes
seen as "routes without exit". This is
not because they are not important,
they are in fact of great importance in
a countrys economic development, it
is simply because these productions
do rarely induce and create new
territories of other economic
activities.
The above discussion explains why it is widely accepted that industrialization and
trade oriented economic development policy is the right policy to get a country out
of poverty, as trade reduce differences in prices of production factor, thus reduce
differences in revenue. The following tables and graphics show the structure of the
world trade, the major trading commodities, products and trading countries.

Graph 1.4
Composition of World Trade 1997
(in percentage of a total 6500 billion US$ world trade)
agriculture
services 9.0%
20.4%
mining
9.3%
manufacture
61.2%
source: compiled from WTO World trade in 1997
Table 1.1
World Merchandise Trade by Region 1997
(in billion USD)
source: WTO World Trade in 1996 (1997)

Recent trade development
Since the Second World War, world trade has grown much more rapidly than the
world production (commodity output). Such a phenomenon has continued and
accelerated during recent years as shown in the table and graph below.
Table 1.2
World Merchandise Export and Production growth (1980-97)
In percentagge
1980-85 1985-90 1990-97 1995 1996 1997
World merchandise exports
Total volume 2.2 5.8 6.5 9.0 5.5 10.0
Agriculture 1.0 2.2 4.5 4.0 3.0 6.5
Mining -2.7 4.8 4.5 9.0 2.5 5.0
Manufacturing 4.5 7.0 7.0 9.0 6.0 11.5
World merchandise output
Total volume 1.7 3.0 2.0 3.0 3.0 3.5
Agriculture 3.0 1.9 2.0 2.0 4.5 1.5
Mining -2.7 3.0 2.0 2.0 2.5 3.5
Manufacturing 2.3 3.2 2.0 3.5 2.5 4.5
World GDP (volume) 2.9 3.0 2.0 2.0 2.5 3.0
Source: WTO 1998
Graph 1.5
Growth in volume of world merchandise exports and merchandise
12 output and GDP, 1980-1997 (annual % change)
10
0
1980-85 1985-90 1990-97 1995 1996 1997
World exports World output World GDP (volume)
Source: World Trade Organization, Yearbook 1998
The main reason for the above reality is that trade barriers have generally been
diminishing after 1960's and the formidable transport and telecommunication
technology development. There are 2 kinds of barriers to international trade:

artificial barriers and natural barriers. Artificial barriers are mainly related to trade
policy matters and natural barriers are mainly related to the trade transaction
process especially transport. The reduction of trade barriers can generally be seen
in the following areas:
1. The open market economic development policy has been adopted by an

increasing number of countries, especially those in Asia, Africa and Latin
America and countries in Eastern Europe.
2. Artificial trade barriers have been diminishing thanks to the bilateral and
multilateral trade agreement, such as EU, ASEAN, NAFTA, MERCOSUR
and of course the World Trade Organization - WTO (it is estimated that the
WTO could boost global income by USD500 billion in the year 2005). It is
estimated that merchandise trade volume now is 7-8% above what it would
have been without Uruguay Round for industrialized countries and more than
14% for other countries.
3. Trade is completed and benefit materialized only when cargo has been
moved over the distance between the two trading parties. Transport
therefore is required for the safe delivery of goods. Time delay and the cost
of the transport are therefore natural barriers to trade. The rapid and far
reaching development of transport, especially maritime transport, and
telecommunication technology and its application, has contributed
enormously to the development of world trade and the ever enlarging
process of the economic globalization.
The development of new transport technology and the continuous decrease of

transport cost, due to improved productivity, have led to the formation of the global
integrated market place. International trade has expanded to the extent that lots of
new grounds are created. Prior reefer transport, for instance, perishable goods had
not been traded over long distance. Cloths of the lasted fashion is now made in the
other side of globe and delivered in very short and precise delay.
Enormous improvements in the efficiency of telecommunications such as fax. IDD

telephone, EDI, Internet, etc. and postal services such as express mail and other
phenomena like simplified customs procedure, formality and documentation etc.
have greatly facilitate trade development worldwide.
The cost of transport has always been a single important natural trade barrier.
Bricks, for instance, are not traded goods between distant countries even the
difference in prices between the countries is relatively big. Bricks are however being
traded between countries or places close to each other, as transport cost turns out
to be less than the price differences. The question becomes then how far is the
distance with which bricks can be meaningfully traded? From the above discussion
a formula, although much simplified, could be used to answer this question.
Supposing that for a certain product P, Ca is its cost of production in country A. Cb is
its cost in country B and Ct is the cost of transport. If there are no other artificial
barriers (like customs duties, documentation), trade will make sense as long as:
Ct < Ca Cb

On the assumption that there were no transport costs and customs duties to pay or
any restrictive regulations to follow, then in the long run the price of a same product
will be equal in different countries (or places). Because if there is a difference,
traders will try to make money by bring the product from where it is cheaper to
where it is more expensive until the price in different places becomes equal.
In reality, however, there are transport costs and customs tariffs and restrictive
regulations. The World Trade Organization (WTO) is aiming at the reduction of
tariffs and other artificial trade barriers. While the WMU students are here to
undertake the mission and obtain the knowledge to promote trade by increasing the
shipping and port efficiency and thus reduce the transport cost the nature barrier
to trade.
Maritime transport can improve and even create trade
Since the end of the World War II, the improvement of transport has contributed to
the growth of world trade. While the transport distance remains the same, transit
time has been shortened considerably thanks to the new technology in transport
and cargo handling at ports. Transport cost per ton/mile has been dramatically
reduced thanks to effects of scale economies. As shipping is an open, free and
competitive market, competition among shipping companies have always been
intense, which leads to the result that the fruit of the technology and productivity
improvement is, often very quickly, passed on to the customers.
Although one of the most ancient economic activities in the world, shipping industry
has been the sector where probably the most significant improvement in
productivity has been experienced during the last 40 years. Such an improvement
is attributable to two technical breakthroughs occurred in the shipping industry:
specialized bulk shipping and containerization in liner shipping. Because of these
changes, large ships have been put in service in order to achieve economies of
scale. Also fast transit time and better transport quality are realized due to a higher
degree of specialization.
The new transport technique has also enlarged international trade to include many
goods which otherwise would not have been technically possible and economically
viable to be traded internationally. For example, it has been reported that water is
transported from Malaysia to Saudi Arabia using converted tanker vessels. Brazilian
stone is imported by Europe, Chinese sand is exported to Japan, New Zealand's
kiwi has become a cheap daily fruit in Europe; In winter, habitants in the cold north
are consuming vegetable produced in the warm southern countries: the concept of
seasonal vegetable is fading fast.
The total international transport freight costs as percentage of the world total import
value was 6.64% in 1980 and 5.27% in 1995 (IMF data). The world total needs of
international trade could be described by the following graph:

Graph 1.6
Total needs of international trade
Actual need Potential need
Price differences Trade barriers
It is to be understood that the need of the market is the transport (safe arrival) of
goods from origin to destination. Transport users generally do not care how their
goods are moved. Their concern is mainly time delay and costs involved in the
transport.
Graph 1.7
World Merchandise Trade by Major Product Group 1950-96
Source: WTO 1997

Table 1.3
Intra and intern regional merchandise trade, 1996
(billion dollars and percentage)
Source: WTO 1997
Graph 1.8
Trade Barriers and Efficiency
Source: UNCTAD
CHAPTER I INTRODUCTION TO MARITIME ECONOMICS

16
Table 1.4
Estimated total freight costs as percentage of import values
1980 1996 by groups of countries
As shown in graph 1.8 that there is big potential for trade facilitation gains of up to
US$100 million. According to WTO (WTO 1998) trading costs are those costs of less
transparent trade barriers such as customs procedures, product standards and

17
conformity certifications, licensing requirements, etc. in the context of the EC single

market programme, elimination of internal customs procedures and related
administrative streamlining were projected to reduce trading costs by up to 2 per
cent of the value of trade. Globally, UNCTAD has arguedd that trading costs
represent 7 to 10 per cent of the cost of delivered goods and like EC, UNCTAD also
estimates that about 2 per cent could be reduced. The Japanese Economic
Planning Agency has also estimated such savings at 2 per cent of the value of
trade in an APEC context.
Table 1.5
World Trade in Commercial Services 1990 1996
(billion dollars and percentage)
Graph 1.9
World Trade in Commercial Services by Region
(1996 percentage)
source: WTO (1997)

18
Role of shipping in national economy
In 1996, Japan has decided to celebrate, on the 20th of July of each year, a national
Maritime Day. As explained by one of the senior directors of the Japanese
Shipowners Association (H. Uematsu 1998) that the purpose of the Maritime Day is to
sensitise the Japanese people of the overwhelming dependence of the country on
the sea, and to express the nations gratefulness to the ocean. The economic role
of shipping in national economy can be extremely big not only for Japan but for
other countries as well. There are in fact a number of ways to measure such kind of
importance.
As described earlier in this chapter, trade and exchange with the outside world has
been widely accepted as the most effective way for a country leading to the
economic prosperity. Subsequently, the importance of foreign trade, not only of
goods but also technology and capital, has become obvious for all countries.
It has been said that about 90 percent of the world total trade of goods measured in
tons are moved by sea. Therefore, it is safe to say that the role played by shipping
is much more important and critical nowadays than it was when economies were
less exposed internationally. It is obvious that in the discussion like ours focusing
on the importance of shipping to a national economy, knowing how much an
economy is dependent on maritime transport is paramount. However the great
difficulty is that the statistics collected on trade is seldom in tonnage, whilst data
available on sea trade is not in value. Therefore the 90% of world trade in volume
using sea transport is merely a rough estimate. Another estimate is that in value
terms, only about 40% of world trade are moved by sea. Over-land transport (rail,
road and inland waterway) and aviation are the two most important modes of
transport through which part of world trade is moved. In 1997 the total volume of
cargo moved by civil aviation was 15.6 million tons (ICAO 1997), which looks negligible
in comparison with 5 billions of seaborne trade (only 0.3%), although it will be much
more impressive when measured in value terms. If aviation is not yet a threat to
shipping, at least in the short run, road, rail and inland water transport is a more
serious competition to maritime transport.
Maritime Transport Dependence

Today very few people deny the importance of shipping to an economy as trade is
THE motor of economic development and 90% of that trade is moved by sea.
However, the assumption and the Graph are actually global based. It is interesting
to know the situation of each individual economy in order to know which country is
more dependent on maritime transport and which countries are less. To properly
measure such dependence, we should look at the amount of the countrys
international seaborne cargo in value and compare this with the countrys GDP. We
can call such an indicator the Maritime Dependence Factor - (or MDF).
MDF = Seaborne Trade in Value / GDP x 100%
The following are the MDF Graphs of a number of selected countries for 1995. A
total of 56 countries were taken to make the list. Two criteria were used: the size of
the countrys foreign trade and regional balance. Russia and the Eastern European
countries were not included because of the lack of data and also of their overall

19
dependence on shipping which is less than that of other regions in general. The
volume of trade of these 56 countries constitutes is representative as it makes up
the majority of the world total trade in 1995 (UN statistics yearbook 1995). It is hoped that
MDF gives a general idea of a countrys dependence on maritime transport. The
aggregated MDF for all the 56 countries in 1995 is 9.7%. Europe Union with 15
member states is taken as one entry instead of 15 entries. This is because of the
increased integration of the EU. The same arrangement is also made for USA and
Canada.
Table 1.6
Maritime Dependence of Selected Countries
(seaborne trade in USD as percentage of GDP, 1995)
No. COUNTRIES MDF No. COUNTRIES MDF

1 Singapore 179% 22 Morocco 37%
2 Malaysia 131% 23 China 36%
3 Thailand 95% 24 Iran ** 35%
4 UAE ** 90% 25 Turkey 32%
5 Tunisia 70% 26 Australia 32%
6 The Philippines 62% 27 Benin 29%
7 Viet-Nam 61% 28 Liberia** 29%
8 Korea 60% 29 Senegal 29%
9 Saudi Arabia 58% 30 Columbia 27%
10 Tanzania 54% 31 Pakistan 27%
11 Kenya 52% 32 Nigeria 25%
12 Israel 50% 33 Peru 24%
13 Cte d'Ivoire 49% 34 Egypt 24%
14 Ghana 47% 35 India 18%
15 New Zealand 46% 36 Mexico 15%
16 Algeria 44% 37 Japan 15%
17 Indonesia 43% 38 (USA+Canada) 14%
18 Chile 43% 39 E.U. 12%
19 South Africa 40% 40 Brazil 11%
20 Venezuela 38% 41 Argentina 11%
21 Cameroon 38% ** only statistics of earlier years available
Source: compiled by Ma Shuo based on UN Statistics Yearbook and various other sources
Graph 1.10
Global Trade and Seaborne Trade Dependence
(based on 56 major trading nations on above table - 1995)
40.9%
50.0%
30.7%
40.0%
30.0%
12.6%
20.0%
10.0%
0.0%
Trade/GDP Sea/Trade Sea/GDP

20
The above shows that the percentage of seaborne trade over total trade is low. This
is because the Graph of trade includes that between EU countries. According to the
World Trade Organization, only 25.5% of EU members export and 26.8% import
were with countries outside Europe. A majority of this intra-European trade is not
moved by sea. The above table shows that the MDF varies greatly from country to
country and from one region to another. Singapore for example, is special because
the country has made itself a trading house of the region. The economy is relatively
small but the level of import/export is very high. Generally the level of MDF is
affected mainly by the following four factors: the difference in the type of economy,
the size of economy, the level of economy, alternative transport modes and
geographical location.
1) Type of economy. Evidently, a closed economy does not rely as much on

shipping as an open economy. Trade structure affects the dependence on
shipping. Countries exporting mainly raw materials tend to depend more on
shipping, as maritime transport is the most suitable mode of transport for the
cargo of low value and big volume. The newly industrialized countries in East
and Southeast Asia have their economies highly export-oriented. The situation
is reflected in the table whereby among the 10 first countries, 6 come from that
region. Mature economies with the service sector counts for a substantial part of
GDP tend to have lower MDF. Commercial service, although increasingly being
traded internationally, is not maritime transport reliant.
2) Size of economy. In principle, the bigger the economy, the less dependent it will
be on the external market. Take foreign trade as an example. Trade as
percentage of GDP was merely 26% for EU as a whole with the non-EU
countries, such a Graph varies between 34% to 126% for each of the individual
member states when counting their trade with other countries including other EU
member states. Big economies can be seen as a pool of many smaller states
trading with each other. That is why, we have USA, EU and Japan with one of
lowest maritime dependency factor. It is worth noting that with the accelerated
process of economic globalization and regional economic blocks, the difference
between what is international trade and what is national trade is no longer
clearly distinguishable and obvious.
Graph 1.11
Size of economy and maritime dependency
MDF Seatrade as % of GDP
200%
2
175% R = 0.0287
150%
125%
100%
75%
50%
25%
0%
1,000 10,000 100,000 1,000,000 10,000,000
GDP 1995 in bn USD (log scale)
Source: table 1.6

21
From the above Graph, it looks that the variation of maritime transport
dependency is not fully explained by the changes in a countrys GDP. This is
because the size of an economy is not the only influential factor. However, in
this coordinate we see a number of exceptional cases. Singapore, Malaysia,
Thailand for instance are highly dependent on shipping due to the special type
of their economy, as explained above. Bar those exceptional cases, the two
variables will become more co-related (22% explained).
3) Level of economy. Advanced economies normally enjoy a more developed and

sophisticated service sector. As mentioned above, service sector is normally
less exposed to international market on the one hand and whenever traded
internationally, it does not require maritime transport. In 1995 for example, EU,
North America and Japan had a combined 65% of the service sector in the total
GDP, and their MDF is 14%. While all other countries had a combined service
sector 49% of their total GDP with an average MDF of 36% (WTO 1998).
4) Alternative transport modes and geographical location. The biggest trade flow
between two nations in the world (of goods) is believed to be the one between
USA and Canada with USD 327 bn or 6% of the world total in 1997 (WTO 1998).
However this trade goes primarily through land transport. As the above graph
shows that about 60% of world total foreign trade in value are moved by other
modes of transport than maritime. European Union as a whole is the biggest
trading block in the world with USD 2101 bn or 38% of the world total. Yet more
than 60% of this trade are intra-EU, which means that they are not generally
moved by ships. Obviously, sea transport is not always an option for moving
cargo between two countries (think of the trade between Austria and
Switzerland). Land transport infrastructure and facilities are well developed in
Western Europe and North America. Asia has also a relatively high level of intra-
regional trade (50.7% in 1997), however, this trade is very much maritime
transport dependent due to the specific geographical features of the region.
Maritime transport is an economic activity. Therefore basic economic principles and

concept do apply in shipping. Economic knowledge enables people to see how
effectively the limited resources are used for the general and long-term benefit of
the organization. Any success or failure in shipping can be traced down to
economic reasons.
Maritime transport is a complex system made up with many separate but

interrelated markets both vertically and horizontally. Vertically means as a supply
chain, different players of the maritime industry are linked or inter-linked with
regulatory, financial, commercial, legal, operational and technical relationships. We
will look into those relationships from the economic point of view. Horizontally, at
the transportation level, shipping is composed of various markets differentiated by
ship type, trade requirements and geographical location. As a service and transport
sector, shipping carries all the characteristics of the sector. But shipping is also
special in its dependence on trade, its openness and freeness, its low cost, etc.

22
Shipping plays a vital role in the economy of many countries. In terms of tonnage,
maritime transport incontestably dominates the movement of world trade, but in
value terms, the situation varies greatly from country to country. The Maritime
Dependency Factor shows that it is not necessarily the big and rich countries that
need shipping the most. The dependency level differs mainly due to economic and
natural conditions of each nation or region.

23
Chapter 2
DEMAND OF
MARITIME TRANSPORT
Chapter objectives
To understand the structure of seaborne trade

To discuss the factors that affect maritime demand
To describe the geographic features of maritime demand
2.1 DEMAND OF MARITIME TRANSPORT
In 1965, the world seaborne trade (total cargo loaded) was of 1476 million tons. The
volume increased in 1970 to 2,605 million tons. Despite of 2 oil crises in 1973 and
1979 when crude oil transport (more than 50% of total trade volume at the time)
stabilized or decreased, the world trade measured as goods loaded increased to 3,704
million tons in 1980. In 1990 this figure went to 4,120 million tons and according to the
UN statistics in 1997 the total world seaborne trade reached a new record high of
4,953 million tons. It is estimated that 5,064 million tons of cargo was carried by sea
in 1998 (UNCTAD 1998). Let's now look at the composition of the world's sea borne
trade.
Of this total of 4,953m tons seaborne trade in 1997, about 44% or 2,172 million tons
were oil; 23% or 1,157 million tons were the 5 major dry bulk cargo and remaining 33%
or 1,624 million tons were minor dry bulk and general cargo. The size of world
seaborne trade of 1997 is shown in the following table.
Table 2.1
International Seaborne Trade in 1997
(Estimates of goods loaded)
millions of tons
Oil 5 major bulks* Other dry Total

2,172 1,157 1,624 4,953
* iron ore, grain, coal, bauxite, phosphate
source: Unctad Review of Maritime Transport 1998
Oil
The majority of tanker cargo is oil (although water, fruit juice, eatable oil, wine, etc. are
also transported by tankers in small quantities), which includes crude oil (about 80%)
and oil products (20%).
The major reason that oil has been the biggest cargo in maritime transport is not only
that it is the principle source of energy, it is also because, except for the USA, Russia,
world oil production and consumption are by and large concentrated in different parts
of the world, relatively far away from each other and separated by oceans.
Oil crisis turned some actual needs into potential needs or made some of them
disappear. Since the crisis, the price difference between OPEC oil and North Sea oil
narrowed down and the production of the latter went up. In early 1999, the world oil
price went as low as less than US$10/barrel, which, if measured in constant dollar
terms, is actually of the same level of before the first oil crisis in 1973. The not-so-good
economic situation in many parts of the world contributed to the down turn of oil price.
Since 1990, the seaborne trade of oil has been steadily growing with an average
annual rate of 2.75% up to 1998.
CHAPTER 2 25 DEMAND OF MARITIME TRANSPORT

Dry bulk
The composition of dry bulk trade is much more complex. If we take statistics of 1997,
then out of the total 1,157 million tons of 5 major bulks (coal, ore, grain,
bauxite/alumina, phosphate) carried, about 39% was coal, about 37% was iron ore
and 18% grain (UNCATD, Review of Maritime Transport 1998). Other dry bulk cargoes are:
timber and forest products (approx. 250 m3), steel products (60-80 m tons), other kinds
of non-ferrous ore, fertilizer, car, etc.
Coal: In 1997, 453 m tons of coal were transported by sea. The demand of
coal increased while the oil became more expensive over the last decades. In
1997 both coking coal shipments and thermal coal shipments increased
modestly compared to the year before. During the last decades, the price
difference between coal produced in Europe and that in Australia, North
America and South Africa widened. The result is that coal mines have been
shut down in Europe on the one hand, increased international sea transport
needs on the other hand. In 1980 the world seaborne trade coal was in the
region of 200 million tons. This traffic has climbed to 453 million tons in 1997,
which represents a growth rate of over 7 percent per annum on average.
Iron ore: In 1997 world crude steel production was approximately at the level
of 794 million tons. As the recent reduction of steel production was mainly due
to the a remarkable decline of the output in The Commonwealth of Independent
States, the total seaborne traffic of iron ore increased strongly in 1997 to 423
million tons. This traffic has been rather stable for some years.
Grain: The world grain trade was of 203 million tons in 1997. This traffic is
heavily affected by the harvest in both importing and exporting countries.
Economic and politic issues have been important influential factors as well (e.g.
the reduction of grain import of the former Soviet Union, the EU agriculture
policy and the agriculture negotiations at the WTO).
Bauxite and alumina: Over 50 million tons were carried by sea in 1997.
Phosphate: About 30 million tons were carried by sea in 1997.
Other bulk commodities: Shipment of dry bulk commodities, other than the
five majors, was about 750 million tons in 1997 (Fearnleys 1998). The table at the
end of this chapter is roughly the break-down of estimated size of each of the
major commodities classified as other bulk commodities in 1997.
General Cargo
Those cargoes, the parcels of which are not suitable to be transported by bulk vessels,
are called general cargoes. The part of so-called general cargo was estimated to make
up approximately 865 million tons in 1996. Typical general cargoes are goods such as
machinery and manufactured products, chemicals, cotton, fruits, processed foods,
coffee, tea, etc. A substantial part of these cargoes are transported in unitized forms
such as containers. The world containerized trade was estimated to be in the region
of 50 million TEU in 1998. Although in volume terms general cargo was less than 20%
of the world total traffic, in value terms general cargo was believed to obtain more than
70% of the world total sea born trade.

Graph 2.1
Structure of World Seaborne Trade
(with traffic figures of 1997)
Coal
(450 mt)
Iron ore
(420 mt)
Major Bulks Grain
(1150 mt) (200 mt)
Bauxite/Alumina
(50 mt)
Dry Cargo Phosphate
(2780 mt) (30 mt)
World Suborn Trade Other bulks

(4950 mt) Other Dry (790 mt)
(1620 mt)
General cargoes
(830 mt)
Crude Oil
Liquid Bulk (1630 mt)
(2170 mt)
Oil Products
(540 mt)
2.1.2. Evolution of Maritime Demand
In 1900, the world maritime traffic was about 200 millions of tons. In 1950 it was more
than 500 millions of tons. The traffic is estimated to have reached 5 billion tons in
1998. This means from 1900 to 1950, the maritime traffic increased 2.5 times, while
from 1950 to 1998, the traffic increased 10 times (see Graph in this chapter on the
evolution of world suborn trade between 1979 and 1998). There is a relationship
between world merchandise production, world trade in goods and maritime transport
demand, however the development of each them has gone a different way. If we take
the statistics between 1980 and 1997, we will see that world trade in value increased
the fastest followed by seaborne trade and merchandise production.
Graph 2.2
World Merchandise Production, Trade and Maritime Transport Demand
Index 1980=100
300
250
trade
200
150 production
100
maritime demand
50
Source: compiled from WTO, UN and other sources

It is to noted from the above graph that the world merchandise production has very
similar evolution pattern as that of maritime demand, although one is measured in
value terms (in current US$) and the other in tonnage. The two developments are
actually highly co-related with 85% of variations in maritime demand explained by
changes in world merchandise production. The fact that seaborne trade has had a
different development pattern as compared to world trade in general, which is
measured in value terms, is because of the reasons discussed in the previous chapter.
The unit value of world trade has increased considerably, while seaborne trade
measured in tonnage does not reflect such a change fully, and on the other hand, high
value cargoes tend to be moved, whenever possible, by the modes of transport other
than maritime.
As the world production is expected to grow with a pace of about 3% a year for the
next decade or so (see forecasts proposed by various international institutions, such as the World
Bank, OECD, etc.), the maritime demand will most probably also be growing at an annual
speed of 3%. With such a prediction, in 2010 world seaborne trade would be in the
region of 7130 million tons.
However, the long-term constant growth does not mean that the evolution of sea borne
trade has been a stable process in the short and medium term. Throughout the years,
there have been lots of ups and downs with regard to each of the maritime traffics.
While a kind of maritime traffic may increase by 3-5% a year on average for a period
of 20 years it can decrease by as much as 10-20 per cent or even more during a year.
From the charts on short and medium term changes of traffics, we can see clearly the
fluctuation of major suborn dry bulk cargoes.
Graph 2.3
World Seaborne Trade in 1996 (miilion tons)
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
Source: UNCTAD (1997)

Graph 2.4
Evolution of International Seaborne Trade
(1970 - 1997)
Graph 2.5
Development of major dry bulk commodities 1987-1997
The change of the size of maritime demand is of great importance for shipping
companies. This is not only because shipping firms as a whole will have a variable
amount of cargo to carry, but especially because the variations in world sea borne
trade will have significant impacts on the level of freight rates. Because of the highs

and lows in the freight market, which will be further discussed in more details later, it
is quite common that shipping companies earn extra profit when market is good in
order to withstand the bad time. Hence, the success of a shipping enterprise depends
to a large extent on the knowledge and understanding of the maritime demand and its
evolution, hence the ability to anticipate the changes.
2.1.3. Major factors affecting the demand of maritime transport
Economic factors
Developments in world economy and trade have a direct effect on the maritime
demand. In 1997, world real GDP increased by only 3% over 1996. In the same year
the world merchandise output, which excludes the service and construction sectors,
increased by 3.2% (with industrial countries grew by 2.7% and developing countries
5.4%). Generally speaking, trade development is in line with the world economic
health, although the former grows generally more quickly than the latter. East and
South East Asia is a very good example to demonstrate how the evolution of maritime
transport demand goes hand in hand with the regional economic development. As the
world economy fluctuates, trade and transport demand fluctuate as well.
As we discussed in the previous chapter that world trade grew more rapidly than the
world production, we can see the difference between world total trade and sea borne
trade. Sea borne trade is more directly influenced by the industrial production, thus the
2 curves are close with each other for most of the time.
The change of economic policy may have a particularly important influence on

maritime demand. Apart from the changes of trade policy in a number of developing
countries, which have a long-term impact on maritime demand, other short or medium
term economic policy changes play an important role too. Take the foreign exchange
rate as an example: During the period of 1984-1986, the US adopted a high interest
rate policy, which resulted in a much strengthened US dollar. The dollar was
appreciated almost 50% against the major foreign currencies. This stimulated US
imports dramatically. In a single year of 1984, the containerizable cargo imports from
Europe to North America grew by 40%, while the US export to Europe suffered a
significant drop. This certainly altered the maritime demand market, particularly if we
consider the fact that at the time the Europe-North America route was the biggest
container cargo market in the world. Similarly, the financial turmoil in some Asian
countries in 1997/98 led also to sudden imbalance of trade.
Another aspect of economic policy, which has direct influence on maritime demand is
the changing economic structure in many industrialized countries. Resources are
being shifted from heavy, dirty industries, such as iron steel industry, petrochemical
industry, etc., to light, clean, high value added and technology intensive industries,
such as electronic, new materials industries and the service sector. The transport
requirement of energy (e.g. oil substituted by nuclear energy) and industrial raw
materials have been decreasing constantly. One of the new trends of industrial
production is that more and more industrial activities and the processing of raw
materials are taking place in the countries of resource. For instance, oil refinery
facilities have been built in oil producing countries. This has also happened in iron and

steel, food processing and forest product industries. Import countries have been in
favour of this policy partly because of environmental concern and the reduction of
costs. Export countries are also encouraging this kind of practice for the sake of more
value-added activities at home. The consequence of this on the maritime demand is
that total seaborne trade becomes higher in value and lower in volume.
Seaborne trade is not only influenced by various aspects of cargo demand side, it can
also change when the cargo supply side varies. Oil transport is a good example.
Between 1980 and 1990, the crude oil import of Europe reduced by almost 40%. Apart
from the structural changes in the European industries, the increase of oil price by
major export countries played a major role. The expensive oil served as an incentive
for people to look for substitutions. While overseas oil import decreased, the oil
production at the North Sea and imports from Eastern Europe increased and the use
of coal and nuclear energy was largely expanded. In Japan oil import was reduced by
16% between 1980 and 1990 (ISL 1992). During the same period, coal import of this
country increased dramatically.
Graph 2.6
Forecast of World Seaborne Trade
1997 2006
Political events and development

Wars have always been a big influential factor on maritime transport demand as far
as military transport, relief and humanitarian cargo or consequent embargo is
concerned. But wars are not the only political considerations. Political alliance, for
instance, may also have significant impacts. Take Europe as an illustration, when the
UK joined the EEC, old trade pattern with the former colonies was given up in favour
of EEC internal trade. Consequently, the UK consumed the same amount of sugar,
butter, meat etc but from different sources. The impact on maritime demand of that
country was considerable.
While the political alliances may adopt a liberal trade policy among the member
countries, they may very well become protective blocks vis--vis other countries
outside the alliance. To overcome this problem, some other countries have to go to the
"locally made" policy, which means to export capital and production skills and build
and operate factories inside the protected blocks. We can mention, to illustrate this,

car and electronic product factories built by Japanese, Korean companies in the EU
and the NAFTA or North American, Far Eastern or European companies in developing
world. As a result, we have seen recently a constant decline in the demand for Pure
Car Carriers (PCC) and an increase in the transport of Complete Knock Down (CKD)
car parts.
Oil transport is another example to demonstrate the political impacts. Crude oil
transport reached the peak in 1979 (1.5 billion tons) and the bottom in 1985 (0.87
billion tons). Now it is steadily increasing towards its highest historical level which is
mainly because of the export reduction of the former USSR, because the world
consumption level remains almost unchanged.
Natural factors
Weather conditions are perhaps the most important factor for the maritime transport
demand of grain: weather in export countries as well as in import countries. Because
of the changes in the harvest, Australia's grain export dropped 47% in 1983 compared
with the previous year and it jumped by a phenomenal 150% in 1984 over its 1983
figure. The former USSR was a major grain import country and the world grain market,
including the associated maritime transport market, was considerably influenced by
the level of harvest of that country each year.
Nowadays more and more seasonal agricultural products are traded and transported
internationally. Apart from traditional items such as coffee, cacao, tea, etc. new items
such as fruits, vegetable are carried by vessels in an increasing quantity. Climate
changes in both production and consumption countries should be watched closely to
predict the maritime demand. Other maritime demands are also influenced by the
changes in natural conditions. For example, a severe winter may boost the import of
energy materials such as coal and oil.
Technical reasons
As we discussed in earlier lectures that maritime transport can create new demand for
trade. This is true not only in terms of reduced transport costs, it is also true in terms
of newly developed transport technology. Fresh fruits, meats and vegetable had not
been part of maritime transport demand until the problems with refer transport were
solved. Similarly, the break through of LNG/LPG transport technology brought a new
and increasing maritime demand.
Technical development and changes are not always happening in favour of sea borne
trade. The increasing part of nuclear-sourced energy has been affecting seaborne
trade of oil and coal enormously. Technology introduced in other modes of transport,
for instance, may also directly affect the level of maritime demand.
The newly built English Channel Tunnel has already attracted some maritime traffics
to use land transport. The UK made cars, which used to be transported by ships to
Southern European markets are now being moved by rail through the Channel Tunnel.
Cabotage and short sea transport have long been victims of more convenient and cost
effective land transport.
Land bridge can be a terrible threat to maritime transport, especially the ones across
the Euro-Asian continent. Once the political and technical difficulties are overcome in

some of the countries of transit, the land bridge (a railway link between coasts)
alternative will become a serious competition to the maritime transport option.
Because the total transit time can be reduced by more than 30% while the cost can
be kept at almost the same level or even cheaper compared with sea alternative. The
same situation, to a different extent of course, may happen in other continents such
as South America or Africa once the land transport system has been improved.
Air transport of cargo has been growing at a much faster pace than other modes of
transport for the last 20 years. More and more high value goods are being creamed
away by aeroplanes from ships.
In 1997, the world merchandise export, excluding intra-EU trade, was of US$ 4184
billion in value (WTO 1998). As discussed in chapter 1 that part of that trade does not use
sea transport. When a shipper is to choose a mode of transport to move his cargo
internationally, he will normally look at the following 3 most important aspects of
transportation:
1. Availability
2. Speed
3. Cost
For an island country, land transport is not feasible mode for the transport of its foreign
trade, but it may be the only possible transport mode for a landlocked country with its
neighbours.
Obviously, aeroplanes can reach everywhere as long as there is an airport. Air

transport is the quickest mode of transport. A typical commercial aircraft can fly about
700-900km/h (from Africa to Europe in lees than 10 hours). Land transport (rail or
road) is also quick: about 80 km/h (8-10 times slower than air transport). Sea transport
is slow: about 10-25 knots or 18-46km/h (from Far-East to Europe 30 days) 20-40 time
slower than air transport.
Sea transport is the cheapest mode of transport. From the Far-East to Europe a typical
bulk carrier (Panamax) tariff could be around USD 20/ton FIO (e.g. coal), or $ 0.02/kg.
Container rate is normally much higher at about USD 2,500/FEU (30 ton), or $ 0.08/kg.
Land transport is more expensive: US mini-land-bridge about USD600/TEU by rail, or
$0.04/kg.
Air transport is the most expensive way of transport: from Far-East to Europe it costs
about USD 4-6/kg (this is the basic tariff, air freight is very complex and change
enormously according to the quantity and cargo). Therefore sea transport is generally
about 50-300 time cheaper than air transport, although on some particular routes this
gap is being considerably reduced by air companies.
Air transport is carrying more and more trade thanks to its high transport speed
combined with the general increase in unit value of world trade. During the last 20
years, the increase of the world air traffic has been at more than 10% every year.
However, because of its high cost, the total volume remains relatively small. The total
more than 200 IATA member airlines carried about 16 million tons of cargo on
scheduled flights in 1997. The international throughput grew by 9.3% to more than 10
million tons or about 0.02% of total world seaborne trade in volume. However, their
part in value term is much higher.

Value versus volume

As the competitive advantage of maritime transport is in its low cost and disadvantage
in its long transit time, the high value and time sensitive cargo tends to use other
modes of transport, while relatively low value and cost sensitive cargo seems more
suitable to be transported by sea. However, even within maritime transport, distinction
should be made between low value cargo and high value cargo. This is because that
although in volume terms general cargo constitutes only about 15% of the world total
traffic, in value terms general cargo makes more than 70% of the world total.
The part of general cargo has been steadily increasing as a direct result of the fact that
the growth of world trade has been in value rather than in volume. This trend is
expected to continue in the coming years mainly for the reasons we have explained
in the earlier chapter. At the same time this market is more exposed to competition
from other modes of transport.
The following tables demonstrate world merchandise trade by products. The mining
products, which include the major liquid and dry bulk traffics, make up about two third
of world trade in volume in 1995, they occupy however merely about 10% of world
merchandise trade in value. On the other hand, just one category of general cargo:
machinery and transport equipment, which is too insignificant in volume to be
distinguished in the world maritime traffic table, constitutes a staggering 39% of total
world merchandise trade in value.
Short term versus long term

When analyzing maritime demand, it is essential to differentiate long term changes
from short-term variations. Overall long term trend of seaborne trade is of great
importance for making development strategies. However even for a declining trade,
a short-run boom is possible and is often enough to let a company make handsome
profits. Similarly, a temporary down-turn of long term promising market can really drive
the freight market to drop by 20-30% or even lower, which will be sufficient to put
some companies in extremely difficult situations or out of the business altogether.
Table 2.2
Composition of World Merchandise Exports by Region and Product
(1985 and 1996 percentage share in value)

Table 2.3
Bulk Traffic Other Than the Five Main
(1996 - 1997)
Source: Fearnley World Bulk Trade 1998

Graph 2.7
World Merchandise Exports by Products
(1990 and 1996 share based on value)
Source: WTO
2.2. MARITIME GEOGRAPHY
As we know through the previous chapters that in 1997 a total of about 4,953 million
tons of goods were moved by sea. But this figure is not reflecting the exact size of the
world maritime transport needs, or in other words, by knowing only the volume of
seaborne trade, one can not tell how many ships (in terms of tonnage) are required
for the transport. In a transport sector such as shipping, the distance that cargoes
have to travel over must be taken into consideration. While million tons is meaningful
for port activity, billion ton-miles makes more sense for ships. Distance is important for
maritime transport. Therefore the following discussion will concentrate on maritime
geography to see where the seagoing traffics come and where they go.
OIL
First of all let's have an examination on the situation of oil, which constitutes about 44
per cent of world total sea borne trade in 1997. As, still today, a principle source of
energy for industrial activities, oil is logically consumed to a large extent in the most
industrialized parts of the world. If we look at the regional shares in world GDP (Gross
Domestic Products) we will notice that nowadays for instance about 70 per cent of
world GDP is made in industrialized countries (Developed Market Economy Countries)
mainly in Western Europe, Japan and North America. The rest of the world contributed
around 30% of the world GDP (UN statistics).

Proportionally, world oil consumption has a similar pattern of distribution. If this is

reflecting more or less the overall picture of oil consumption, what is about oil
production? For this, we should look at the present oil production situation. The
following table shows the world total oil production in 1998.
Table 2.4
World Crude Oil Production in 1998
in million tons
Volume Volume
USA 374 North sea 295
Middle East OPEC 988 Mexico 174
Other OPEC 470 China 157
Former Soviet Union 356 Others 671
TOTAL 3485
source: Fearnleys Bulk 1998
From the above table, we can clearly see the imbalance of supply and demand of oil.
While 72 per cent of world GDP was concentrated in industrialised countries, 60 per
cent of oil was produced in developing world of Africa, America and Asia. This means
that every year there should be a big amount of oil that has to be transported
internationally. This has been revealed by the UN statistics that in the 1990's, about
half of coal, crude petroleum and natural gas consumed in OECD countries were
imported from non-OECD countries.
The chart on the following page shows the recent situation of the world seaborne trade
of crude oil. The 2 figures given for each origin and destination represent total volume
in million tons and in billion ton-miles. The Middle East is by far the biggest source of
oil trade. It is followed by the Caribbean countries and then by Western and Northern
African countries. It may be interesting to note that even Asia-Pacific produced about
10% of world total oil output, the fast increasing local consumption is turning the region
from an oil exporter to a net importer. China started to be a net importer of oil from
1993 despite of its 4% part in the world production. Indonesia and Malaysia may still
be having oil excess for export, but that situation could be completely altered in the
near future in view of the rapid economic development and the increasing domestic
oil consumption.
Russia and some East European countries have long been important oil providers.
During the recent years however, the crude oil export has been declining. This has led
to an increase in maritime transport demand, as for example the oil import from Russia
to Europe usually uses pipe-line transport, but if other alternative sources have to be
used, then very often maritime transport will be needed.
As oil trade always flows to economic production centres and there are new centres
emerging in the developing world, the oil trade schema described above will certainly
be changing accordingly.

Graph 2.9

IRON ORE
Evidently, if we want to study iron ore trade, we have to look at iron and steel
production first. In 1997, a total of 794 million tons of crude steel were produced in the
world. Of this, Europe produced 20%, Japan 12%, North America 16%, former USSR
9%, China 13%, Korea 6%, Latin America 4.7% and India 2.8%. The graphic below
is about the distribution of crude steel production by different country groups from
1987 to 1996. It has to be said that after 1991, there have been a lot of changes in the
steel production. The part of former USSR has dropped. The US, Japan and Western
European countries have reduced their steel production while the in a number of
developing countries, this industry has been booming (especially in South Korea,
China, India, Indonesia etc.).
Graph 2.10
Graph 2.11
The above analysis described the world steel production and the subsequent demand
of iron ore. On the export side, the picture seems to be simpler compared with those
of other traffics. There are two major exporters of iron ore in the world: Australia and
Brazil. Other important but much smaller suppliers are India, South Africa, Sweden
and the US. India will have to reduce its export as its domestic steel production and

consumption grow fast. The chart on the next page gives you a vivid picture on world
seaborne iron ore trade in 1996. Again the figures are in million tons and billion ton-
miles.
Graph 2.12

COAL In 1996, the latest statistics available, the world coal consumption, measured
in oil equivalent, was of 2264 million tons and this consumption was concentrated in
the following regions.
China 30%
USA 23%
Western Europe 17%
Former USSR 8%
India 6%
Japan 4%
Africa 4%
In the same year of 1996, the world main coal producers were:
China 30%
USA 25%
India 6%
Australia 6%
Russia 5%
Africa 5%
We can see from the above statistics that the US was self-sufficient for coal with some
surplus for export. China and India were also self-sufficient with little surplus for export.
Western Europe and Japan were the biggest net importers of coal, while Australia was
the main supplier.
The world seaborne trade of coal is shown in the chart on the next page, where we
can clearly see that Australia is by far the largest coal exporter in the world. The
countries in the Far East have become important coal importers. It is so thanks again
to the economic development of the region and the increasing demand of energy such
as electricity power.

Graph 2.13

GRAIN
The term grain used in the context of our discussion includes wheat, maize, barley,
soybeans, sorghum, oats and rye. The world production of grain in 1997 was 1592
million tons (of which around 70% were wheat and maize). The world seaborne trade
of grain has been by and large dominated by North America as the main exporter. In
1997 out of 203 million tons of grain transported by sea, 135 million tons, or 69%, was
from the US and Canada. France is a big grain producer and exporter but its market
has been mainly within Europe.
Unlike crude oil, iron ore or coal, the transport of which follows the same pattern of the
industrial production and economic activities measured by GDP, the import of grain
is more influenced by the distribution of the world population. As far as the import
countries are concerned, the Far East has been the biggest market. Japan first of all
and other nations, like China, Korea as well. It is understandable why grain is imported
there when we remember the high density of population in the region. Russia has
always been an important grain importer. The inflow has been decreasing substantially
during the recent years, in 1995 for instance, there were only 2.5 million tons of grain
exported to Eastern Europe. Africa is also a net importer of grain (22 m tons in 1996),
while Latin America is rather an exporter.
The future development of grain trade depends on a number of factors. Weather is

definitely an essential consideration. Other factors have also an impact especially in
the long run. The evolution of population (grain consumption), economy (grain
production) and political will of individual countries that will decide the future picture
of grain seaborne trade.
Economic development has two major impacts on grain needs of the country. First, the
building of new industrial infrastructure tends to take more and more land from
agriculture. Secondly, economic development often leads to a change of people's diet
(more meat, dairy products, fruits etc.) which in turn will require extra needs for grain
consumption. Therefore, Asia, Africa are expected to be even bigger net grain import
regions in the future.
Political consideration in this matter means whether to reduce, maintain or increase

the protection of national agriculture. If all kinds of state subsidies were given up, as
required in the Uruguay Round of GATT, higher degree of production concentration
will be happening and the world seaborne trade of grain will be growing. The chart on
the following page is the situation of world grain seaborne trade in 1997.

Graph 2.14

GENERAL CARGO
To know the situation of general cargo trade, we have to look at the world
classification of trade leaders in terms of value.
The following is a list of world trade leaders countries, territories and economic
regions (measurement of export only and in US$ value terms) in 1997 (WTO 1998).
1. EU - 15 (20%), 2. US (16%),
3. Japan (10), 4. Canada (5%),
5. Hong Kong, China (5%) 6. China (4%),
7. Korea (3%), 8. Singapore (3%)
The intra-EU trade (66%), intra-North America trade(36%) and intra-East European
trade (18%) can be excluded from seaborne trade calculation as in most cases they
are not moved by sea. About 20% of Latin American trade are intra-regional, however
part of such trade is still transported by sea. Although intra-Asian trade is quite big
(50% of the total), a majority of it is moved by ships. Intra-regional trade is insignificant
for Africa and Middle-east. As far as the rest of the world is concerned, Australia and
New Zealand are totally maritime dependent while a substantial part of trade of non-
EU Western European countries is moved by land transport. Taking all the above into
account, then out of the total world export, as shown in the following chart Asia will
count for approximately 36% of the world total (seaborne and in value) trade, West
Europe 22%, North America 15% and the rest of the world 17%.
General cargo traffic is mainly

between the industrialized Graph 2.15
countries. To illustrate this, we World trade by region in 1997 (export value)
can look at container traffics.
During the recent years (e.g. * other European countries, Australia, N. Zealand
Rest of world * N. America
1995-1998) and out of the world 9% (extra N.A.)
total container traffic handled by 15%
ports (about 170 million TEU in Latin America
1997), North American ports 7%
handle about 20%; Western
Asia
Europe handled something like 36%
25% of the world total; East Asia EU (extra EU)
(including Japan) handled about 22%
40% of the world total. The ports
of the rest of the world then Eastern Europe
Africa (extra)
handled about 15% of the world 3% Middle East 4%
total container traffic. This shows 4%
a similar pattern as the world
maritime trade. source: compiled from WTO statistics (1998)
The following graph shows the world containerized trade in 1995. Of the total of about
38,000,000 TEU transported between the world major shipping routes, 44% were in
the East-West trade, which means the market between Asia, North America and

Europe. About 34% were the so-called intra-regional trade, especially in Asia and
Europe and the 22% rest were the North-South trade. That is the container trade
between Asia, Europe, North America on the one hand, and Latin America, South
Asia, Africa, Australia/New Zealand on the other hand.
Graph 2.16
Main Liner Traffic
(in Thousand TEU, 1995)
Intra-Europe
4250
Intra-N.Am.
1250 N.America Europe 3,030
N.America Middle East 205 Asia N. America 7,470
Asia Australia 875

L. America Europe 1,150
N. America S. Asia 250
Intra-Asia
6750
L. America N. America 2000
Asia Europe 4,895

Europe Africa 950
N. America Africa 100

L. America Asia 725
Europe Middle East 645

Asia Middle East 255
N.America Australia 275

Asia South Asia 425
Asia Africa 425
Europe South Asia 475
Europe Australia 400
Source: Based on Drewry Consultant 1996
As it is true for all maritime transport markets, the liner trades are not always in
balance between import and export. The trade imbalance rate varies between 10% to
as high as almost 90%. World wide it was 25% in 1996. It is very expensive for the
shipping companies to cope with the trade imbalance, especially in the container
transport. Because the movement of empty containers incurs a cost but generate no
income.
Major ports
Classifications of ports can be done with different criteria. According to cargo

throughput in 1997 for instance, we will have the following list.
Singapore (314 ft)

Rotterdam (284 mt)
South Louisiana (234 mt)
Chiba (178 mt)
Shanghai (172 mt)

Nagoya (137 mt)

Kobe (135 mt)
Yokohama (127 mt)
Hong Knong (125 mt)
Antwerp (106 mt)
Source: ISL (1997)
But we should consider that some ships may come to a port for provisions or other
services without necessarily having any cargo loading or discharging. Furthermore,
sources of a port's income not only come from cargo but also come form ships: Dues
and charges on cargo and on ships. Therefore, according to ship tonnage, we have
another list of the biggest ports in 1997.
Graph 2.17
Major ports of the world according to ship numbers and tonnage, 1997
million gt thousand ships
900 140
800 120
700
100
600 Right side scale
500 80
400 60
300
40
200
100 20
0 0
Singapore Rotterdam Kobe Hong Kong Antwerp
Source: compiled from ISL 1998
The table on the next page shows the worlds top 30 container ports in 1998. Ports are
also being divided into hub ports and feeder ports (mainly for containers). For
example: the port of Singapore is a hub port for the south-east Asian market. (it is
estimated that more than 70% of container traffic of the Port of Singapore are
transhipment. Major feeder ports are Bangkok, Jakarta, Sulabaya, Manila, Kelang,
Saigon, Indian ports). Hong Kong is another hub port for the east Asian region.
Rotterdam can be considered as one of the hub ports in western Europe.

Table 2.3 Table 2.4

Top 30 Container Ports in the World Top 20 Bulk Port in the World
(1997, in million tonnes)
Port 1997
1 Port of Tubarao 84.00
2 Qinhuangdao 78.62
3 Port Hedland 68.33
4 Port Waratah Coal Services 61.60
5 Dampier 60.65
6 Richards Bay Coal Terminal 60.00
7 Ponta Da Madeira 43.99
8 Port of Glandstone 39.31
9 EMO 33.00
10 Lamberts Point 31.52
11 Port Kembla 28.00
12 Port Walcott 26.00
13 Dalrymple Bay Coal Terminal 24.27
14 Port of Sept-iles 23.81
15 Westshore Terminals 23.05
16 Hay Point-Coca 22.37
17 Port Cartier 22.04
18 Saldahana 20.25
19 Antwerp 20.20
20 CVC Ferrominera Orinoco 11.24
Source: Port Development International

Source: Containerisation International
Sea canals
The following table shows the maritime traffic of the most important three canals in the
world. The following table is the shipping traffics through the 3 canals in 1997.
Number of transit Net tonnage (,000)
Suez Canal 14,730 54,000

Panama Canal 13,500 227,000
Kiel Canal 24,770 57,400
Source: ISL (1997 Yearbook)

Suez Canal: 101 miles long waterway linking Port Said on the Mediterranean with Port
Suez on the Red Sea. Opened in 1869. (constructed over a decade at a cost of
USD30m). Compared with via Cape, using Suez Canal can savings in the distance.
While ULCC can transit in ballast, the limit for fully-laden vessels is around 150,000
dwt.
Economic benefits of Suez Canal (Round trip, nautical miles)
Route via Suez via Cape % (increase)

____________________________________________________________________
Ras Tanura to Rotterdam 12,698 22,338 76%
Ras Tanura to Houston 19,512 25,004 28%
Sydney to Rotterdam 22,966 25,414 11%
Yokohama to London 22,042 28,854 31%
Panama Canal:
51 miles long lock type canal between the ports of Bilbao and Cristobal. The Canal
was built under a US-Panama treaty signed in 1903 and opened in 1914. Vessels size
is constrained by the canal's locks: 274.3m loa, 32.3m beam and 12m draft.
There is a number of project to build new canals in order to shorten or improve sea
routes.
Land bridges
A fixed railway link connecting two coasts is normally called a land bridge. Land
bridges are dedicated block train services with certain efficiency and advantages. Land
bridge transport may just be used to serve the two coastal zones, or it may also be
employed as the pre or post one or two sea transport. As compared to maritime
transport, the overwhelming advantage of land bridge and quick transit time whilst the
major setback being the transport high cost due to the infrastructure cost, costs related
to additional cargo handling and the lack of scale economies. Obviously, land bridge
transport is more affected by the transit countries. There are many land bridges in the
world and the following are the most important ones.
Tran-Siberia Land Bridge This is a railway link between the Far Eastern
Russian ports to West Europe over a distance of about 12,000 km (e.g.
between Nakhodka to Rotterdam). This land bridge transport has big potentials
in view of the current difficulties in connection with various transit countries that
could be overcome in the long run. In 1997 a total of 22,000TEU were
transported via Trans-Siberia land bridge (only 15% of the 1989 level). A one-
way trip from Japan to Rotterdam takes about 15 days and costs about
US$1200/TEU as compared with 30 days and $1800/TEU for sea transport. If
double-steak technology could be applied, this option will be even cheaper.
China-Central Asia/Europe Land Bridge. This railway link Lianyungang of China

to Europe. It is about 1500 km shorter than Siberian land bridge. It is closer to
production centre of China, HONG KONG, Taiwan and South Korea. It covers
also a vast region of central Asia and Middle East, especially those land-locked

countries. The current problems are the railway capacity, some organisational
problems and the imbalance of trade. Despite the relatively short existence, the
new China-Central Asia/Europe land bridge moved over 40,000 TEU in 1997
from a mere 257 TEU transported in 1995. A big majority of the cargo is for the
central Asian countries. It is expected that this alternative transport will
experience a very fast development in the years to come.
North America mini land bridge. It goes over North American continent linking
the eastern and western coasts. It is called mini in comparison with land
bridges of Asia-European continent. However, this is probably the most
successful example of land bridge transport. It serves not only the two coastal
areas, but the whole region in-between. The competitiveness of the this land
bridge comes mainly from the innovative practice of double-steak block train
technique, which greatly enhanced the productivity of the railway transport.

Chapter 3
SUPPLY OF
MARITIME TRANSPORT
Chapter objectives
To appreciate the decisive factors regarding the size of supply

To analyse the structure of maritime supply and its evolution
To understand the economics of ship's size and speed
To review the current supply in terms of major suppliers of various
shipping services
3.1. SUPPLY OF MARITIME TRANSPORT
World economy and international trade create maritime demand and such a demand
is satisfied by the supply of maritime transport by ships. The aim of this chapter is to
examine the supply side of maritime transport to see what are the important factors
that influence the size and form of world maritime supply. It is worth mentioning that
passenger shipping remains as an important segment of maritime supply, yet for the
purpose of and the time allocated to this series of lectures, we concentrate ourselves
on the maritime transport of freight.
3.1.1. Size of maritime supply
In 1997 a total of 21,413 billion ton-miles of seaborne trade was carried by the world
shipping industry (Fearnleys Review 1997). This was a record-breaking performance.
However to transport 21,413 billion ton-miles, how many ships are required? In other
words what is the carrying capacity needed. The following five factors are the major
factors that determine and influence the size of maritime transport supply.
(a) Size/type of the ship

It is evident that the number of ships needed for carrying specific maritime trade
measured in ton-miles depends on the average size of ships: the bigger the
ships are, the fewer the number of ships required will be. Over the last four
decades, the number of ships has always increased slower than that of total
tonnage. This means that the average size of ships has consistently grown
bigger.
The average ship size of the world merchant fleet was about 1,500 gt (gt - gross
tons - total enclosed space within a ship expressed in tons) in 1900. It became 2,740
gt in 1950 and about 5,955 gt in 1995. The total number of ships in the world
merchant fleet of over 100 gt was 28,400 in 1920. It was 30,850 in 1950 and
52,444 in 1970. In 1995 there were approximately 81,080 merchant ships in the
world. This means that between 1950 and 1995, the total number of ships
increased by about 2.6 times, while during the same period of time the total
gross tonnage of ships increased by nearly 5.7 times (ISL 1997). The following
graph is about the world fleet development between 1950 and 1995. It shows
that the increase of total tonnage has been much faster than that of total
number of ships, which means that average size of ships has become bigger.
(b) Sailing speed

The ship's carrying capacity will increase when the ship sails faster. The sailing
speed is one of the only ways maritime supply can be adjusted to the variation
of demand in the short run. Ships increase their fuel consumption dramatically
by increasing speed. This is one of major causes that prevent merchant ships
from sailing very fast.
CHAPTER 3 53 SUPPLY OF MARITIME TRANSPORT

Graph 3.1
Structural change of world fleet
(c) Time in ports

The less time ships spend in ports, the more cargo they can carry over a fixed
period of time. Some ships stay at ports for more than a third of their total
operational time during the year. Cargo handling and port formalities used to,
and still now, require ships to spend considerably long time at ports. To
increase ships' turn-around time, more efficient cargo handling facilities have
been built in ports during the last decades (such as liquid and dry bulk,
container, ro/ro and other specialized terminals). Such a change in port has not
only improved the cargo handling productivity, saved ships time but it has
resulted in the increase in ships' size. It is important to note that as cargo
handling becomes quicker, cargos transit time has also been sensibly reduced.
(d) Operation/maintenance ratio

Old ships carry less cargo during a year because they normally need more time
for repair and maintenance. Obviously, repair and maintenance will increase
the direct costs such as the repair cost, the increased fuel consumption, bigger
crew size, less productive equipment, etc. At the same time excessive repair
and maintenance takes time and thus leads to a loss of carrying capacity.
(e) Space utilization factor (Loading factor)

When a ship is fully loaded, it carries more cargo than if it is only partially
loaded. Tankers and bulk carriers often have to sail on ballast for their return
voyage, so in general, they carry less cargo throughout the year than combined
carriers which are suitable for both dry bulk and oil and designed specifically for
improving loading factor. For general cargo ships, they have to sail even half
empty. So higher space utilization factor can greatly improve ship's income.

Graph 3.2
Ships size/type
Time
in port
+ -
Ships speed
Ships carrying Ships
Loading factor capacity age
The following table and graphic show the size of the world fleet, its productivity in
terms of tons and ton-miles of cargo performed per dwt - the number of tons of cargo
carried and ton-miles performed by each dwt capacity - and the changes in productivity
during 1988 and 1997.
Table 3.1
Productivity of world fleet
By the end of 1996, there were 27,781 merchant ships of 1,000 gt and above in the
world. The total tonnage of this fleet was 702 million deadweight tons. This means that
the average ship size of the world ocean going fleet was 25,300 dwt.
During the previous lectures, we have discussed the structure of world seaborne trade.
Now let's have a look at the structure of the world fleet. We shall analyze the
composition of the world fleet and its technical features. In other words we shall see
what kinds of vessels that make up this total fleet of 702 million dwt.

World maritime demand is by no means a homogenous phenomenon. It is in fact a

mixture of various traffics of cargo which are different in physical form, cargo handling
features, value per unity, total size of demand throughout the year, transport direction,
transport regularity and in average size of consignment, etc. All these particularities
of maritime demand have important impacts on the technical features of vessels.
If we look at the physical forms of seaborne trade, we can identify three main
categories of traffics, namely liquid bulk, dry bulk and general cargo. To carry different
forms of cargo, ships are also built in different forms (the attached illustrations show
the difference in physical structure and equipment of major types of ships). The
following graphic shows the world fleet structure in number of ships by ships size (in
000 dwt) and type. The table on the next page is a comprehensive classification of
ships by type.
Graph 3.4
The world fleet classified according to the number of ship types may be misleading if
the real intention of the analysis is to know the exact shipping carrying capacity.
Although there are more tweendeckers than oil tankers and more ro/ro ships than
container vessels in number, the average carrying capacity of tanker and container
ships are generally much bigger than tweendeckers and ro/ro ships respectively. If
vessels are classified based on tonnage (e.g. dwt), five groups of ships should be

identified, which are oil tankers, dry bulk carriers, general cargo ships, container ships
and others. The following table and graph illustrate the general structure of the world
merchant fleet and the change of it.
Table 3.2
World Fleet Size by Principle Types of Vessels 1996-1997
(end of year figures, in thousands of dwt and percentage)
We will notice from the above table that percentage changes over recent years are
different for various types of vessels with container ships having the quickest
development. The conventional general cargo fleet has been on the down-turn for
some years. The evolution of the world fleet structure is illustrated in the graph below.

Graph 3.5
Evolution of world fleet structure
Source: SSY Consultancy & Research
As discussed earlier in this chapter, maritime supply is determined by the vessel's size,
sailing speed, time spent in ports, maintenance/operation ratio and loading factor. The
questions as regards the optimization of time in ports, maintenance time and loading
factor are more straightforward for the simple fact that the less the time spent on
unproductive activities, the better. So the optimization process will simply be a
minimization effort. However, the problem of optimal size and speed of ships deserves
further analysis.
Graph 3.6
Size range of different types of ships

Why is there a limit to the ship's size and what are the factors that prevent ships from
becoming bigger and benefiting to a larger extent from the effect of economies of
scale?
From shipowners' point of view, the effect of scale economies is only limited by the
physical and technical conditions, such as ship building, sailing safety, port and sailing
channel access and cargo handling speed etc. Without those constraints, the bigger
the ship is, the less the unity transport cost will be. For cargo owners, on top of the
freight he also has to consider the capital cost of cargo. By using bigger ships,
shippers may pay less as sea freight, but the capital cost of cargo tends to increase,
sometimes considerably, due to the consequent slower ship and cargo turn around
time. Therefore, fundamentally, the optimal size of each category of ships is a
compromise between cargo's cost and ship's cost. The graphics below illustrate this
relationship.
Graph 3-7
We may analyze the optimal speed of ships solely from shipowners' point of view by
introducing the profit as a variable of the sailing speed of his ships. This means when
ships sail faster, shippers tend to be willing to pay more as they save capital cost of
cargo (in other words owners will then get more and better deals). Similarly, shippers
will be less willing to use the service or pay less if ships sail slower (owners will have
less and poorer business). This is of course based on cargo's daily capital cost, which
varies from commodity to commodity, i.e. owners of high value cargo will be willing to
pay more for faster ships and owners of low value cargo will prefer to use slower ships
and pay less. Consequently, the faster the ship, the more the revenue will be.
However, as we said earlier, the ship's fuel consumption increases the cube of the
increase in the sail speed. Therefore the cost will go up considerably as the ship sails
faster. The optimal speed does not depend on the level of revenue or cost but on the
difference between them, i.e. the level of profit. The following graphics are illustrating
what the optimal speed should be and why different ships have different average
speed.

Graph 3-8
Graph 3.9
Source: Alderton (1994)
3.2. MAJOR MARITIME TRANSPORT COUNTRIES AND REGIONS
In the very early days, maritime transport was performed by the merchants
themselves. This can also be said the other way round that trade with overseas
countries was mostly done by shipowners. This means that once people had ships,
they could have international trade. That is why there is a famous policy statement
made about some four centuries ago which says "Whosoever commands the sea
commands the trade; whosoever commands the trade of the world commands the
riches of the world and consequently the world itself". If this were still true today, our

analysis of maritime countries would be much easier that the world major maritime
transport countries should be the world trade leaders. However the situation is not that
simple.
Before the World War II, maritime transport was indeed very closely linked with the
country's foreign trade capability. Until the beginning of this century, the Great Britain
had been the biggest maritime power and at the same time one of the world's trade
leaders. Other important maritime countries were also the world's largest trade nations
like France, Italy, the US, Germany, Japan, etc.
It has been argued that maritime transport is an integral part of international trade.
Therefore, each trading nation should have its own maritime transport capacity. This
seems to be still the case of today, as of 1997, there were more than 170 countries
that had a national (not necessarily national owned) merchant maritime fleet. However,
if we look at the size of national shipping fleets, we will notice that the majority of
maritime transport capacity of the world is in the hand of a small number of countries.
The following table shows the 15 maritime leading countries in 1997. The fleet of these
15 countries made up about 3/4 of the world total tonnage.
Table 3.3
World 15 Leading Maritime Nations in 1997
in thousand dwt
No Country Tonnage (%) No Country Tonnage (%)

1 Liberia 107538 (17%) 9 Japan 25721 (3.6%)
2 Panama 94804 (13%) 10 China 23739 (3.3%)
3 Greece 47582 (6.6%) 11 H.K. (China) 13752 (2%)
4 Bahamas 37063 (5%) 12 Philippines 13687 (1.9%)
5 Cyprus 36760 (5%) 13 USA 13400 (1.8%)
6 Norway 33864 (4.5%) 14 Russia 11283 (1.6%)
7 Malta 31613 (4.4) 15 Korea 10980 (0.9%)
8 Singapore 25787 (3.6%)
source: ISL 1997, Lloyd's Register of Shipping - Statistical tables 1997
(vessels of 300 gt and above)
After the second world war, the world economy and international trade underwent a
tremendous development. Some fundamental changes took place in the maritime
transport as well. Gradually, shipping activity became a specialized business in its own
right and to some extent detached from the trading activities. New maritime countries
emerged, which were not necessarily big trading nations. Countries and territories of
cross traders such as Greece, Hong Kong and Norway have been operating huge
fleets which are much bigger that what is needed for their own trade.
If we compare the above table with the table of the world's 15 leading trade countries,
we will find big differences. Not only in the league of shipping powers are there
countries like Greece and Norway, which are not as important for their trade
performance, but, particularly, a number of countries like Liberia, Panama, Cyprus
etc., which have the leading positions as great maritime nations but have no
correspondent places in the world trade league at all. Why?

The question of Greece or Norway and the question of Liberia, Panama or Cyprus are
completely different. The first is about "Cross Trade", which means that a substantial
part of the fleet of those countries is used to carry other countries' trade rather than
that of their own. The second is about "Open Registry", which means that those
countries open up their doors to shipowners of other countries for the registration of
their ships. The ships registered are owned and operated by nationals of other
countries.
In order to know the true picture of maritime supply, we must have a brief discussion
on open registry. The practice of open registry has developed very rapidly after the
Second World War. Liberia, for example, had had no registered ocean going ships
until the beginning of 1950's. In 1965, however, this country climbed to the third place
of world maritime countries. In 1997, the world biggest shipping flags were Liberia and
Panama - two countries of open registry. And among the world 6 most important
shipping flags in 1997, there were four countries of open registry. Open registry is
indeed the most important feature of modern shipping.
Table 3.4
World 6 Biggest Flags in 1965, 1980 and 1997
in thousand dwt (vessels of 300 gt and above)
1965 1980 1997
No. Country Tonnage Country Tonnage Country Tonnage
1 UK 21500 Liberia 80200 Liberia 107538
2 USA 21000 Japan 41000 Panama 94804
3 Liberia 17500 Greece 39500 Greece 47582
4 Norway 15600 UK 27100 Bahamas 37063
5 Japan 11900 Panama 24100 Cyprus 36760
6 USSR 8200 USSR 23400 Norway 33864
Source: compiled from statistics in ISL 1997 (Countries of open registry are underlined)
There are in the world a dozen countries, which are practicing open registry of
merchant ships. However, according to the UN statistics, five countries dominant the
market and combined they have attracted more than a third of the world total tonnage.
They are Liberia, Panama, Cyprus, Bahamas and Bermuda. The following table shows
the size of each of these open registry fleets and the tonnage distribution among major
ship types.
It is not the aim of this course to discuss details of open register. However, it is
necessary to outline the main feature of this important and fast developing activity in
maritime industry. The reasons for which ship owners put their vessels under foreign
flags are believed to be from two concerns: 1) costs, 2) accessibility of the register and
standards enforced by the state of register. A study on this subject recently made in
the UK (Bergantino, Marlow 1998)1 reveals that shipping companies which have chosen not
1 The survey was done only with UK shipowners. The samples covered 38% of the total UK owned ships. See
full report on Maritime Policy & Management Volume25 Number2 April 1998 page157.

to use the national flag are mainly looking for the following advantages:
1. Lower crewing costs/manning requirements, since registration under open registry

generally means: unrestricted choice of crew in the international market; not being subject
to onerous national wage scales; more relaxed manning rules.
2. Lower operating costs generated by lighter maintenance programmes and less stringent
enforcement of safety standards imposed by the register.
3. Less regulatory control and avoidance of bureaucracy.
4. The avoidance of tax.
5. Anonymity.
6. Easy accessibility/exit to/from the registry.
Graph 3.10
Reasons Given for Choice of Open Registry
Source: Bergantino and Marlow (1998)
In 1997, it is estimated, the share of tonnage registered in Open Registries was about
45% of the world total. The percentage is still growing.
People can always argue about the pros and cons vis--vis open registry.
Disagreement is also frequently seen between various groups of people, such as the
open registry countries, shipowners, national authorities of traditional and new
maritime countries, the international institutions with regard to real reasons for this type
of shipping practice to develop.
The existence of open registry (and indeed the extraordinary development of it) has
confirmed the very nature of the shipping industry itself: i.e. shipping is international,
open and above all free. It is too simplified, or it is even unjust, to make an automatic
link between open registry and substandard ships. According to the annual report of
the Paris Memorandum of Understanding on Port State Control 1997, the fleets of the
open registry countries do not figure on the top of the ship detention list of Paris MOU.
In fact, none of the recognized open registry countries (the 7 open registry countries
are in the list of the top 10 flag states with detention percentage
classified by UN)

exceeding the average percentage of all ships inspected between 1995 and 1997.
Among the 22 flag states targeted as priority cases for 1999 in the Paris MOU, only
2 are open registry countries. Similar situation is also found with the Tokyo MOU on
Port State Control where no open registry countries are found in the top ten of the
black list for the period of 1995-1997 (Tokyo MOU annual report 1997).
Like it or not, open registry is bound to further develop and takes even bigger market
share (see graph 3.11). This phenomenon has stimulated the authorities of many
traditional maritime countries to follow the suit. They "copied" some of the major
features of open registry to offer an "off-shore" second registry to the countries'
shipowners, and this effort has proved to be quite successful.
Graph 3.11
The magnitude of open registry
As open registry does not always reflect the real country of control of ships, efforts
have been made to recalculate the league of world maritime transport countries by
excluding those countries open registry for a more realistic analysis of world maritime
supply. In order words, people try to trace the exact owners of the ships that are
registered in open registry countries. Table 3.5 tells the world 35 most important
maritime countries in 1997 by shipowner's nationality rather than ships registration.
It is worth mentioning that these 35 maritime countries occupied about 94% of the
world total carrying capacity.
From the above table, we notice that the foreign flag tonnage as percentage of total
fleet of the country varies greatly from very low in, e.g. Iran to very high in Sweden or
in Belgium. Nevertheless, the shipowner's (or the one who has the effective control of
the ships) nationality is more meaningful information, based on which one can
measure the maritime countries and their development. Although the above table
gives a general picture of the worlds major shipping powers, the analysis has to go
a step further by examining the situation in each of the major ship types, namely: oil
tankers, dry bulk carriers, general cargo ships and container vessels.

Table 3.5
Major owner countries and their fleet
Oil Tankers
Oil tankers made up nearly 38.7% of the world total merchant fleet in 1997. Its share
has been slightly growing during the recent years, despite of the considerable decline
in the 1980's when half of the world total had been oil tankers. Although Western
Europe, Japan and North America are the biggest oil importers and Opec countries
exporters, it was Greece that controlled the biggest tanker fleet in the world and many
of its ships are ultra large crude oil carriers. Together with Norway and Hong Kong,
they provide the world with substantial tanker transport capacity. The following graphic
is the world 10 largest tanker fleet owner countries or regions as of January 1998.

Table 3.6
10 biggest tanker owners
Source: ISL 1999
Dry Bulk Carriers

According to the UN classification, dry bulk carriers include ore/bulk carriers and
ore/bulk/oil carriers. Together they constituted about 35% of the world total fleet in
1997. As the majority of that fleet (31% of the world total) are ore/bulk carriers, we will
focus on this fleet only. Here once again, Greece took the lead. The following graphics
show the 10 first bulk fleet owner countries or regions in January 1998.
Table 3.7
10 biggest bulk carrier countries and regions
Source: ISL 1999
General Cargo Ships

Conventional general cargo ships used to be the only type of maritime transport. The
cargoes they carried were both homogeneous cargo and small parcels of different
goods. Nowadays, this category of vessels includes single-deck ships, multi-deck
ships, special ships, etc.

Table 3.8
10 biggest countries or regions for general cargo ships
Source: ISL 1999
Containerization has changed that scene dramatically since the 1960's. The general
cargo fleet has been declining constantly in favor of container ships and this trend is
most likely to continue in the future, especially in the majority of developing countries.
In the ports of some industrialized countries, the degree of containerization of general
cargo is as high as 98% (Port of Oakland) or more than 90% (Port of Singapore), in
Pusan of Korea it was also more than 90% in 1993 and in Malaysia more than 70%.
However, as a whole, conventional general cargo ships are still occupying a significant
part in the market. In a few ports of industrialized countries and in many developing

countries, the lion's share of general cargo is still being carried by old-fashioned single-
deck or tween-deck ships.
In 1997, the general cargo fleet was composed of some 13,000 ships with a bit over
100 million dwt and about 13% of the world total tonnage (for comparison, the full
cellular container ship's tonnage was about 7% of the world total in 1997 though this
figure does not reflect the carrying capacity of this fleet). Looking at the different ship
types, which make up the general cargo fleet, the multi-deck ships still constitute the
largest share with 43% of the total general cargo tonnage. The overwhelming majority
(81%) of the general cargo ships belongs to the size classes under 20,000 dwt.
If we look at the tween-decker market, which has been the core of general cargo fleet,
we will notice that in 1998 Greece was the biggest owner country although it was very
closely matched by China. Germany and Japan were also active in this particular
sector. The following table is about the worlds top 10 general cargo transport
countries in January 1998 and the distribution of ships' size.
Container Vessels
The world container fleet has witnessed a constant and sometimes spectacular growth
during the last few decades. Over the last four years, for instance, the vessel TEU
capacity (which includes vessels of fully cellular, converted to cellular, semi-container,
Ro-Ro, etc.) has been growing by an annual average rate of 6.5%. The fully cellular
container fleet's tonnage almost doubled its size between 1990 and 1997, with a
growth rate of around 8% per year (about 12% increase in 1994 alone) and the
respective figure for TEU development is 9.2% per year. In spite of all these
extraordinary growth, the share of container vessel fleet in the world maritime tonnage
as a whole is still relatively small (about 5% in number of ships and 6.7% in dwt in
1997 ISL 1997). However, the carrying capacity of container fleet as a percentage of
the world total is much higher thanks to the faster average sailing speed, quicker turn-
around time at ports, younger fleet age and higher average space utilization level.
The trend towards larger container vessels seems unbroken for the last 30 years. By
the beginning of 1996, there were more than 30 ships with a tonnage of over 60,000
dwt. Actually, huge container ships with a staggering capacity of about 6,500 teu were
delivered at the beginning of 1996 and people are talking about 8,000 or even 15,000
teu ships quite seriously! It is widely believed that such ships will be in service in the
near future.
According to the ISL of Bremen, in 1997, in terms of TEU capacity, 35% of the
container fleet (ships of 1,000 gt and over) were controlled by OECD countries and
25% by other EU nationalities. The rest of the container fleet was heavily dominated
by the newly industrialized countries of Southeast and East Asia which kept 36% and
remaining 4% owned by other countries in the world. The following table is the list of
the leading container transport countries at the beginning of 1997. Germany was by
far the most important owner (not necessarily the operator though), while Taiwan and
Korea also occupied respectable positions. On the contrary however, Greece was only
the 13th in the row for this particular type of transport.

Table 3.9
10 biggest countries or regions for container ships
(CN)
Source: ISL 1999
Table 3.10
Table 3.10 shows the biggest container 20 biggest container lines in TEU slots
September 1998
shipping operators in late 1998. These 1 Maersk 346,123
20 major shipping lines controlled about 2 Evergreen/Uniglory 280,237
2.5 million out of the estimated 4 million 3 P&O Nedlloyd 250,858
TEU slot capacity in service (or over 4 MSC 220,745
5 Hanjin 213,081
60% of the world's TEU capacity). 6 Sea-Land 211,358
During the last couple of years, 7 COSCO 202,094
container market is the most dynamic 8 NOL/APL 201,075
shipping market, whereby profound 9 NYK 163,930
10 Mitsui OSK 133,681
structural changes have taken place to 11 Hyundai 116,644
alter totally the scene of the sector. The 12 Zim Israel 111,293
order of the shipping company league 13 CP Ship 105,322
has been constantly reshaping itself 14 CMA-CGM 91,600
15 Hapag Lloyd 90,879
and from 1996 some fundamental 16 OOCL 90,063
changes have been taking place as 17 K Line 89,717
major lines went to form new alliances 18 Yang Ming 79,840
or merger. 19 United Ara Shipping 59,331
20 Safmarine and CMBT Line 55,584
Source: Containerisation International
Container shipping remains to be a concentrated market. The fierce competition and

the requirement for cost cutting through economies of scale have induced shipping
lines to build ever bigger ships and fleet. The globalization process, which is taking
place also within the shipping industry has been in favor of huge, or people call them
mega, carriers to strengthen their position as the main players in the world market.
Ship Building
It is evident that supply of maritime merchandise transport is not only about owning
and operating ships, we must also know who are building the cargo carrying ships.
Before the last world war, ocean going ships were mostly built in Europe and North
America. Japan started to be a major ship builder really from 1960's. Quickly, by the
middle of the 1960's, Japan turned out every year almost half of world tonnage and
this market share was successfully kept till late 1980's. By then another ship building

super power emerged which was South Korea. During recent years, these two
countries are obtaining almost three-quarters of the world total, with South Korea more
and more challenging the leading position of Japan.
Graph 3.12
Shipbuilding and builders
Most of shipbuilding industry in Europe and North America has suffered a big decline
and some successful yards maintained in the business by specializing in high-tech
ships such as military ships, passenger ships, etc. During the last couple of years,
yards in China and in East Europe, especially those of Poland, have been extremely
active and attracted many new orders. Graphic 3.12 demonstrates the evolution of
shipbuilding industry and the domination of Japan and South Korea.
Officers and Seafarers

Another important input regarding maritime supply apart from ships and operational
control is of course the input of human resources. Who are operating the world
merchant fleet? It is not the attempt of this lecture to give an in-depth analysis of this
question, but some general knowledge on this question is presented and that is very
important for people to better understand our subject of concern which is maritime
transport supply.
As ships can be registered internationally through the practice of open or international-

national registration partly because of the high labour cost in traditional maritime
countries, more and more ship officers and seamen are also providing their services
on world-wide basis. Presently, there is a slight shortage of seafarers especially
officers in the world and this situation is expected to be getting worse in the future
years.
It is believed that new sources of seafarers have to be explored in Asia, Eastern

Europe, Latin America and Africa. The following table was prepared by a study for the
International Shipping Federation in 1995. It reveals that the world biggest sea crew
exporting countries were the Philippines, Turkey, Korea, India, etc. and the biggest
crew importers were Panama, Liberia, Germany and Norway. Using foreign crew is
one of major reasons for ship owners to fly the flags of open registry countries.

Table 3.11 shows the age composition of seafarers in different regions. It is clear that
curve for OECD countries differs from that of all other regions with the peak of the age
group 10 years older. This implies that insufficient young people have been recruited
in OECD countries. In fact the situation is quite critic in many European countries and
in Japan. Take Japan as an example, in 1998, the country still own and control about
13% of the world total tonnage, yet it is estimated that there are only about 5,000
Japanese seafarers (officers and ratings combined) or merely 0.4% of world total seafarers.
Table 3.11
BALANCE OF SEAFARER MARKETS 1995
(by region of supply and category of seafarers)
(as percentage of the world total)

OECD Eastern Africa & S-East Asia Arabic&Indian
countries Europe Latin America & Far East sub-continent
Number of 57% 16% 1% 22% 4%
vessels*
Deck officer - senior 55% -2** 15% -1 3% 2 22% 0 6% 2
Deck officer - junior 33% -24 14% -2 5% 4 41% 19 6% 2
Eng. officer - senior 52% -5 15% -1 6% 5 21% -1 6% 2
Eng. officer - junior 32% -25 16% 0 9% 8 36% 14 7% 3
Other officers 37% -20 22% 6 13% 12 23% 1 6% 2
Officer 27% -30 10% -6 15% 14 36% 14 12% 8
trainee/cadets
Specialist ratings 45% -12 24% 8 7% 6 22% 0 2% -2
Ratings 23% -34 8% -8 10% 9 49% 27 10% 6
Rating trainees 16% -41 6% -10 7% 6 56% 34 16% 12
Total (officer + rating) 32% -25 13% -3 9% 7 39% 17 8.0% 4
Source: compiled based on BIMCO/ISF 1995 survey and UN shipping statistics of 1995
* vessels of 1,000 gt and above of the world 35 most important maritime nations, which constitute about
93% of the world total. This includes ships under both national and open registries.
** the balance of seafarer market is calculated as the difference between the percentage of ships controlled and
the various categories of seafarers.
Source: compiled based on BIMCO/ISF 1995 Survey on world seafarers
The situation is far from any better in Europe where the general shortage of seafarers
has set the alarm. If the portion of ships owned and controlled by OECD countries will
not change too much in the foreseeable future, which is very much likely to be the
case, then it is obvious that an increasing number of international seafarers will have
to be employed.
Graph 3.13
AGE DISTRIBUTION OF OFFICERS 1995
%
40
35
OECD
30
Eastern Europe
25
20 Africa/L.Am erica
15 S-East/East Asia
10
Indian Sub-cont.
5
0
under 20 20-25 26-30 31-40 41-50 51-55 over 55

Major types of ships



Chapter 4
TYPES OF SHIPPING
ORGANIZATION
Chapter Objectives:
Describe the economic reasons for having different shipping organizations

Discuss the major features of tramp shipping
Discuss the major features of liner shipping
4.1. TYPES OF SHIPPING ORGANIZATION
Having discussed in the previous chapters, we now know how the demand of world
maritime transport looks like. We have also examined the maritime supply as
regards ships and major maritime countries that own and operate those merchant
ships. In this chapter, we are going to discuss how the maritime transport is
organized. By studying shipping organization we expect to have a closer look at
and also a better understanding on the major forms in which shipping activities are
managed.
As maritime supply, especially in the long term, is always demand driven, we

should first of all look at the demand side to see what organizational features
seaborne trade has with regard to the maritime transport. This will help understand
why shipping has been organized the way it looks now. This may also allow us to
have an idea about where the industry might be heading from the organizational
point of view, as if demand changes, the way such a changed demand is satisfied
should adapt as well.
In fact, in the earlier chapters we have discussed the physical forms and volume of
maritime demand as well as its geographical division. Yet the features of seaborne
trade in relation to the maritime transport supply depend mainly on some other
factors especially the following two.
(1) Size of average ship load (consignment)
Technical and economic characteristics of shipping require ocean-going

vessels to have a minimum size, which, as we have explained in lecture
four, is relatively large compared with other modes of transport. The way this
unity of carrying capacity matches maritime demand is therefore the first
decisive element, which conditions shipping organization. Accordingly,
seaborne trade can be divided into transport consignment of full shipload
and transport consignment of less-than-full shipload.
When the consignment is large enough to fill in a shipload, the owner or

receiver of the cargo (or more exactly the ship user) may use a whole ship
offered on the market to transport his cargo. The corresponding shipping
practice is called tramp shipping or ship chartering (which means to
conclude a transport contract with a shipowner/operator)
When the consignment is NOT large enough to fill in the whole ship that is
available on the market, the ship user can either pay for the total ship's
capacity with a waste of resource (ship's space) or he may use and pay for a
PART of the shipload only. In the latter case, he has to share the shipload
with other users. Such kind of cargo is called general cargo.
In general cargo transport, even the ship can be found, an individual user
may have troubles of having enough other users to share the ship's
CHAPTER 4 77 TYPES OF SHIPPING ORGANIZATIONS

capacity, especially when his consignment is too small and so are the other
people's. Somebody has to get all those small shippers together and provide
a suitable shipping service. Such a service provided on a regular basis by
shipping companies is called LINER shipping.
(2) Frequency and regularity of demand

The size of each consignment is not the only element to consider when
choose the most appropriate form of shipping organization. As a transport
demand, the frequency and regularity of shipment are also of particular
importance. If, for a certain cargo owner, not only each of his consignments
is of full shipload, but also shipment is required frequently and regularly
during a fixed period of time, then the cargo owner may very well use the
ship not for a single transport voyage but for several trips. Or he can use the
ship for a period of time provided his transport requirement can justify the full
use of the ship during this period of time. Eventually, he may even consider
controlling the ships and organizing the transport himself instead of going to
the market for chartering. This kind of practice can be called industrial
shipping, which has been widely used by the big trade houses and industrial
groups.
Industrial shipping belongs to neither tramp nor liner, although it is a very

important form of shipping organization. The reason we are not going to
include this particular type of shipping in our discussion is because this
transport supply is considered part of an internal industrial process rather
than an external commercial practice on the open market. In a sense, this
kind of shipping practice can be seen as a regular shipping service, even
though commercially it is different from the traditional concept of liner
shipping.
To sum up, we may say that there are three kinds of situations that any cargo
owner has to face as regards the suitable type of maritime transport to use.
First, if the consignment is of less-than-full shipload. liner shipping should

normally be used (although occasionally, in tramp shipping, a vessel also
carries cargo for more than one shipper as a form of part cargo).
Secondly, if the consignment is of full shipload but transport needs are

irregular and not frequent enough in the long run, then the shipper should
use tramp shipping for the particular voyage or for consecutive voyages or
for a short period of time.
Thirdly, if the consignment is of full shipload and also the shipment is regular
and frequent, then the shipper may use tramp ships for a long time or
organize the maritime transport himself.
Consequently, in the total of about 5 billion tons of cargo currently carried by the
world shipping every year, we can identify three groups of shippers.

Group 1
This includes big industrial shippers in oil industry, iron/steel industry,
electricity industry, chemical industry, paper/forest products industry, car
industry, food industry, etc. Their cargo is of full shipload and the transport
requirement is regular and frequent. They are therefore either
owning/operating their own shipping fleet or operating ships on long time
charter. This is called industrial shipping.
It is estimated that about one-half of the world tanker fleet is owned or long
time chartered by the oil companies. And in the dry bulk market about 30%
of the tonnage is owned and operated by big industrial companies.
Assuming these self-owned fleets have the same productivity as the rest of
the fleets, we will come to the conclusion that almost 1,600-1,800 million
tons of cargo is being carried by the industries themselves, which means
that this amount of cargo is out of the normal open shipping market.
Group 2
Bulk cargo shippers with big consignments but irregular transport
requirements or with a transport frequency, which does not justify the owning
and operating of one's own fleet. Shippers in this market are mainly medium
and small industrial or trading groups or shippers of seasonal cargo like for
instance: grain, fertilizer, coal for heating, logs, etc. or other liquid or dry bulk
cargoes such as oil, ore, etc. These cargoes are transported by tramp
shipping.
The size of this market is big. The whole liquid and dry bulk market, apart
from what is transported by the industrial shipping, is in this market. In
addition to that, part of general cargo is also being transported by tramp
shipping. It is in fact impossible to give an exact figure on how many tons of
cargo belong to this market, we could however estimate that about 2,000-
2,300 million tons of cargo is being transported by tramp shipping, which
constitutes approximately 45% of world total traffic.
Group 3
This is mainly for shippers with consignments and parcels far too small to fill
in a ship's load whether the transport requirement is regular or irregular.
These kind of maritime traffics are called general cargo. They have to use
liner services. General cargo traffic using liner services is estimated at about
10-15% of the world total seaborne trade with approximately a volume of
700-800 million tons of cargo to carry during each of recent years.

In the maritime industry, a shipping market Graph 4.1

signifies normally a competitive market, Requirements of Shipping
although with various degrees, where a big
number of shipowners and shippers can
enter and exit freely. Tramp market and liner Seaborne cargo
market is such kinds of shipping markets, to transport
even though the level of freedom in all sense
of the word is different between the two
markets. They are by and large open and
competitive. On the contrary, Industrial Size of consignment
shipping does not constitute an open
shipping market, as the shippers are at the
same time the shipowners. We will
concentrate our following discussions on the
tramp and liner markets. Full ship load Less than ship load
The above analysis is based on the demand

side, which means the characters of
maritime demand require occasional, tailor-
made tramp shipping services for big Regular Irregular
shipments and regular and frequent liner
services for small parcels. Now we will have
a closer look at tramp and liner shipping from
the supply side. Industrial Tramp Liner
shipping shipping shipping
4.2. TRAMP SHIPPING AND LINER SHIPPING
4.2.1 Tramp Shipping
Tramp shipping refers to the transport service made to suit a particular need. In
terms of routing and timing of shipment, it is not fixed. Normally a cargo owner has
a specific transport need which justifies the use of an entire ship, then relevant
efforts are made to identify the supply of the service. Shipping companies and
ships providing services in such measure-to-fit type of market are in tramp
shipping.
At the beginning of shipping history, tramp shipping used to be the only type of
maritime transport. Now it is still the form of shipping organization through which
most of world's maritime traffic is moved. However, due to the evolution of the
shipping industry, tramp shipping is more used in the transportation of large
quantity of homogeneous cargo. It is also called bulk cargo.

Bulk cargo refers generally to the cargo without packing in complete loose type,
which can be loaded, stowed and unloaded easily and quickly by using specialized
equipment in or out of bulk carriers in a continuous manner. There is a number of
bulk cargo handling equipment widely used in ports, such as pumps, crabs, a
convey belt, an off-loader by sucking or screwing. The typical bulk cargoes are for
example, oil, grain, coal, ore, etc. Another term neo-bulk is also used to cover
those types of cargo, which are homogeneous in nature and identical in
appearance but have to be loaded or unloaded piece by piece or separately in or
out of the ship. The cargoes in this category include, logs, steel products, bagged
cargo like cement, fertilizer, cocoa, coffee, etc.
The ultimate objective of bulk shipping is the extremely low cost achieved through
economies of scale. Because of the physical feature of bulk cargo, ships can be
built very big. If we take the data used in chapter 3, we can clearly see that the
largest ships are always found in the bulk sector. For instance, the biggest oil
tanker today is of 500,000 tons and the biggest dry bulk carrier 350,000 tons.
Three elements should be mentioned to explain the extraordinary size of bulk

carriers and the consequent economic advantage: First, there is an enormous need
of bulk cargo in the market. The market need of cargo like oil, coal or iron ore is
always in great quantity, which requires a transport able to satisfy the need. The
huge and stable need not only justifies specialized bulk carriers but also purposely
built terminals in ports. Secondly, bulk cargo is primary raw materials
homogeneous in nature, which makes the transport in loose form possible. Thirdly,
because of the loose and homogeneous nature, bulk cargo can be handled rapidly
at ports using specialized equipment.
Terminals specialized in handling bulk cargo, liquid or dry, have normally the
following characteristics. (1) deep water draft. As the size of bulk carriers is very
big, deep draft at ports is necessary. This may vary according to different types of
bulk cargo and ships between 12 to 17 meters. (2) specialized handling equipment.
The equipment is purposely built to achieve high productivity. A dry bulk terminal,
for example, can normally load, or even unload, a bulk carriers with a rate of
10,000 - 20,000 tons per day. (3) large storage area and facilities. Oil tanks, grain
silo or big storage areas, open or closed, are often symbols of a bulk terminal. (4)
good onward transport connection. Bulk cargo is normally raw materials with low
unit value. Same as for sea transport, the over land transport of bulk cargo also
needs to be of low cost. Therefore, bulk terminals are very often well connected
with the railway system and sometimes also have inland waterway transport
possibilities.
Bulk cargo is normally transported in tramp market, however, it is not only bulk
carriers that are operating in the tramp market. General cargo ships, specialized
ships such as ro/ro ships, log carriers, etc. are also frequently seen in this market.
The only condition is that the transport routing and timing are tailor made for the
cargo, which is sufficient in quantity to deploy the entire ship. Some general
cargoes like steel products, coffee, cacao beans e.g. are is in big quantity and thus
are transported in tramp shipping.

Tramp shipping is different from liner shipping particularly in the following aspects.
- Operational features
Ships sail based on cargo commitment, which is irregular in time and/or
places. Time means that for certain trades, characters (those who conclude
transport contracts with shipowners) would like to use the vessel for a period
of time. This can vary from one month to six months or one year or even
longer. The exact duration is fixed each time the owner and the charterer
meet and is solely based upon the will of the charterer. Places, in most
cases, mean loading and discharging ports. Most tramp ships are intended
for world-wide service, but there is no expected repetition of voyages. Every
voyage is made individually. Sometimes shippers may require a number of
repetitious voyages carrying the same commodity, yet this kind of
consecutive voyages are scheduled purposely for the convenience of the
specific shipper (charterer) and should not be considered as a regular
service provided by the shipowner.
- Organizational features
Many tramp companies are small with few ships because organizationally it
is difficult to manage a big tramp company as not only each ship but each
voyage is made individually. Or the same can be said the other way round:
tramp shipping can be organized at small scale with, for instance, a single
ship. An illustration of a tramp company is used by Stopford and it gives an
interesting description of what a typical tramp company looks like. It is a
company owned by two Greek brothers and runs a fleet of five ships - three
products tankers and two small bulk carriers. the company has a two-room
office in the West End of London run by a chartering manager with a telex
and a part-time secretary. Its main office is in Athens where two or three
staff do the accounts and administration and sort out any problems. Three of
the ships are on time charters and two are on the spot market (voyage and
short-term time charter market).
- Contractual features
The formal transport contract concluded between a shipowner and a
charterer is called Charter Party. The shipowner must negotiate and sign a
separate contract for each employment of his vessel and the terms of the
charter party vary from voyage to voyage as well as from ship to ship. The
negotiation is free, open and on all clauses, although basic charter parties,
as widely used in practice, are printed and set in standard forms. The final
agreement (or not) depend upon the bargaining power of the owner and the
charterer and certainly the general situation of the market.
- Commercial characteristics
Tramp market is a free and competitive market with great number of
charterers and shipowners. Freight rates vary according to the supply and
demand of the market. As the demand by nature is irregularly and constantly
changeable, the freight rates of tramp market is always fluctuating. For the
level of freight rates and the choice of ships, there is no controlling body in
whatever form on tramp market. This makes tramp shipping a very risky

venture for many people and at the same time a wonderful speculative
business for some others.
- Various forms of tramp shipping practice

As there has never been a rigorous definition of tramp shipping, we should
understand that all those that do not belong to industrial shipping and liner
shipping are in the sphere of tramp shipping. Because the market
requirements are different in terms of shipment regularity and frequency, the
tramp market can be subdivided in three main categories.
1.Voyage charter (single or consecutive)

Under a voyage charter, the shipowner undertakes to put a specific vessel at
the charterer's disposal for the carriage of an agreed amount of cargo from
one or more ports to another or more ports. Payment is made at rates and
conditions negotiated and mutually agreed upon in advance and based on
the quantity of cargo actually loaded within the range allowed. An alternative
way of payment is by "lump-sum", which means to agree upon a total figure
rather than a level of rate.
During the whole contract period, the ship is under full control of the
shipowner who also has to pay for all capital and operating costs, such as
crew wages, stores, provisions, insurance, bunkers, etc. Cargo handling
costs have to be agreed upon specifically in the charter party. The charter
can be for a single voyage or, on the request of the charterer, for a number
of consecutive voyages. This is normally the transport for the same kind of
cargo moving between the same ports and applying the same rates.
Another variation of voyage charter is what is generally known as "contract of

affreightment" (COA). When a charterer wants regular movements of similar
amount of same sort of cargo between the two ports (or two ranges of ports), they
can conclude a COA with a shipowner. The freight rate and transport intervals are
agreed upon, but no specific ship is named.
2. Time charter (short or long term)

Under a time charter, a charterer charters a specific vessel for a stated
period of time, sometimes within a definitive geographical area. The period
agreed upon is normally for several months or a year. Sometimes, a time
charter can be very long, it can last for 2 year, 5 years or even more than 10
years. The charterer has to pay the hire money (on the basis of so much
dollars per day) and also bunkers, port and canal duties and cargo handling
costs. The ships operating costs such as crew, maintenance, are still paid by
the shipowner.
The duration of the time charter can be based on time needed for the trip.
This is a variation of time charter and is generally called voyage (or trip) time
charter. Here the charterer hires the ship for the period of voyage
concerned. Compared with voyage charter, the main difference is that the
charterer pays daily hire instead of freight based on the tons of cargo moved
and fulfills the responsibility of a time-charterer rather than that of a voyage
charterer.

3. Bareboat charter (demise)

A bare boat charter can also be considered as a kind of time charter,
because the ship is put at the charterer's disposal for a period of time. But in
this case the charterer will take over a "bare" boat, which implies that the
charterer has to supply the crew and pay for it. He also has to pay for the
ship's maintenance, for all operating costs, fuel costs, port costs, etc. The
shipowner transfers the operational control of the ship during the charter
party period to the charterer against the bare-boat hire payment made by the
charterer.
Under bareboat charter, and to a lesser extent time charter as well, the ship
is in the complete control of the charterer who can operate the ship as if it
belonged to him. In this case the charterer acts as an owner of the ship and
he can then let out the ship on the tramp market through other voyage
charter or time charter arrangement with new charterers. An important
source of demand for this kind of tramp shipping service comes from the
liner shipping companies. When their own tonnage capacity is not
considered adequate to meet the market needs, shipping lines can
supplement their fleet by chartering in ships from tramp market.
The above three different types of tramp shipping or chartering

arrangements highlights the variable nature of the maritime demand for
tramp shipping services. Long time charter or demise charter is often used
by big trading and industrial groups as part of industrial shipping capacity.
The commercial risks are believed to be lower for long term time charter or
demise charter than for short-term time or charter voyage chartering where
the market is volatile.
Started in the 1970s a few shipowners realized the need of cutting operation cost
in order to survive in the highly competitive market. One of the ways to reduce the
cost is to relocate part of ship management operations to places where labour cost
is lower and tax regime more favourable. Gradually this became an independent
profession providing ship management services to other shipowners. This is a
brand new activity in shipping and a lot of functions in a shipping company can be
entrusted to ship management companies. This applies to tramp shipping and
specifically to industrial shipping, whereby the owners (or the industries) have
plenty of cargo but may not have or wish to have capability of ship operation.
Manning of the ships is the major activity offered. This could be a full package
based on a lumpsum contract or any relevant individual service. Other services
such as technical service, insurance arrangement, financing and accounting and
commercial management can also be provided specialized ship management
companies to any shipowner. Ship management companies choose the location of
their offices based on a set of criteria such low labor cost, abundant supply of
qualified administrative and technical staff, favorable fiscal climate, good
telecommunication and transport connection. Nowadays major ship managers have
their head offices in places like Cyprus, Hong Kong, Singapore.

4.2.2. Liner Shipping
Liner shipping as a distinguish sort of shipping organization appeared by the middle

of the last century when steam ships started to enter in commercial shipping
service offering a better, faster and more reliable transport. Shippers with cargo of
small quantity but of high value prefer to use this kind of shipping service. It is
estimated that presently more than half of the world total sea freight is earned in
liner shipping.
Liner shipping system consists of a number of special subsystems. Apart from the
technical management, which is similar in both liner and tramp shipping, liner
shipping is completely different from tramp in many ways.
- Operational features
Liner shipping is a kind of maritime transport equivalent to airlines in air
transport, train service in land transport or bus service in urban transport.
Liner shipping companies provide transport service with fixed sailing
schedules, fixed ports of call, named vessels and in most cases fixed price.
The operational system of a liner company includes the management of both
ship and cargo movements. Scheduling and terminal logistics are the two
main activities of liner operation. The operational criteria for a liner service
are capacity i.e. space and containers available for customers; service
frequency i.e. how many time a week or a month; transit time, i.e. port to port
transit time or door to door transit time, this may also include feeder
services; punctuality i.e. reliability of the service.
Some shipping lines take care of terminal activities themselves some not.
Inland transport services may also be provided by shipping lines. Therefore
the operation of inland transport and the inland clearance depots (ICD)
become also part of liner operation. Container management is another
aspect of liner shipping activity where shipping lines have to deal with
problems of e.g. imbalance of trade, maintenance of containers, replacing
and repositioning of containers.
- Organizational features
A liner company is normally a well structured organization. Compared with
tramp shipping companies, liner companies are generally large and
complex. First of all to provide a regular liner service, the enterprise often
needs several ships of similar specifications. Within the organization, a
traffic service is always needed to assure the continuous cargo supply for
the ships. Because cargo in liner shipping is generally small parcels, so
shipping lines have to deal with a great number of clients. This incurs a
higher overhead cost. An agency network has to be established at all ports
of call to provide services to ships as well as cargo. In liner shipping the
number of ports of call is much greater than that involved in a tramp voyage.
Information management and coordination efforts are much more important
in liner shipping than in tramp shipping. As actually liner shipping is more
and more containerized, logistic services are required for clients as well as
for the line as regards the container management. Liner shipping
organization is considered as a system- and network- based organization.

The network and coordination are built not only within a liner shipping
company, they are also commonly seen between and among different
shipping lines. Commercially, liner shipping may be seen as a business of
high risks. Because ships have to sail on planned schedule whether or not
the necessary cargo has been found to fill the ships up. The costs like
bunkering, port charges, which are variable costs in tramp shipping become
parts of fixed costs in liner shipping. In order to keep the service and the
whole network running, some shipping lines came together to form a kind of
cartel aiming at maintain service and freight level by eliminating competition.
This is called a liner shipping conference system. Nowadays especially
during the last couple of years, there are many new forms of coordination
and co-operation among shipping lines.
- Contractual features
In liner shipping, the transport contract is called Bill of Lading (B/L). A B/L is
not only a transport contract but also a cargo receipt and a document of title.
As a transport contact, the Bill of Lading defines the responsibility and
liability of the carrier and the shipper with clauses on the back side of the
document. As a receipt of cargo, the Bill of Lading carries the signature of
the cargo recipient, normally the ship master, together with the clear
description of the cargo concerned. As a document of title, the Bill of Lading
can be transfer, which signifies the change of ownership of the cargo, by an
endorsement of the holder of the Bill of Lading.
The terms and conditions pre-printed on the bill of lading are imposed by
shipping lines and are not negotiable (practically it is also impossible to do
so considering the fact that there are normally hundreds or even thousands
of shippers for a single liner voyage). Each shipping company has its own
pre-printed and published bill of lading, although the majority of shipping bills
of lading have similar clauses often based on international rules (such as the
Hague Rules).
Some shipping lines offering door to door transport service also issue a
Combined Bill of Lading. This extends the shipowners responsibility beyond
ports.
- Commercial features
The pricing system of liner shipping is complex too. Traditionally, shipping
lines, especially shipping conferences, used to use commodity based tariffs
(it is sometimes also called value-based tariffs). It is a kind of tariff book with
detailed commodity classifications. The tariff is measured on weight (ton) or
volume (dimension). But for the same unity of measurement, the tariff is
different for different commodities. Essentially according to the unity value of
the commodity, the tariff is set at what traffic can bear level. By using
commodity based tariff system, high value cargoes cross subsidize low value
cargoes, if we consider that the transport cost would be the same for
cargoes of different unity value.
With containerization in liner shipping, another liner tariff system emerged. It

is called Freight All Kinds (FAK) or box rate, which means that the tariff is

based on the number of containers transported regardless of the content of

the containers. This is transport cost based tariff and has been now widely
adopted by shipping lines.
The most significant change, which has ever happened in liner shipping is perhaps
containerization. Started commercially from the late 1960s, containers have
become almost the synonym of liner shipping. The improvement of productivity is
so great that today, according to one estimate, 1 modern container ship replaces
more than 20 general cargo ships in terms of carrying capacity. The impact of
containerization goes well beyond maritime transport itself. Transit time is much
shorter, safety and security much better, transhipment becomes a common
practice and intermodal transport is now possible, even transport price is lower.
Table 4.1
Containerization ratio in ports
source: ISL 1999
New Development in Liner Shipping
Recently, liner shipping has gone through a very profound structural change. This
is directly related to containerization. As transport in containers enhance
productivity and reduce cost, containers are taking bigger and bigger market share
of the general cargo supply. The size of container ships increases very fast. From
1970 to 1997 the average ship size of the world container fleet increased steadily.

Graph 4.2
Container fleet structure
However compared this to general cargo ships, the size of which has not changed
at all during the same period of time. One of the reasons for such an extraordinary
growth in container ship size is the productivity gain in cargo handling at port
terminals, which will be discussed in a later chapter. The other reason is the
practice of hub-spoke transport pattern (see Graph 4.3).
Transhipment was not a popular practice in the era of conventional general cargo
transport by tween-decker ships. This is mainly because of the low cargo handling
productivity associated with this type of transport. This is still true today where
conventional general cargo transport is in use. Cargo handling is too costly and
takes too much time that it is more economical to call more ports directly or to use
land haulage if available. Another raison related to the first is that the size of
conventional general cargo ships on average is smaller and subsequently daily
capital cost of the ship much lower. This makes the calling of additional ports less
expensive as compared to big and more sophisticated container vessels.
A port may be served by feeder ships for either technical/operational or economic

reasons. Physical and equipment constraints may prevent ports technically from
receiving large mainline vessels. Inefficient and unreliable port operations can also
make lines to decide serving the port with feeder ships rather than with expensive
mother ships. Yet transhipment is also expensive in terms of feeder transport cost,
cargo handling cost and transit time cost. But direct call may be even more costly
mainly because of higher daily cost of big mother ships and longer total transit time
cost for both ship and cargo. Therefore in many cases, transhipment or direct-call
is an economic decision. It is argued that the direct call is justified as long as the
feedering cost is higher than the cost of direct call. Only when all technical and
economic conditions are fulfilled that a direct call will be meaningfully considered.
Co-operations in shipping such as liner alliances do not necessarily modify the
technical conditions of a feeder port, but they do have effects on the ports
economic conditions.

Graph 4.3
From Direct-Call to Hub-Spoke System
Hub
From a shipping lines point of view, the number of direct call port depends on a
series of interrelated variables such as transport distance to each port, ships cost,
hub and feeder port cost, ships size and speed, freight level and the volume of
traffic, etc. The most important decisive factor is the volume or the number of TEU
that the line is able to consolidate for a specified period of time (a week) to and
from a port on a trade route. This number of TEU per week (Q) and its expected
development will determine the size of ships to be used and service frequency or
the number of strings to employ. Based on weekly volume and the freight level
applied by the line, the total revenue per week can be calculated. Hence, what the
shipping line should do is to minimize its cost by selecting the appropriate speed of
ships, the right number of ships in a string and the optimal number of direct-call
ports. Clearly these three elements are interrelated and interactive although the
following discussion is limited to the problem of direct-call ports only.
The containers that are consolidated by a shipping line on a trade route may come
from or go to a wide range of locations that are close to many different ports in the
region. However, it will not be economical for the main line ships to call at every
port directly, given the distance to each port, the volume of cargo available at each
port and the high daily capital cost of container ships, containers and containerized
cargo. Over-land transit haulage and short sea feedering are thus the necessary
alternatives to concentrate regional traffics to a small number of load centers or
hub ports where main line ships will call directly. The critical question is to decide
whether a port should be a feeder port or a direct-call port.
Such a decision is largely based on the outcome of a cost comparison between

direct call and feedering options for the port in question. The costs to be compared
is the total costs which includes ship related costs and cargo related costs. Ship
related costs are mainly capital cost, fuel cost, port cost for ships etc. which can
also be considered as fixed costs, whereas cargo related costs are those occurred
in connection with cargo such as cargo handling cost, storage, port charges on
cargo, cargos capital costs, etc. which can also be called as variable costs. It is
clear that the major advantage of feedering lies in the lower daily capital cost
resulting from smaller and cheaper feeder ships compared with big main line ships.
The biggest disadvantage of feedering is the cost of extra cargo handling and
longer transit time. However for the assessment of transhipment, a comparison of

individual cost items makes little sense and it is the total cost, which matters. A
meaningful comparison is thus the one made between the total cost per TEU by a
feeder ship and the total cost per TEU by a main line ship. The general rule in this
respect is that feedering is to be used as long as the total cost is less than that of
direct call alternative.
Problems with the number of direct-call ports

For a shipping line, up-grading a port as a port of direct-call may not turn out to be
as easy as the above analysis would seem to suggest. What is happening in liner
shipping during the last decades, especially on main routes of world container
trade, is that fixed-day weekly service has become the norm of customer service.
Not only longer intervals such as services of every 10 days or every fortnight are
less and less acceptable to the market, shorter frequency like service of every 5
days or 4 days intervals are generally not appreciated by the shippers. Fixed day
weekly service is welcome and accepted because it fits in the planning and
production practice and procedure of most shippers. As a result, shipping lines
possibility to adjust the level of supply to the ever changing demand has been
limited to merely two alternatives. One is to increase or decrease the size of ships
in a service, the other is to cut or add the number of weekly services (loops), e.g. to
have 2 loops or 3 loops per week. However, such a market requirement has put
shipping lines in a very difficult situation particularly with regard to the up-grading a
port from feedered to directly called.
When the traffic from a feeder port increases to a certain level, the cost comparison
between direct-call and feeder options may suggest that it is more economical for
main line ships to call at the port directly than to use feeder ships. However, such
an increase in transport demand may very well exceed the supply capacity of the
shipping line, taking into account that in most case the increase in one port does
not necessarily mean a corresponding decrease in other ports of the same region
and, as a matter of fact, the reality is often exactly the opposite. If it is decided, in
response to the increased traffic, that the size of ships is to be changed, then the
ship related cost will inevitably alter and therefore the cost curve will modify.
Consequently, the volume which justifies the direct call of smaller main line ships
may most probably not enough to justify the call of bigger ships. And finally feeder
ships will always have to be used. This kind of situation seems to be observed in
recent years in some of the world major liner shipping markets.
Another problem associated with the increase in ships size is the huge capital
investment. Ships or series of ships are designed and built normally for a specified
market for many years. Shipping lines with limited market coverage can not deploy
their ships of different size among various markets. Recent experience of world
container traffic development especially the extraordinary and lasting increase in
container traffic in Asia has shown that the traditional method of fleet expansion
alone can hardly enable lines to keep pace with the traffic evolution. No shipping
line can afford to up-grade the whole group of ships every three years.
Shipping lines are not always free to include as many ports of call as they want in a
trade route even when the volume of traffic to and from those ports grows to a
sufficient level for direct calls. This is mainly because of the concern of total transit
time. Despite of possible cost savings, adding more ports to a liner route does not

increase any carrying capacity but it does increase the tonnage requirement of the
shipping line. As more ports of call means longer time for the round trip, more ships
will be needed per route. For instance, adding two more ports of call may require 8
ships instead of 7 per loop. It is true that extra cost of additional ships can be offset
by savings from the feedering, however the consequent longer transit time could
make it very hard for the line to compete in the marketplace where the high value
containerized cargo is becoming increasingly time sensitive.
In fact, the market trend is to further cut the number of ports in a loop and reduce
the total transit time of service. Therefore, lines are actually reluctant to add more
ports to their service, especially in the case of remote or inefficient ports. As an
alternative, lines often have to change the port of call without increasing the total
number of them or they take an additional port or ports only if the extra time can be
saved from faster sailing or faster turnround at ports.
Therefore because of the constraints of transit time and of increased fixed cost of
direct call, shipping lines have been dependent on the hub-spokes pattern of
transport to an even greater extent, particularly in the Asian market. On the one
hand, both hubs and spokes have become extremely big with annual traffic of
multi-million and over one million teu respectively, on the other hand shipping lines
continuously have to pay expensive feedering costs which have become one of the
major items of shipping lines total costs.
Of course, there is another way to cope with increased traffic on a trade route and
that is to introduce new weekly services. In other words, since fixed day weekly
service is the norm of the industry and bigger ships do not solve the problem, the
only alternative left for shipping lines for including more ports is to consider the
increase of the number of weekly services. However the main problem associated
with this option is that the adjustment of capacity supply jumps instead of changing
gradually like the way in which the market demand evolves. Shipping lines have to
find the way to cope with this problem. Economies of scale seems to be a valid
solution. Large shipping lines operating in numerous markets with different sizes of
ships definitely have bigger room of maneuvering. The building up in size has taken
place in three forms: fleet expansion, joint-venture (forming strategic alliances) and
merger. Currently, the market share of the top 10 container lines has increased and
it is predicted by some of the sector's experts that in the near future the number of
true global players will be even smaller.

Chapter 5
OTHER SERVICE INPUTS

TO THE SHIPPING
Chapter Objectives:
To review the basic functions of a port

To understand the relationship between port and shipping
To examine the roles of shipping intermediates
5.1. THE ROLE OF PORTS IN MARITIME TRANSPORT
Ports are places where ships can anchor, berth, load and discharge. Ports are also
seen by many as the interface between sea and land transport. Ports have two
basic functions on each of ships side and cargos side. However, even loading and
discharging have long been widely recognized as the major role of ports, but the
most fundamental function of a port is to provide ships with a safe anchoring and
berthing place. Ports are first of all built to accommodate ships. The chart below
shows the port of Helsingborg in Sweden, which representatively demonstrates the
basic layout of a port.
Graph 5.1 Port Layout
According to the physical conditions, ports can be divided into natural port or man-
made port, sea port or river port, tidal or non-tidal port. To accomplish its basic
functions, a port needs to have some physical capabilities like for instance
sheltered wet area for the protection of ships from hostile sea conditions, deep and
safe water and approach channels for ships safe sailing, manoeuvring and
berthing, sufficient land areas, etc. If a port is in such a location where water is
naturally deep and protected, the port is called a natural port. Otherwise, major
construction and dredging works are required and the port is called a man-made
port. The distinction between natural and man-made port is economically
meaningful as the capital cost level may be quite different between the two cases.
Another distinction is between a sea port and a river port. A port built along the
coast and has a direct access to the sea is a sea port and a port that is alongside a
river is a river port. Exposed to the sea, a sea port needs a natural or a man-made
break-water for protection. River ports may have more chance to encounter the
siltation problems. A tidal ports means that the draft of the port is conditioned by
the level of tide, while non-tidal ports are those protected by locks.
5.1.1. Basic Port Function

No two ports in the world are identical, neither in their physical settings nor in their,
political, economic, social and even technical environment. Yet ports have also
common features. The following graph illustrates the basic operational functions of
a port.
CHAPTER 5 93 OTHER SERVICES INPUTS TO THE SHIPPING

Graph 5.2
Basic Port Operational Functions
Ship flow Ship flow
Cargo flow Cargo flow

Ship-shore telecommunication
Navigational aids
Navigational services to ships
Sheltered water anchorage
Pilotage (in and outside port)
Locking
Towing
Mooring/unmooring
Berthing
Discharge / Loading
Unlashing Lashing
Opening of holds Closing of holds

Ship operation
Handling on board
Handling services to cargo
Handling ashore
Quay transfer Transfer operation
Storage Storage operation
Delivery / reception Gate operation
IMPORT EXPORT
source: based on various sources, particularly UNCTAD

The above operational functions of a port can be broadly divided into two
categories of services: the navigational services to ships and handling services to
cargo. These two kinds of services are quite independent in the sense that the
provision of one type of services is not directly related to or affected by that of the
other. For example how the pilotage service is provided does not depend on what
type of cargo handling service offered. On the other hand, the charges of the two
services are also separated from each other. The level of charges of one service is
independent of that of the other service. Most of the services to ships are charged
according to the size of the ship (there are exceptions, e.g. towage is charged by the number
and horsepower of tugboats employed), whilst the services to cargo are charged based on
the quantity of cargo handled.
If the quantity of cargo is used as a variable factor, then we say that the costs
incurred by services to ships are fixed costs and those related to the handling
services to cargo are variable costs. However, some ports, although not many, do
charge their ship related services according to whether the ship is laden or in
ballast (this is also true for some canal tolls).
As far as the operational functions associated with handling services to cargo, four
sub-systems can be distinguished. These are ship operation, transfer operation,
storage operation and gate operation. They are divided apart because of the
different characteristics of each activity.
Ship operation includes various activities of cargo loading and discharge using
either shore-based cranes or ships gears. It is important to notice that
although done separately by different persons, the handling on board and
handling ashore should be considered as one single operation, even for break
bulk general cargo handling. Cargo stowage is needed for break bulk cargo
while lashing is required for the containers loaded on-deck.
Transfer operation means the transport between the quay side and the
storage area, whether it is cargo shed in the case of break bulk or container
yard in the case of containers. Different transport pattern and equipment can
be used for the transfer operation.
Storage operation consists of the provision of storage facilities and the

management of the warehouses and yards. Both the layout of the storage
area and the equipment used are very important for the productivity and
efficiency of the operation.
Gate operation is critical because this is where the registration of cargo takes
place. This can be done in different fashion: fast and computer based or slow
and manually. Customs procedures are also part of gate operation, which in
many places is the bottleneck of the cargo and container flow.
Although distinguished to each other, the four cargo handling operations are highly
inter-linked and inter-dependent. The slow-down of one operation will inevitably
affect the speed of another operation. Similarly improvement made on any one
operation will not bring fruit unless corresponding efforts are also made on other

operations. An example of that is in many ports, efforts on the improvement of

cargo handling speed are undermined by the unchanged quay transfer operation or
by a congested yard or by the slow gate operation due to indifferent customs
service, which is, unfortunately, too often the case.
Apart from the basic operational functions as from the above graph, ports have to
assume other functions too. Externally, these may include the social functions such
as provide employment opportunities for the local community, or economic
functions like contribute to the national income or play a role in the cargo
distribution and transport chain. Internally, a port like any other organization has all
the management functions.
Having seen the main operational functions of a port, it is appropriate to take a look
at who does those functions. Such a question is probably meaningful only in the
context of port. This is because physically it is relatively easy to identify a port, but
organizationally it is far from clear what a port is. In many places, the above basic
port functions are carried out by different organizations independent with each
other. A port is first of all a physical land and water area on which port facilities are
built and installed. The ownership of such a property is a good indicator to define a
port. Yet the owner may not assume all or even part of the operation activities. The
relationship between ownership and port operation varies greatly from one port to
another. It is thus necessary to examine the different types of port from this point of
view.
5.1.2. Variety of port organizations

The great majority of ports in the world are owned by the government. The body
representing the public interests in the port is often called a port authority. Three
types of situation can be identified of a port authority according to its relationship
with the operational functions. Subsequently, a port is known as a landlord-port or
a tool-port or a service port.
The landlord ports. The powers of the port authority in this case are
limited to decisions concerning land use, reservation of space for the port
areas and construction and use of public port works. The port authority
leaves it to the individual operators (public sector or private enterprises)
to construct and operate the facilities and equipment necessary for the
operation of ships and the storage and internal transport of traffic, and to
operate other services provided for traffic (pilotage, towing, etc.). It makes
the necessary sites available to them on the basis of contracts specifying
public service obligations or, conversely, permitting private use of the
facilities. In this case the port authority acts like the owner of the port
property, grants short- or long-term leases, or concessions or transfers of
land (the latter is not recommended) and performs other activities for the
purpose of ensuring optimal functioning of the port facilities.
The tool ports. The tool-port is a variant of the landlord-port where the
landlord provides the main tool but does not use it. It may be considered
useful to entrust to the port authority the execution of works other than
those mentioned above, including ship control stations, heavy handling

equipment, storage area and warehouse equipment, equipment for ship

repair and supply, etc. In France and several African countries it is the port
authority that purchases and installs the heavy handling equipment (gantry
cranes), which are then run by the port operators.
This practice may prove necessary if the local geography or volume of

traffic makes it physically and/or economically impossible to have a large
amount of equipment or to operate it satisfactorily. Sometimes the local
operators are not experienced or powerful enough to install the right
equipment. There are other cases where only one port operator could
install the right equipment and be in a monopoly situation, which the
country does not want to have.
In such cases, the port authority will be performing its role by financing,
building or purchasing the works and equipment necessary for efficient
operation of the port and making them available to the operators under
short-term contracts generally incorporating public service obligations.
The tool-port role does not exclude the landlord role. If, for example,
there is a sufficient space available, the port authority may combine both
functions itself, providing certain works for equipment, which are then used
by certain operators, and entrusting the provision and operation of other
works and equipment to other operators.
The operating ports (or service ports). The port authority may consider
not only that it should provide certain works and equipment, but that it also
should act as their operator. It may also consider it to be in the public
interest that it should in itself set up and operate certain services for the
port traffic. Like the other operators, it then maintains direct industrial and
commercial relations with port users, while retaining its governmental
power vis--vis the port community. It is then called an operating port.
Operating ports normally form part of the public sector. The current trend
in certain countries towards privatization of ports will lead to the formation
of private sector operating ports.
As in the case of the tool-port, the operating ports role may be considered
only with certain port activities, the others being carried out by operators
separated from the port authority. The port authority may also consider it
desirable to play a role through enterprises separate from itself in which it
holds a majority or minority of shares. This formula allows the port
authority to make a clear distinction between its governmental role and its
role in performing industrial and commercial activities. Such a policy
seems advisable whenever the port authority considers that it should also
perform an operating role.
5.1.3. Importance of port in shipping activities

Despite all the differences between the two types of port services to ships and
cargo respectively and the differences amongst various port authorities, there is a
common point which is the time spent by ships as well as cargo in port. Such a time

is called dwell-time or turnaround time, which can be broadly defined as the period
between the moment when a ship or cargo enters the port and the moment when it
leaves the port.
From an economic point of view, two types of cost occur to any user of the port.
One is the explicit payment of port charges, either related to services rendered to
ships or those to cargo. The other is time cost. A common mistake made by some
port managers is to underestimate the time cost and to think that port charges are
the only element that determines port cost. For ship and cargo owners, time
element can be more important than port charges when calculating the total cost at
a port, especially in view of the much increased unit value of both ocean-going
ships and internationally traded cargo. On the one hand, all the ship and cargo
related services do take lots of time which may very well cost more to the users
than what the port charges them for providing the services. On the other hand, time
cost is sometimes hidden and unexpected delay can always happen. Still in many
ports, no dwell estimate is reliable.
Time needed for berthing varies greatly between a river port and a sea port, a tidal
port or a port with lock and a port without lock. Yet it is cargo handling that take
most of the total time a ship spent at the port. A conventional general cargo ship,
carrying, say, cargo in bags, can only be loaded or discharged at a rate of about
250 300 tons per day per gang. With four gangs working simultaneously on a
ship with more than four holds, the typical cargo handling rate will be in the region
of 1000 1200 tons a day. Such a cargo handling rate limits the size of ships. Big
ships are uneconomical to operate as they spend disproportionally too long time at
ports.
Examining carefully what has happened in the shipping industry during the last half
a century, almost all technical break through has taken place at the ports rather on
ships. Containerization was originated to tackle the bottleneck of cargo handling at
ports and not intended to improve navigation or ships themselves. Ro/Ro
technology did not really change the transport but the port operation. Similarly,
transport cost of primary materials has been dramatically decreasing due to the use
of large tankers and bulk carriers. But this was possible only when efficient cargo
handling at ports had been in place with specialized facilities and equipment.
Specialization of cargo handling at ports has revolutionized the shipping industry.

At a dedicated container terminal, a ship-to-shore gantry crane can move, in
normal circumstances, 25 containers per hour. A big container vessel can have
simultaneously 2 or 3 cranes, which represents approximately 65 containers per
hour per ship. Supposing the containers are 20-foot/40-foot mixed with an average
weight of 15 tons, then about 1,000 tons of cargo can be loaded or discharged per
hour. With 16 working hours a day, the daily output is then 16,000 tons1. This is 16
times more productive than a conventional vessel. A dry bulk terminal with
specialized equipment can load as quickly as 60,000 tons per day (iron ore),
although discharge of dry bulk cargo normally takes more time. Coal and especially
grain, though also transported in bulk, generally need more time for cargo handling.
1
In some big ports, much higher productivity can be achieved. The port of Singapore once handled 280
containers per hour per ship, which represents 420 tons per hour. With 20 working hours per day, 84,000 tons
of cargo can be loaded or discharged per day.

(Hillerstrm, 1999).
At a specialized oil terminal, cargo handling rate can reach as high
as 100,000 tons of crude oil per day.
Graph 5.3
Cargo handling rate and ships size
Ships size (in DWT)
350,000
300,000
Tanker
250,000
200,000 Iron ore in bulk
150,000 Grain in bulk 2

R = 0.9855
100,000
50,000 Container ships
Cargo handling
General cargo ships rate (tons/day)
0
0 20,000 40,000 60,000 80,000 100,000 120,000
Source: compiled by Ma Shuo from various sources
If the above cargo handling rates are considered to be representative good

performance that todays ports can achieve in normal circumstances, then these
figures can be compared with the average size of the largest group of ships for
each ship type. The above graph shows that these two variables are highly co-
related, as more than 98% of the variations of the ships size are explained by the
changes in cargo handling productivity at ports. In other words, that the cargo
handling speed is a decisive factor for determining the largest size of ships.
Cargo handling speed is not the only constraint on the increase of ships size.
Another limitation imposed by ports on ships is the physical size of the port. The
physical constraints include the depth of water, width of channel, length of quay,
capacity of lock and the capacity/outreach of cranes, etc.. Today with so much
achieved, ports still represent major constraints for the further enhancement of
shipping productivity. The principle limitations to ships size are often from the port:
either cargo handling speed or physical capacity. Subsequently, various efforts
have been made in those areas. In the future, new technical breakthroughs are
expected to happen more likely in the port sector, rather than anywhere else, for
the shipping industry to be more efficient and economical.
Without exception, the high cargo handling productivity of any type of ship or cargo
has always been achieved through specialization. Dedicated terminals are built with
specific equipment tailor-made for a particular kind of cargo carried by a particular
type of vessel. The concept of berth and quay gives way to that of terminals, which
include not only the water-front but also the vast land-side areas. This is partly
because the high loading and discharging operation requires ample space for
storage as the land based transport connection may have to be operated in
different rhythm. The following graph is an illustration of a container terminal as
compared with a conventional general cargo berth.

Graph 5.4
Port expansion: from berth to terminal
CFS
A general cargo berth
shed
A container terminal
shed
70 meters 400 meters
Source: Ma Shuo 1999
While appreciating the benefit of port specialization, one has to know the
drawbacks of it. Three disadvantages can be mentioned in relation to cargo
handling specialization at ports. The first is the lack of flexibility. A dedicated
container terminal can handle only containers, nothing else. Specialization is the
opposite of multipurpose. The second is the high investment required in the areas
of both infrastructure and superstructure (equipment). Combining the first two
points, there is the third disadvantage, which is the high risk. Because a specialized
terminal is operationally inflexible and financially expensive, so it is commercially
risky.
As discussed in the earlier chapters, cargo handling at ports had been of

multipurpose type for long time. Specialization is something relatively recent. The
driving force behind such a change is two-fold: one is the cargo handling and
transport technological breakthrough such as containerization, Ro/Ro, the other is
the extraordinary and sustained growth of traffic volume during the last 50 years.
Under the given conditions in terms of technology and market, the decision on
whether or not a port should go specialization depends primarily on the volume (and
the stability) of the particular type of trade in question. It is obvious that only a
sufficient amount of traffic will economically justify the investment, as the gain from
the improved productivity will overweight the loss of inflexibility. Multipurpose berths
are still economically viable when the volume is small or the traffics are not stable.
No general standard exits2. The threshold of traffic required for cargo handling
specialization varies between places depending on the cost structure of each ports
production. Labor cost and land cost play a decisive role. Types of technology to be
considered and additional investment needed all differ from one port to another.
Even the relationship between clients can be an influential factor.
2 Some studies suggest that, under normal situation, when a multipurpose berth handles 50,000 teu or
more per year, it should consider building a dedicated container terminal.

5.2. BROKERS, AGENTS AND FREIGHT FORWARDERS
Apart from the industrial shipping where ship users have their own tonnage, in both
tramp and liner shipping, maritime demand and supply have to meet many times on
shipping markets throughout the year. Generally speaking, however, world maritime
demand and supply do not meet directly. They use intermediates. On the shipping
markets, there are various kinds of intermediates which are normally referred as
ship brokers, shipping agents and freight forwarders. Although each of them has
particular functions and works for specific clients, there are a number of common
characters, which should be analyzed first.
5.2.1. Why maritime demand and supply do not meet directly?
As a matter of fact, maritime demand and supply did meet directly in the early days.
But as the market developed bigger and became more sophisticated and
diversified, intermediates appeared. The following three aspects can generally be
considered as the main reasons to explain why shipping intermediates are needed.
(a) Market knowledge and contacts

The world shipping market consists of many individual local markets, each
has its own features and particularities. First of all their geographical location
makes them different from each other. African market is definitely different
from Latin American market. Similarly, the markets in Asia can not be
treated the same way as the markets in Europe. Even in countries of the
same continent, maritime transport markets can be very different. This is
mainly because the transport related laws and regulations are different in
different places. Economic, social and cultural backgrounds are so different
from one country to another that a same business is not being done in the
same way everywhere. Consequently, knowledge on the local market
becomes essential for any success.
The other aspect about the market is the market contacts or in other words
the network of contacts. In tramp and especially in liner shipping market, the
number of shippers is always very big. It is extremely difficult for a shipowner
to keep close contact with all shippers. Therefore the use of intermediates is
necessary to enlarge the market coverage of shipowners.
(b) Technical know-how and professionalism

Throughout years and years evolution, maritime transport market has
become a highly developed and specialised market segment. Shipping
intermediates not only have commercial knowledge on the market but many
of them also have special technical and managerial knowledge which is
required. For instance, in ship sale & purchase activities, shipowners often
need the help from financial, legal and technical experts to conclude
contracts. In tramp shipping, in-depth knowledge on charter-party clauses
and practices is of importance. It is necessary that technical knowhow is
supplemented by market negotiation techniques and experiences.
Intermediates often play an indispensable role both in reaching a transport
agreement, and finding solutions to difficult problems and settling disputes.

(c) Logistic services

Related to their special knowledge on the market, shipping intermediates are
often requested by shipowners or shippers to provide a great variety of
logistic services. For example to process transport documents, such as
transport contracts, insurance, customs and shipping documents and other
formalities required by the import/export and transport. They sometimes also
provide their clients with advice regarding transport routing and connections.
They may arrange storage, distribution and door-to-door transport services.
Port services are also provided on request of shipowners.
The activities of shipping intermediates have therefore three main aspects: First it
is informative, as to provide necessary information on the market to the clients;
Secondly it is intermediatory as to facilitate the transport arrangement; Thirdly it is
supportive as to provide logistic services required at various stage of transport.
Although there is no universally accepted definition of different kinds of shipping

intermediates, we can make distinctions between three major groups of
intermediates, namely ship brokers, shipping agents and freight forwarders. As
they work in different markets serving specific clients, their functions are often
different from each other.
5.2.2. Ship brokers
A broker is someone who acts between two parties for a definitive task. In shipping,
a shipowner needs to establish relationship with its suppliers or clients at different
occasions. This may include the need of buying a ship, or chartering out a ship for
a voyage or for a period of time, or having bunker provisions at ports or selling a
ship. Although there are many different kinds of ship brokering activities, two main
types of ship brokers should be identified and examined specifically. They are
sale/purchase brokers and chartering brokers.
(a) Sale/purchase brokers

Buying a ships is a decision making process of high complexity. This implies
considerations and knowledge in financial aspect as regards financial
conditions offered by ship builders or sellers, in commercial aspect as
regards the shipping freight situation and its development and in technical
aspect as regards specifications of the ship. Thus, a sale/purchase broker
should offer lots of services especially the following:
To provide information on reported ship's sales in the recent past. This

includes ship's particularities, names of the seller and the buyer, price
and conditions etc.
To provide information on the relevant vessels on the market for sale.
Again, this should include technical conditions of the ship and its
location, name of the seller, the price offered and other financial
conditions etc. Information of alternative suppliers should also be
provided for comparison.
To provide information and analysis on the market in which the vessel
will be operated. This includes the freight rates and tendencies.

To provide information on second hand market, its development trends

and also scrap metal markets.
The broker, of course, should assist its principal to negotiate the
conditions of sale/purchase contract.
(b) Chartering brokers

Compared with sale/purchase brokers, the number of chartering brokers is
much bigger. Chartering brokers are for the tramp shipping only and usually
shipowners and charterers use their own brokers separately. Thus
chartering brokers can be further divided into owner's brokers and
charterer's brokers.
An owner's broker and a charterer's broker have similar activities, except

that they are appointed by opposite parties. Owner's broker represents the
interest of the shipowner by trying to get the highest possible transport
freight or hire and the best possible contract conditions, while charterer's
agent is trying to do the opposite for the interest of the charterer.
A chartering broker, whomever he represents, should provide information

and sometimes give advices to his principal on ships' open and cargo
offering. He also assists in the negotiation and conclusion of transport
contracts and very often in the settlement of any dispute.
As the number of charterers and owners on the tramp market is very big and
their situations are different from one another, the use of a well reputed
chartering broker gives a certain kind of guarantee on the reliability of the
counterpart. A chartering broker can act as charterer's or owner's broker at
different occasions.
Graph 5.4
Chartering brokerage
Charter
Party
Freight is
too low! Less demorrage
source: Ma Shuo 1999
5.2.3. Shipping agents
There is no clear cut and absolute border between a broker and an agent and the
two terms are sometimes used interchangeably. However, while a ship broker is
working between two parties, a shipping agent is normally representing his principal

to deal with various parties. And while a broker's work terminates often with the
conclusion and carry out a specific task such as a transport or sale/purchase
contract, an agent's work normally lasts for a long period of time. Amongst various
kinds of shipping agents, two major ones need to be discussed which are port
agents and liner agents.
(a) Port agents

A port agent is generally appointed by the shipowner to represent the owner
at the port of call. The port agent is widely used in tramp shipping. The agent
should assist the master in all respects in his contacts with local authorities
and in loading, discharging matters. A port agent also assists in ship's
berthing, the payment of port charges, the supply of ship's provision, the
processing of port and cargo handling documents and other activities
required by the master and crew at the port.
In voyage chartering, cargo handling cost may be at either owner's or

charterer's account. The charterer may therefore insist that the port agent is
appointed by him. As there is often a conflict of interests in cargo handling
matter, an owner, if he has to accept the charterer appointed port agent,
may wish to appoint a protecting agent, who will then assist the master and
look after the interests of the shipowner. Nowadays there are fewer and
fewer pure port agents except in small ports. Most port agents are also doing
chartering brokering and activities of a liner agent.
(b) Liner agents

A liner agent is working as a general agent normally for a long period of time
for a or several shipping lines within a geographical area. The activities
carried out by liner agents are much wider than that by port agents. Liner
agents normally enter into written contracts with their principals.
Apart from the activities of a port agent that a liner agent carries out as well,
a number of other activities fall also into his scope of services. These include
for instance transport connections, container equipment control and
maintenance, freight collection, transport documents processing and signing
of the Bill of Lading on shipowner's behalf, space booking and especially
marketing & sales.
5.2.4. Freight forwarders
Like shipping agents represent shipowners, freight forwarders represent shippers.

However, in the absence of an internationally accepted definition, the term of
freight forwarder is sometimes confusing. Because a freight forwarder may act on
behalf of his principal but he can also act for his own account. We should divide
these two kinds of freight forwarders by using different names. We call those who
act on behalf of an exporter/importer as forwarding agents and those who act in
their own name as Non-Vessel-Operating Common Carriers (NVOCC) or in some
case as Multimodal Transport Operators (MTO).
(a) Forwarding agents

Originally, a forwarding agent performs, on behalf of the exporter or

importer, routine tasks such as loading/discharging of goods, cargo storage,

land transport arrangements etc. However, today a forwarding agent has an
enlarged scope of competence which may range from basic tasks such as
the booking of space or customs clearance to a comprehensive package of
services covering the total transport and distribution process.
A forwarding agent may study the provisions of trade documents and all
government regulations and give advices to his principal on the choice of
route. He may provide services in relation to packing, warehousing, customs
clearance and receiving and delivery of goods, pre- and post-sea transport
connection and the payment of freight etc.
(b) NVOCCs and MTOs

When a freight forwarder acts in his own name, his activities may be similar
to that of a forwarder acting as an agent. The only major difference is that he
acts as a principal not as an agent. As a principal, a NVOCC or a MTO often
provides services of cargo consolidation (i.e. the grouping of small parcels
into larger load) which are not provided by an agent. As a principal, a
NVOCC or MTO issues his own transport document such as bill of lading.
The international freight forwarders organisation (FIATA) has produced a
standard bill of lading for door-to-door transport.
The following graph illustrates the relationship between various maritime

intermediaries and their principals.
Graph 5.6
The Working Relationship of Brokers, agents, forwarders and NVOCC
Shipper
Ship (general cargo)
Liner
building
Charterer
Second (bulk, break bulk)
hand ships Liner / Tramp
Charterer
(ship owners)
Ship
demolition
Tramp
Ports
(loading/unloading)
Sale/purchase Chartering Liner Port Forwarding NVOCC,

broker broker agent agent agent MTOs
Source: Ma Shuo 1999

5.2.5. Legal status of brokers, agents and freight forwarders
As far as the legal aspect is concerned, all above mentioned shipping

intermediates have the same status except NVOCCs and MTOs. Although
differences exist in various countries with different legal system, the following
principles generally apply everywhere.
(a) When acting as an agent

This category includes sale/purchase brokers, chartering brokers, port
agents, liner agents and forwarding agents. The following terms are
frequently used when an agent signs a document: "... on behalf of ..., ... in
the name of ..., ... for the account of ..., or ... as agent only".
As an agent, they accept liability for their own faults or omissions and that of
their employees. Examples of such errors and omissions are: delivery of
goods contrary to instructions, or omission to take cargo insurance in spite of
instructions, or routing to wrong destinations, or delivery of goods without
collecting cash from the consignee, etc.
The brokers or agents are also exposed to claims from third parties for any
loss or damage or personal injury that they may cause to those third parties
during course of their operations.
However, a broker or an agent generally does not accept liability for acts or
omissions of third parties, such as a shipping company, provided he has
shown proper care in the choice of such third parties.
(b) When as a principal

When a forwarder acts as a principal (in the case of a NVOCC or MTO), he
is an independent contractor who assumes responsibility in his own name
(by means of issuing his own transport document) for providing services
required by his client. He becomes liable for the acts and omissions of
carriers, warehouse operators etc., whom he engages for the performance
of the contract.
As a principal, his liabilities to third parties remain the same as when he acts
as an agent.
5.2.6. Impacts of shipping brokers, agents and freight forwarders
The impacts should be discussed in two aspects: on transport quality and on

transport cost. On quality, shipping intermediates play an important role in transport
reliability. In shipping practice. A good broker is often referred as a "first class
broker". In a market such as shipping where breaks of contracts, frauds or other
kinds of unpleasant stories are unfortunately still a frequent phenomena, replying
on first class brokers is of great importance for having a reliable transport service.
This is equally true as regards the dispute settlement.
Cargo movement monitoring is a service provided by some forwarders. For a
shipowner, the importance of a NVOCC (and MTO) is becoming bigger as

increasingly NVOCCs control transport routing of cargo and thus the selection of
shipping companies. There is a big difference between the marketing capability of
various brokers and agents. A good agent with marketing experiences can enlarge
the shipowner's market share in a competitive environment.
The impact of shipping intermediates on the costs is twofold. On the one hand, by
using a good broker or agent or a forwarder, unexpected costs can be minimized
and cost control can be improved. On the other hand however, there is a direct cost
of using a shipping intermediate. The payment for the services provided by
shipping brokers and agents takes the form of commissions or fees. A broker
(sale/purchase or chartering) normally takes commissions which is a percentage of
the contracted price. Liner agents and forwarders acting as agents are also paid
with commissions. The percentage of commission varies form 1 to 5 per cent. It is
rare that the total commission would be more than 7.5 percent of the contract price.
Port agents, as well as liner agent for their service of port agency, are paid by
mutually agreed fees. While freight forwarders acting as principals have the income
from difference between the freight with the shipper and that with the shipowner.
5.2.7. Evolution of activities of shipping intermediates
We should discuss this question of evolution through the three main functions of
shipping intermediates, namely: informative, intermediatory and supportive.
Services offered by ship brokers (sale/purchase and chartering) are mainly
informative and intermediatory while services offered by shipping agents and freight
forwarders are more supportive.
To provide information and play an intermediatory role, brokers are functioning in

shipping centers. There are many shipping centers nowadays in the world. The
oldest one is the Baltic Exchange in London, which started in the 19th century. This
is a place where ship brokers (there are presently 750 company members and
2,500 individual members at the Baltic Exchange) can meet, exchange information
and negotiate informally for the chartering and sale/purchase of ships. The broker,
having surveyed the market, will inform his principal (owner or charterer) of the
various possibilities. The owner or charterer will then make firm offers through his
broker.
However, the Baltic Exchange model has not been followed by other shipping
centers which were established at later stages. This is mainly because by the time
those shipping centers like New York, Hong Kong, Tokyo, Hamburg or Singapore
took shape, there was new development of telecommunication technology. So
instead of gathering in a place physically, brokers communicate with each other by
telegraph, telephone, telex and facsimile. It happens that some brokers have
worked together for long time without ever having the chance to see each other.
There is thus no tangible market in those places. Such kind of brokers are also
called "cabling brokers".
As the telecommunication technology changed, in the past, the way of doing

business for ship brokers whose functions remain informative and intermediatory,
new technological development in telecommunication will most probably further
alter the pattern of brokering business. For example, actually the "Internet" system,
which is an electronic information network is having a great impact on brokering

activities. Already some air travel agents are threatened to loose jobs by the
"Internet" through which travellers have access to all necessary air travel
information and have the possibility to carry out all booking arrangements.
In maritime transport sector, in some countries and with some shipping lines,
Internet service has also become available to shippers with regard to a complete
rate, service, schedule and cargo information of the carriers. The number of
shipping lines offering on line Internet booking, container tracing and scheduling
information to the market is increasing very fast. The changes and improvement in
the IT technology is incredibly quick that all the remaining problems with the
electronic agency such as speed, security, reliability, etc. will be solved in the near
future. The challenge is real as there is no reason why cargo transport can not be
arranged, ships fixed on the Internet. Even sales and purchases of vessels can be
very well done through the Web, as what is happening to so many product and
service with so-called E-commerce.
The port agency is one of oldest profession in the shipping. For tramp ships this will
remain an indispensable activity although pure port agent becomes fewer in major
ports. The general tendency for liner agency is that major shipping lines are
gradually replacing liner agents by their own agency companies. This is mainly
because more and more shipping lines have adopted a strategy of integrated
services, active marketing and tight cost control, which have led those lines to put
those activities back in their direct control.
A standard liner agency agreement form is found in the annex. This form is
proposed in 1991 by the Federation of National Associations of Ship Brokers and
Agents.

Chapter 6
MARITIME TRANSPORT
COST AND FINANCING
Chapter Objectives:
To examine the capital requirement of shipping

To discuss the major financing options and their main features
6.1. THE CAPITAL COST OF MARITIME TRANSPORT
To supply maritime transport services, a series of costs will occur to shipping

companies. As we mentioned earlier, shipping is a capital-intensive activity (in terms
of capital investment per employee). It is said that whether or not one can run a
shipping company largely depends on one's financial capability. Capital costs are
always taking a significant part in a shipping company's total costs. Capital costs in
shipping are those costs associated with the acquisition of a ship, new or second-
hand. In both tramp and liner shipping, hire and freight rate levels are heavily and
directly affected by the ship's capital costs. In this chapter, we shall concentrate
ourselves on various aspects of shipping capital costs.
How much does it cost to build a new ship? This is a difficult question not because
prices vary enormously according to the type of the ship to be built, but because the
price of ships fluctuates over time. The world shipbuilding prices are very much
influenced or led by Japanese and Korean yards as they actually produce about 70
per cent of the worlds total merchant ship tonnage. Table 6.1 shows the price
changes for different types of ships over the period between 1980 and 1997.
Table 6.1
Representative newbuilding prices 1980-1997
In 1997 there were 53.2 million dwt new shipbuilding contracts for the major types of
ships placed with world ship building yards for a total of 1,273 ships (UNCTAD 1998). The
biggest influence on the price of a new ship is the demand of that type of ship at the
time of ordering. Generally the cyclical nature of shipping has mirrored the world
economy with freight rate, which has a direct impact on ship's price, rising when GDP
growth rates pick up and falling when they slow down.
CHAPTER 6 110 MARITIME TRANSPORT COST AND FINANCING

Graph 6.1
Relationship between freight market and shipbuilding market
Ships normally need 1 to 2 years to be built and the freight market may have
unpredictable changes during that period of time. Therefore, the time to place a new
order at a ship yard becomes often a decision of a speculative nature. Shipowners
have to take risks when it comes to decide when to build his new ships.
The nature of cyclical market situation is obviously difficult to foresee. However, the
time of building a new ship is not the only influential factor on capital costs. There are
a number of other factors that should be taken into full account. Among these we shall

look at the two most important elements namely: the vessel characteristics and the
funding arrangements.
Graph 6.2
6.1.2. Vessel characteristics

The specific characteristics of a vessel have directly impacts on the price. There are
5 main variables which are of big importance: vessel size, vessel type, method of
propulsion, configuration, and level of specialist equipment. A double hull, for example,
would add about 15 per cent to the tanker newbuilding price in 1993. From the
following tables, the impacts of ship size and type on prices can be seen.
6.2. SHIP FINANCING ARRANGEMENTS
The amount of funds needed for the fleet development is huge. This is because the
existing tonnage also needs to be replaced, as a ship has, normally, a service life of
about 25 to 30 years. In the beginning of 1999, the world merchant fleet has on
average an age of 18 years (ISL 1998). This is clearly higher than the normal replace rate
of 3-4% requires (when accidental loss and ships over 30 years are excluded). This
factor should be added to the net world tonnage growth, which has been maintained
at 3% for the last three consecutive years (ISL statistics Feb. 1999).
Overaging is not only a cause of safety problem, it is also a major economic concern
to the shipping industry at large. Whilst the container fleet is relatively young with
average age of 10 years, the situation of tankers and bulk carriers is worrisome. It is
estimated that in the next 4 to 5 years, more than US$100 billion funds will be needed
for the investment in new ships or over US$20 bn per year.

The big amount of money involved in the purchase of a vessel is generally beyond the
financial capability of most owners. The operational result and profitability of a shipping
company rely to a great extent on the type of funding arrangement that the owner
obtained for the ship acquisition. Basically there are two major types of ship funding:
equity or debt (leasing is another alternative for ship acquisition, but it has been used
to a less extent by the shipping industry as compared with the other two options).
6.2.1. Equity funding

Investment in a ship can be assured by self-funding or through partnership. It is
possible, though not very common in practice, that a shipowner finds himself capable
of funding the newbuilding by using the savings and profits retained. This can come
from the operation in the past or from the asset sales or from issuing stocks or shares.
As a matter of fact, every ship is financed at least partially with equity or shipowners
own financial resource. Just like the down payment, no ship can be acquired with
100% borrowed funds. The main advantage of financing ships with equity is the
reduction in the requirements for external loan financing and thus a reduction in the
debt servicing burden. In other occasions shipowners may simply find no other
alternative financing possibilities other than self (equity) financing.
In many cases, a shipowner may find it impossible or very difficult to finance the ship
by its own private resources. Alternatively, a solution can be found with a kind of joint-
venture between a number of owners or shareholders. There are a number of options
available to ship owners.
Partnership and management buy-out A limited number of business

partners or individuals can get together to pool the funds for ship finance. Lots
of new shipping companies start that way. Established companies can also use
this method with financial partners by, for example, setting up a new joint
company. A shipping company can also secure the necessary funds internally
amongst its own personnel. Many shipping companies today have their senior
managers holding the companys shares.
Stock market The equity funding in this case can be raised by the company
through the issuance of commercial paper or through a public offer at a
financial market. The main sources of funding are (a) other shipping
companies, willing to join partnerships or joint ventures; (b) individuals, looking
to shelter capital from taxation; and (c) cash rich institutions like pension funds,
funds management companies and other organizations aiming to find vehicles
for investment.
The Kommanditt system This is basically a fiscal regime commonly used

in the Scandinavian countries (called K/S) and Germany (called K/G),
especially Norway in the 1980s and Germany in 1990s. A specially high
depreciation allowance enables investors in the K/G system to escape paying
taxes. The Norwegians were particularly interested in tanker finance while the
German have been active in investing in container ships. In 1995 for instance,
about US$1.5 billion were raised through the German K/G arrangement. As the

companies that arrange the K/G financing are pretty prudent in selecting the
ships for funding. The vessels financed normally have already had long term
employment (chartered) with established shipping companies. This will provide
the investors with a good dividend income in addition to the tax relief. Some
container shipping lines such as Senator Line or CMA have built their huge fleet
almost entirely on chartering ships with K/G arrangement. In 1996, the German
tax reform tightened up somewhat the K/G, although the system seems to be
still attractive. Some other countries, like France, started also to experiment this
type of practice.
6.2.2. Debt financing
The debt investment is more widely used in the ship financing. This is also called loan
funding which means that the shipowner borrows part of the money needed to
purchase the ship at a prefixed rate of interest on debt repayment. Equity funding in
shipping has not been a very popular practice as the eyes of the public, shipping is still
very much linked with an image of risky adventure. Shipping is viewed, and it indeed
is, as a volatile sector in terms of its return on investment. Freight rates varies greatly
during a relatively short period. However, the long term profitability of shipping is quite
comparable with most of other economic sectors. Shipping companies virtually have
to make extra profit while the market is flourish to pay for the inevitable losses of the
bad time. Commercial banks, institutional investors, individuals and shipyards backed
by the governments are all keen to lent money to ship investors. So until today,
commercial banks remain to be the primary source for the external capital needs of
the shipping industry. There are in fact a number of alternative ways of loan funding.
Bank loans
At the moment, there are many commercial banks offering loans to shipping
finance from the major maritime centers in the world, such as London, New
York, Tokyo, Hong Kong, Oslo, etc. Shipowners should apply for the loan with
a request indicating clearly the main technical and economic aspects of the
intended ship. The submitted application document will be assessed by the
bank of the financial viability of the project.
The general performance of the shipping company in the past will be examined
to evaluate the quality of the management. This may include the profitability of
the company and its safety record. The past experience regarding the debt
service is a critical point to be looked into.
One of the key factor of bank loan finance is the interest charges. This is the
cost of loan made by shipowners. The interest rate may be at a fixed
percentage during the entire term of the loan, or more commonly with shipping,
may fluctuate in line with changes of market interest rates. The London Inter
Bank Offered Rate (LIBOR) is normally used as a base for medium-term
Eurodollar loans made to the shipping industry. Typically a bank may charge
its interest 0.5 to 2 percent above the LIBOR. As the nature of the world
financial market, the LIBOR changes greatly over time. It is not possible to

attempt any prediction as the rate is influenced by so many factors such as the
inflation and government policy regarding the interest rate. The LIBOR moved
from 19.7% in 1980 to around 3% in 1993 and many ups and downs in-
between (Stokes 1997). Actually the 6-month LIBOR is 5.01% as of March 1999.
The term of bank loan or the repayment period varies from 5 to 15 years
depending on various deals between the shipowner and the bank. Usually the
repayment is made in equal instalments over the period of loan.
Currency is another important element in bank loan financing. The volatility of

currency exchange market makes a choice of currency a risky business. As US
dollar is still the dominating currency used in shipping, the loan made in any
other currency than US dollar will present a risk. To overcome this difficulty, a
multi-currency loan can be made.
Table 6.2
A number of financial parameters,
especially the loan-to-asset ratio
(gearing), are highly important for
the bank's decision. Normally the
gearing is not higher than 80%. The
specific questions concerning the
conditions of the project to be
financed will be discussed only the
bank is content with the
management capability of the
borrower. The specific questions
include those of technical features
and those of commercial
conditions. Banks always want to
make sure that the ship will not
become technically obsolete which
will diminish the vessel's market
value (ship's structure, size, speed,
consumption, etc.). Banks are often
concerned with the owner's
planned employment of the ship to
have an idea about the return of
the investment.
As a security of the loan, ships to

be financed are often treated like
first mortgage to the banks.
Sometimes, a bank requires also a
guarantee for the loan from a
government, or a company or an
individual.

Commercial and investment banks have been a major source of ship finance.
In recent years, however, the number of banks involved in shipbuilding has
been diminishing due to the worsening outlook for earnings and doubts over the
ability of borrowers of repayment. It is estimated that there are actually a dozen
or so of banks actively looking for investment opportunities in shipping. As the
size of investment in ships is normally big, several banks are pooling funds
together to spread out liability and risks. This kind of syndication of loans is
more and more a standard form of shipping credit. In Scandinavia and
Germany, specialist ship mortgage banks are also important sources of ship
funding.
Yard credits
The shipyard credit started in late 19th century in the UK and it had developed
to expand to nearly all European yards in 1930's. In the early 1960's Japan
introduced an export credit scheme that offered the shipowner credit on eighty
per cent of the purchase price over eight years at 5.5 per cent annual interest
on the security of a first mortgage of the ship. Other shipbuilders followed more
or less this example. In 1969 the OECD set up a standard level of export credit
that all signatories agreed not to exceed ("OECD understanding on export credits
for ships 1969"). This OECD formula has been revised several times and the
present pattern is the following, which is actually under revision for its projected
elimination. OECD ship building formula is only applicable for export ships:
Table 6.3
OECD Export Credit Package of Ships
advanced level (credit) Repayment Interest rate

80% contract price 8.5 years from delivery 8%
The OECD terms on export credit for ships allow shipyards to offer overseas
customers loans up to 80%. The owner has to provide the remaining 20% of
the contract price, either from his own funds or from other sources such as
commercial banks. As explained above, funding through commercial bank is
normally with a loan interest fluctuating according to the financial market. Such
an arrangement put shipowners in a very risky situation. The primary advantage
of shipyard credits, always supported by the governmental import/export bank,
is that the interest rate is fixed. The OECD credit is especially attractive to
owners during periods when rates at commercial banks are higher. This was
the case in the 1980's. But as the situation in late 1980's and early 1990's has
proved, more attractive terms were available on the commercial banking
markets for shipowners with good credit records.
The interest rate is a decisive factor in the ship's funding. The following two
tables are about the funding arrangements of the same new building with only
2 points difference in the interest rate. The result is that for the option with
higher rate the shipowner has to pay USD2.85 million more interest during the
loan repayment period of 8 years. In the real financial market, the rate may

swing between something like 3% and 20% as people experienced as recent

as in the early and mid 1980's.
Table 6.4 Table 6.5
Starting from 1994, discussions have been going on and agreement has been
reached to modify the OECD shipbuilding export credit system. One of the
change is to eliminate the subsidies by removing the fixed interest rate and
replace it with commercial rates. The repayment period is more flexible in the
modified OECD package. Special subsidy to orders from developing countries
has been eliminated. The agreement has not been put in practice as not all
OECD countries have approved it.
Bond issuing
Shipping companies or operators, which would issue corporate bonds based
on their credit, or that of their parent companies or principals could attract
investors seeking long-term stable returns. Shipping companies can also issue
bonds in the capital market to raise funds for ship investment. This has not
been a very popular alternative as it requires a good reputation of the company
and only the well-established shipping firms may have a possibility of issuing
bonds.
The most important condition for this kind of funding is to obtain an acceptable
credit rating from one of the specialised financial institutions (e.g. Stardard and
Poors). The ability to borrow and the rates of interest are related to the credit
rating of the borrowers. The credit worthiness of a company is measured by
credit rating agencies with a system of investment grades going from AAA to
BBB. For example AAA is the highest with extremely strong capacity to pay
interest and repay principals. While BBB has an adequate capacity to pay

interest and repay principal, whereas adverse economic conditions or changing

circumstances are more likely to lead to a weakened capacity for the borrower
to do so. Grades from BB to C are generally considered as speculative grades,
which means that there are large uncertainties or major exposures to adverse
conditions. The grading is made primarily on the past, present and expected
future financial viability and performance of the organization.
6.2.3. Leasing financing
In shipping, the leasing alternative has not been as widely employed as in many other
sectors, such as aviation. Leasing is generally understood as a system whereby a
lessor (owner) put at the disposal of the lessee (operator) the physical asset (ship) for
the employment of the asset during the lease period. According to the lease contract,
the lessee pays a rental to the lessor for the full operational control of the asset. Also
can the lessee eventually take the ship over at the end of the lease by paying the
lessor a price agreed upon.
The financial lease of vessels is regulated by national legislation of each country. The
period of lease is normally extended as long as vessel's economic life. It is pre-agreed
upon between the two parties as regards what to do with the vessel at the end of the
lease. Financial leasing of ships is quite similar to bareboat chartering. In fact, it is
common that one of the standard bareboat charter-party is used as a base of the
lease contract. Why is lease used instead of chartering?
The real attraction of leasing is in the area of taxation. In different countries taxation
regulation provides tax relief to both the lessor and the lessee to various extent. As the
lessor acquires the vessel for subsequent rental to the lessee, the lessor can,
according to the regulations of the some countries, claim the full tax relief, if he has a
large taxable income. This makes his investment in the asset (ship) cheaper as
compared to purchase and then charter it out. He can then share this benefit with the
lessee in the form of reduced rental in order to the deal attractive. From the lessee's
point of view, leasing can also be cheaper then buying for the same reason of tax
relief.

Graph 6.3
Different possibilities of ship finance with main points
(the dream of a WMU student learning maritime economics)
Equity 1 Equity 2
Don't have enough funds
I buy my ship with my money Joint ownership with partners
Pros: I don't owe others money I'll use money elsewhere Pros: we don't owe others money
Cons: cannot use funds elsewhere Cons: complicated ownership
NO
Conditions: I have enough funds Conditions: sound management
No suitable partners
Prefer own ship 100%
YES YES NO
Leasing Equity 3
Pros: no financial liability, tax Shares at stock market
YES Pros: may have funds quickly
relief, flexibility YES
Cons: dont own the ship Cons: have to please shareholders

Conditions: sound management Conditions: company's reputation
Prefer own ship 100%
Want independence
NO
Credit lowly rated
Bad stock market
NO
YES YES
Debt 3 Debt 1
Bonds Charter Rate 000'US$/day Bank loans
Pros: rate under control 30
Pros: can get good deals
Cons: market fluctuation 25
Cons: interest rate fluctuates
Conditions: good credit rating 20 Conditions: reputation
Dislike variable rates
No suitable banks interested

Lack reputation/guarantee
15 NO
Too high interest rate
1990 1992 1994 1996 1998
YES
Debt 2
Shipyard credits
Pros: fixed interest rates
Cons: currency/interest rate risks
NO
Conditions: reputation/guarantee
6.3. Prices of second-hand ships
To buy a new ship, a shipping company has to be financially strong. Not only because
he has to pay, out of his pocket, the 20% or so of the ship's price as the down
payment, but especially, the interest and debt payment can constitute a extremely

heavy burden particularly when the freight market is bad. In this case the owner may
wish to turn to the second-hand ship market.
A shipping company look towards the purchase of a second-hand unit may have other
incentives. He may do so just in order to gain direct and quick access to tonnage to
meet a requirement to move cargo; or in order to be able to charter out the vessel on
the market expecting a return on the investment; or just to make an investment on
asset hoping to be able to resell the vessel in the future for a profit, or simply to take
advantage of tax benefits.
The buying of a second-hand vessel is not an easy task. No yard credit is available.
The buyer has to rely on his own capital reserves or to expect commercial banks' help.
The owner should take into consideration (a) vessel type and conditions and ship
particulars especially the age, (b) repair and maintenance record, special survey date,
and (c) estimated remaining life expectancy of the vessel and the scrap value.
The table below illustrates second-hand prices for selected vessels of 5-year-old form
1990 to 1996. The changes at this market reflect the evolution of the new building
market. The two graphics on the next page are the situations of second-hand prices
for general cargo ships and container ships.
Table 6.6
Representative prices of second-hand ships
6.4. Ship Demolition Prices
Capital cost is a major part of the investment made by a shipowner. The repayment
or depreciation should be calculated taking into account the remaining value of the
vessel once its economic life expires. There is a scrap market for the demolition of old
ships. This market closely reflects the trends of price in the newbuilding and second-
hand markets. Ship demolition market's movement is the reverse of the freight market,
i.e. when the freight market is good, there will be less business for ship scraping. Ship
breaking became a veritable booming industry during the shipping recession years in
the mid-1980's. Asian countries like India, Bangladesh and Pakistan are actually the
leading ship breakers (these 3 countries obtained more than 90% of the world market
in 1997). In 1997 the annual average demolition price was around USD125 per ldt
(light displacement ton). In 1997 the total volume sold for demolition was 603 vessels,
16.9 million dwt and 4.5 million ldt.

The following two tables show the broken-up tonnage trends from 1987 to 1997 where
we can see that at the booming period of the late 1980's, less ships were broken up
and the other table gives the average age of broken-up ships which followed almost
the same track. Compare the age of ships for demolition in 1986 and 1989, we can
see ships for demolition were older in 1989 especially for container ships.
Graph 6.7
Graph 6.8
Tonnage broken and brokers
Source: SSY Consultancy & Research

Chapter 7
COST ANALYSIS AND

PRINCIPLES OF PRICING
Chapter Objectives:
To examine the running cost aspect of shipping companies

To know the basic cost structure of various shipping organizations
To discuss the economic concepts and principles regarding shipping cost
and pricing
7.1. COST ANALYSIS IN MARITIME TRANSPORT
Once a ship is built, it is not yet in an operational position. A number of other

activities have to be arranged in order to make the ship ready to perform the
transport of cargo. While the costs of ship acquisition are called capital costs, the
costs involved in making the ship operational are called operating costs. As soon as
the ship is operational, it can be employed in a particular voyage to actually perform
transport activities. Then other costs will incur. The costs involved in the carrying
out a voyage are called voyage costs. Following the previous chapter where the
capital costs were discussed, we shall, in this chapter, look into other cost elements
in connection with the maritime transport supply.
7.1.1. Operating costs

How can a ship be in an operational condition? First of all the ship should be
technically fit and operational. This means that the ship has to be manned. A ship is
still a complicated machine, which requires a full team of crew to operate it day and
night. This includes a Captain, a chief engineer and other officers and seamen. The
ship should also be maintained and repaired to be in a good operational condition
or to be always seaworthy. Secondly, as ship operation even today is still a risky
activity exposed to big accident possibilities and ships themselves involve huge
amount of capital investment. To be financially and commercially operational, the
ship needs to be covered by proper insurance. Consequently, shipping operating
costs should include all above mentioned expenditures namely: labour costs,
repairs and maintenance costs and insurance costs.
1) Labour costs
In the enlarged sense, labour costs include the costs of ship crew and the
costs of shore-based management staff, which is also sometimes referred as
over-head cost. Often the costs of administration and house-keeping are
also integrated in the labour costs. However, by a narrower understanding,
labour costs in shipping just mean the costs related to seafarers. Labour
costs have been increasing more rapidly than most of other cost elements
during the last couple of decades. For many shipping companies, manning
cost is the single biggest item of total cost.
Manning costs vary, sometimes greatly, due to crew nationality,

remuneration package, service conditions onboard, crew size both onboard
ships as well as standby. The cost is not only determined by the level of
salary the crew is paid, the costs include also the social benefits that are
provided. A number of factors that influence the crew costs are in fact
conditioned by the national legal system, employment practice and living
standard and the country of the crew. Maritime labour costs include wages,
overtime pay, leave, pension, travel, etc. They also include indirect costs
such as social benefits, management cost, training, accident insurance, etc.
CHAPTER 7 123 COST ANALYSIS AND PRINCIPLES OF PRICING

Therefore the major difference in crew costs to be observed is between

different origins of seafarers. International organization like ILO has
recommended minimum wage rates and Unions like ITF has also a big
influence on the crew remuneration levels. The table below gives an
overview on the difference of crew cost, direct and indirect, among major
seafarer providing countries. The difference between the highest and the
lowest can be almost 7 times for a masters monthly cost up to as big as 22.5
times for a seamans cost.
Table 7.1
Crew Costs of Different Nationalities
Some other aspects have to be taken into account when studying crew
costs. One is reserved crew. To keep the ship running all year round, a
reserve of crew is needed and a standby pay has to be made. The other
thing is that very often the change of crew implies extra travelling costs. A
more strict and shorter working hours/days onboard per year implies more
frequent change of crew, which in turn will inevitably increase the cost in
relation to size of standby crew and travel. The size of crew differs greatly for
various kinds of ships and also for different national regulations. A typical
15,000 dwt general cargo twindecker still needs 30 or even more people
working on board, whereas a medium sized tanker needs 24 persons and a
modern 4,000 teu container ship may require merely 15 men.

Box 7.1
The Japanese Experience of Cutting Labor Cost
It is interesting to see the Japanese experience in changing the tasks and functions of
seafarers so that the number of crew can be reduced and cost saved. The experiment
was carried out in four stages.
The first stage was started in 1980 by introducing a dual-purpose crew (DPC)
system. They were able to cut the total number of seafarers on board from 23 to 18.
This experiment proved to be successful and thus ships with 18 men were then
institutionalized by law.
The stage 2 commenced after the stage 1 was successfully implemented. The ships
used in this stage were with newer automated devices. The aim was to eliminate one
officer for which either the second mate or the third engineer officer was trained to
combine the watch duties. Finally the total number on board was reduced to 16 men.
The system, once again, was institutionalized by law in 1986.
Soon after, the stage 3 began. The ships used in this stage had the bridge, the
engine control room and the radio room all on the same deck with even newer
automatic devices permitting centralized watches at sea. As a result, one watch
officer and one DPC were cut and the ship was manned by 14 persons. This was
institutionalized by law in 1988.
The stage 4 was a bit different. Because it was selective as regards the type of
ships and the route. Container ships, bulk carriers and car carriers were chosen.
The engine control equipment and steering equipment were installed on the ships
bridge wings. With a new watch-officer system, the chief mate, engineer officer and
the chief radio officer were utilized for watch on the bridge and in the engine control
room. In parallel, the DPC was minimized. Currently this stage is being introduced
which allows ships to sail with 11 men on board1, all with high degree of
polyvalence.
When people were getting exited about the progress, the exchange rate changed
A comparison of annual crew cost per vessel

(1US$=100J )
23-crew normal ships Modernized ships with Japanese crew
All 23 crew 5 Japanese 9 Japanese 11 Japanese 14 Japanese 16 Japanese
foreign 18 foreign 14 foreign crew crew crew
$ 0.6 mn $ 1.61 mn $ 2.31 mn

$ 2.43 mn $ 2.95 mn
$ 3.35 mn
Source: Based on Akatsuka The Japanese Shipowners' Association 1996

1
The crew includes one captain, one chief engineer, four watch officers, four dual-purpose crew and
one rating.

The costs of office staff and administration are once again not identical
everywhere. The costs are definitely conditioned by the national legislation
as regards the wages and the social benefits etc. Yet this costs are directly
determined by the kind of shipping organizations. For a
tramp shipping company, especially for those which are operating in the long
time chartering business, the size of shore-based staff is relatively small,
while for a liner shipping company where the organization is much complex,
the size of office staff tends to be very big. The difference can be something
like, for instance, 50 people for the former and 2,000 for the latter for
operating similar size of ship tonnage, say 20 ships of about total 1 million
dwt.
2) Repair and maintenance costs

It is very difficult to estimate the level of annual expense on repair and
maintenance. One of the reasons for this is that some expenditures on repair
and maintenance are entirely unpredictable, such expenditures may arise
from damage to equipment failure. Therefore only scheduled repair is
measurable. The following factors are those that have notable impacts on
the repair and maintenance costs.
a) Class requirement
In order to get insurance, the vessel has to be with a "class"
throughout its life. To maintain a class, the vessel's specification and
technical conditions have to be certified regularly by one of the world
classification societies. Periodical repairs are required which incurs a
cost. The surveys of classification societies are of course payable.
b) Age of the vessel

It is obvious that the older the ship is, the more expensive repair and
maintenance cost will be. The economic life of a ship means that up to
a certain age of the ship, it will become no longer economical to keep
the ship in operation. The ships life expires and it should be sent for
demolition. In 1997 169 ships of total 14.8 million DWT went to scrap
yards. This makes of about 1.9% of the world total tonnage was sent
for breaking-up. The average ship age for demolition in 1997 was
about 26 years (UNCTAD 1998).
The graphic illustrates the age distribution of tankers, which have corrosion
damage since 1985 in a classification society.

Graph 7.1
c) Insurance costs
Because of the heavy investment in ships and the high risks of sea transport,
every merchant ship has to be covered by insurance. There are quite a few
different insurance options available to vessels on the international marine
insurance market. The two most important forms of marine insurance that
ships must take which are (1) hull and machinery (H&M) insurance and (2)
protection and indemnity (P&I) insurance. There are some other aspects that
can also be covered such as insurance against war risk, strikes and loss of
earnings, etc.
Hull and machinery (H&M) insurance covers risks of physical loss or damage
to the vessel. The insurance policies begin (or being renewed) on yearly
basis. How much the H&M insurance is priced? It depends on the statistical
probability of any one vessel becoming a loss. Generally this is determined
by the vessels' type, age, size, previous claim record, type of equipment, etc.
Between 1980 and 1992, about 0.2-0.4% of the world total tonnage was lost
every year.
H&M insurance costs vary according to the yearly loss ratio of the world
tonnage. The annual cost could be about 1-2% of the insured value of the
vessel. However as the world total loss increased in 1989, 1990 and 1991,
many underwriters had severe losses. As a result, the H&M insurance
premiums increased dramatically during the last 5 or 6 years. The following
table shows the cost patterns from the end of 1980's to 1993.

Table 7.2
The Protection and Indemnity (P&I) insurance is a responsibility insurance

against third party liabilities such as damage caused by the ship to a jetty or
another ship or damage from oil pollution of ships. Worldwide, the P&I
insurance is provided by about 20 P&I clubs, which are non-profit-making
bodies operating on the principle of mutuality. All policies are started (or
renewed) on the 20th of February every year. The clubs reinsure amongst
themselves to obtain the advantage of a very large spread of risks.
Table 7.3
The premium level of P&I insurance depends on the claims in the past
couple of years and an estimate for the coming year. Due to the bad record

in the beginning of 1990's, the P&I insurance costs also have gone up
sharply during the recent years. The table above gives you an idea about the
level of the P&I premium from 1986 to 1993.
It is estimated that in 1998, an Aframax tanker (80-110,000 dwt) has to pay

US$215,000 per year for H&M insurance and US$190,000 for P&I insurance.
Likewise, a Panamax bulk carrier (63-73,000 dwt) should pay US$160,000 and
US$90,000 per year respectively for H&M and P&I (Drewry 1998).
Voyage costs
With capital costs and operating costs paid and corresponding activities
accomplished, the vessels can be considered ready for any commercial
employment, in order words she is ready to start its transport voyage. To perform a
voyage, other costs will occur. Therefore, all those expenses, which are related to a
particular sailing, either laden or in ballast, are called voyage costs. The two main
components of voyage costs are fuel costs and port costs.
1) Fuel costs
The oil-based marine fuels are generally referred as bunkers and there are
three principle grades, namely: intermediate fuel oil (ifo), high viscosity fuel
oil (hfo) and marine diesel oil (mdo), with the first two for main engines and
the last for auxiliaries. Bunkers are in many cases the biggest item of a
ship's total trading costs (operating and voyage). Their part can typically be
in the region of 40-60% depending on each specific voyage and the fuel
price at the moment. The global consumption of marine bunker fuel is
estimated at 140-160 million tonnes per year in recent years, representing a
total cost of around USD15 billion.
Obviously, the cost of bunkers depends directly on the international oil

market. However, bunkers' prices are different in various ports, all depends
on factors such as local demand, refining capacity and competition between
suppliers. For example, in April 1999, on main maritime routes, IFO was
priced at USD69/ton in St. Petersburg but USD84/ton in Le Havre,
USD78/ton in Singapore but USD83/ton in HongKong and USD96/ton in
Tokyo Bay.
Marine bunkering services are generally provided by four different types of

suppliers: big multinational oil companies, national oil companies, trading
companies, and bunker agents. The big multinational oil companies (like
Shell or BP or Texaco) used to dominate the market in the past (with 70-80%
market share), but their part is now close to 30-40% of the total market, while
the market share of state-owned national companies has been growing
steadily.
Generally, the fuel consumption of vessels is the cube of the sailing speed.
With the high proportion of fuel costs in the total costs, ship operators are
always trying to find the optimal point of speed. For any given bunker price,

there may be cost savings to be made. It is mainly a problem of trade-off

between reduced bunker consumption and loss of time.
The following figure is an illustration of the way in which fuel consumption

and thus bunker cost change for a tanker (VLCC) at different speed.
Graph 7.2
Fuel consumption of a ship varies enormously according to the efficiency of

ship engines. Newly built ships are in general equipped with more efficient
engines and therefore more economical to operate (with low consumption per
horsepower). The table below demonstrates this big difference in efficiency
between ships built in the 1970's and those built in the 1990's.
More fuel efficient engines were developed after oil crises. It is estimated that
further advances in technology could result in engines being 20% more
efficient than at present by the end of the century.
Table 7.4
Representative fuel consumption for selected vessels
hfo/day efficiency improvement

(at 14 k) (compared with 1970)
Recently built 120,000 bulk carrier 39

1970's built 120,000 bulk carrier 59 34%
Recently built Panamax 30

1970's built Panamax 54 44%
Recently built Handymax 18

1970's built Handymax 34 47%
source: Drewry Consultant 1994

Consumption of diesel oil vary greatly with ship type. Refrigerated cargo ship of
around 450-600,000 cubic feet can consume 8-10 tons per day while a handysize
consume only 1.5-2 tons/day. Ships using their gears or other equipment
(ballasting, cleaning) at ports consume much more than ships not using them.
2) Port costs
Port costs constitute an important part of ship's total costs. These costs can
normally be classified into costs incurred by the vessel itself and costs
attributable to the cargo handling.
Ship related costs in a port include pilotage fees, towage fees, mooring and
unmooring charges, harbour dues. Ship related costs are normally charged
according to ship's gt. These costs vary greatly from port to port. To illustrate
this we can make a comparison as follows.
Table 7.5
Ship related port charges (excl. cargo handling)
(lumpsum in USD)
20,000dwt 60,000dwt 250,000dwt

_____________________________________________________________
Rotterdam 25,000 55,000 185,000
Ras Tanura 4,000 8,000 23,000
Yokohama 13,000 25,000 69,000
New Orleans 19,000 26,000
Table 7.6
Container vessel (800 teu) port costs (excl. cargo handling)
Buenos Aires $27,900

Rio de Janeiro $12,400
Baltimore $11,700
Montevideo $11,100
Philadelphia $11,000
Paranagua $9,800
Santos $8,800
Fortaleza $5,300
source: Hamburg-Sud (1994)
Since 1989, the general increases in port costs have been significant. These
include costs for disposal of slops and waste oil, costs for mandatory tug,
increased berthage and dock charges (e.g. tonnage dues have been up
350% in US and 20% in UK). The evolution can be better observed through
the following figures which reflect that situation in two major ports.

Table 7.7
Port charges for tankers at selected ports (1986 - 1992)
(in thousand USD)
Rotterdam Yokohama
20,000dwt 60,000dwt 250,000dwt 20,000dwt 60,000dwt 250,000dwt
1986 21 49 155 12 24 56
1987 26 59 189 12 24 68
1988 27 64 204 13 25 69
1989 25 55 185 13 25 69
1990 30 67 220 13 25 69
1991 29 65 213 15 29 79
1992 34 76 248 16 31 85
% +62% +55% +60% +33% +29% +52%
source: LSE Dec. 1992
Cargo related port costs are difficult to quantify as the responsibility is often
distributed between port authorities and stevedoring companies. The costs
include port dues on cargo and cargo handling charges. In liner shipping the
cargo handling charges are paid by the shipowner. This cost can again
change dramatically from one port to another. For example it can change
from $2 to $30 per ton for handling general cargo and from $60 to $230 per
TEU for container handling.
Canal dues can be classified in the same category as port costs, although
they are paid exclusively by shipowners. As we discussed in previous
lectures, there are two principle canals in the world: Suez Canal and
Panama Canal. The canal charges (tolls) are paid based on particular
tonnage measurement systems set up by the canal authorities. The two
tables on the following page are the toll levels for these two canals and the
cost evolution during the recent years.
Table 7.8
Suez Canal transit tolls (laden, in '000 US$)
1981 1987 1993

Tankers ULCC (ballast) 175 195.5 289
150,000dwt 142 172 246
80,000dwt 100.7 130 189
Bulk 120,000dwt 118 131 173
Carriers 65,000dwt 78 102 174
35,000dwt 55 81 174
Others 42,000dwt (2500teu) 119 155 211
15,000 (twindecker) 26 40 62
Source: Drewry 1995

Table 7.9
Panama Canal transit tolls
(laden, in '000 US$)
1983 1989 1992

Tankers 65,000dwt 47 51 61
35,000dwt 25 27 33
Bulk 65,000dwt 48 53 64
Carriers 35,000dwt 28 31 37
Others 42,000dwt (2500teu) 10 11 14
15,000 (twin-decker) 8 9 11
Source: Drewry 1995
Shipping costs structure
What is the percentage of each cost item in the ship's total costs including capital
cost? This is not an easy question as the percentage varies form country to country
as well as from shipping company to shipping company, and even form ship to ship.
And on top of all these it changes over time. The best way to try to explain this is to
go through an example. The following statistics are another illustration of the total
cost break down of a representative container line trading in North Atlantic market
in 1980's.
Cost Breakdown of A Container Line The Japanese Situation (1996)

(Representative figures) (cost structure of shipping companies in Japan)
Administration 4.4%
Depreciation 15.7%
Crew 4.5%
Insurance 1.5%
Bunkers 7.5%
Cargo handling 22%
Agency 15%
maintenance 3.7%
Port dues 3%
Leasing 10.3%
Feeder 7%
Other 5.4%
Total 100%

The following is a representative example showing the break down of costs for a
tanker in the year 1986 and 1989.
Break-down of a ship's costs

(62,000dwt tanker one year's trading)
1986 1989
capital costs 20% 44%
crew+insurance+maintenance 29% 25%
port+canal 20% 15%
bunker 31% 16%
Total 100% 100%
7.2 BASIC ECONOMIC CONCEPTS AND PRINCIPLES OF PRICING
Laws of demand and supply

The economic concepts and theories (ref. Lipsey 1995) will be discussed because
shipping as an economic activity follows the basic economic and market rules. It is
essential for someone to understand these basic concepts before trying to
understand the functioning of shipping industry itself.
1) A rise in the demand for a commodity causes an increase in both the equilibrium
price and the equilibrium quantity bought and sold.
2) A fall in the demand for a commodity causes a decrease in both the equilibrium
price and the equilibrium quantity bought and sold.
3) A rise in the supply of a commodity causes a decrease in the equilibrium price
and an increase in the equilibrium quantity bought and sold.
4) A fall in the supply of a commodity causes an increase in the equilibrium price
and a decrease in the equilibrium quantity bought and sold.

In a free market, demand and supply are provided by different organizations. How
do the suppliers know how much is the demand of the market? In the shipping
sector, who tells the shipowners that the seaborne trade has diminished and
consequently less tonnage required? The answer is the laws of demand and
supply. In other words, it is through the pricing system that the demand
communicates with the supply.
The price conveys the message back and forth between demand and supply on
the right quantity for them to match each other.
Price not only is the market indicator about the quantity of the demand and
supply, but also about the quality of the supply required. The wrong products (or
services) will have no or less demand and thus be priced low and eventually be
driven out of the market, while the right products will get the price reward from
the market.
Price serves also to select the keenest demand. The price is a benchmark for
the right demand, which means that those take the product (or service) or can
afford it, are deriving value of it. The container transport by fast ships, for
example, eliminates the maritime demand from cargo of low value, as this type
of cargo will not derive sufficient value from the speed of transit.
Similarly, free market price imposes a ruthless selection of suppliers that only
the most efficient ones will survive. This is especially seen when the market is
low, like in the shipping sector late 1990's.
Price elasticity of demand and supply

According to the "laws of demand and supply", the quantity of demand and supply
vary as the price changes. Taking the change in price and the corresponding levels
of demand and supply, we will have the curves as shown in the above graph.
However for different products (or services) the curve is not the same. In other
words, each time the price changes, for different product the demand (or supply)
may change differently. Such a phenomenon is called the price elasticity of demand
(or supply). Price elasticity of demand () (or supply ) is the percentage change
in quantity demanded (or supplied) divided by the percentage change in price that
brought it about.
In shipping elasticity means whenever sea freight changes, what is the reaction of
seaborne trade and shipping supply. A good understanding is very important for
knowing the way the traffic and the transport capacity change. It is also vital for
setting and modifying the pricing structure and levels for shipping services.
The major influential factors on the price elasticity include the economic utility of the
product (or service), the cost structure of the product, the situation of substitute. In
general, the price elasticity tends to be greater in the long term (a period in which all
inputs including plant and equipment can be varied) as compared to the short term (a
period that is too short to vary all the factors of production).
Concepts for cost analysis

We have divided shipping cost into three categories: capital cost, operating cost
and voyage cost. However, these costs can also be divided into faxed cost and
variable cost according to quantity of cargo carried. Therefore:

Fixed costs (FC) are those costs that do not vary with output (imagine which
part of cost does not change when there is change in the quantity of cargo
handled)
Variable costs (VC) are those costs that vary positively with output (imagine
which part of cost changes when the amount of cargo handled changes)
Consequently we will have the Total costs (TC) if we put fixed costs and variable
costs together and the Average total cost (ATC) if we divide the total cost of
producing any given output by the number of units produced (cost/unit, e.g. sea
freight: US$/ton, US$/TEU).
Another cost concept, which is less straightforward is the Marginal cost (MC). This
is the increase in total cost resulting from raising the rate of production by one unit
(imagine how much it costs a shipping line more to load one additional container).
Similarly, Marginal revenue (MR) is the change in total revenue resulting from an
increase of 1 unit in the rate of sale per period of time. In practice this is equal to
the price. Average revenue (AR) is total revenue divided by the number of units
sold, it is equal to the price.
Marginal cost pricing means that for a given amount of output in a sector, the
society benefits the most when the price is set equal to the marginal cost. On a
coordinate, it can clearly be seen that if the price is lower than the marginal cost,
the producer will incur a loss. If the price is fixed higher than the marginal cost level,
then the market (society) is paying more than what it can get. This is true of course
only when the sector has exploited all the economies of scale.
Graph 7.3
Marginal cost pricing
MC
P1
P
P0
One basic economic question for every enterprise or individual is to decide what
goods (or service) to supply and in what quantities. For instance, should we go into
shipping or do something else? Once inside the shipping sector, should we
specialize in bulk transport or in containers and in each of these should we invest a
lot or just a little? To answer the first part of the question, the economic concept of
Opportunity cost is to apply, whereas the second part of the question is explained
by the concept of Profit maximization.
Opportunity costs
What commodities that are to be bought or to be produced are necessary choices
for households and enterprises, because resources are scarce. There must be
decisions on what will be done and what left undone, what project should go first,

what next and what should be dropped altogether, what services will be provided
and what not provided. If you have $5 with which you can buy either 3 kg apples or
a cinema ticket. Then the cost of one more cinema attendance is 3 kg apples
forgone. You have 1 hour during which you can either review a chapter of Maritime
Economics or go to the sport center swimming. Then the cost of 1 more chapter
reviewed is 1 hour physical exercise forgone. This means that the cost of one can
be expressed in terms of the amount of the other forgone. The cost expressed in
terms of forgone alternatives is opportunity cost.
The opportunity cost is also expressed as the cost of the second best choice. It is
important to notice that there is difference between the direct monetary loss (explicit
cost) or gain and the economic loss (opportunity cost) or gain.
Opportunity cost and normal profit. The opportunity cost of capital and
enterprise is referred to as normal profit. A normal profit represents the rate of
return that is necessary to keep capital and enterprise in an industry. For example,
if normal rate of return is 12%, then a firm earning a 12% rate of return is earning
zero economic profit because its capital and entrepreneurial resources could earn
12% elsewhere.
In principle, when economic profits are positive, firms will enter an industry and
when negative, firms will leave.
Profit maximization
it means the output level at which the firm can maximize its profit. Profit will be
maximized where MR=MC (marginal revenue equals marginal cost). At anytime
when MR is greater than MC (which means that total revenue is increasing faster
than total cost when output is increased), profit is increasing. On the other hand, if
MC > MR, an increase in output would cause total cost to increase more than the
increase in total revenue, so profit would fall.
Rules for profit maximization
MR>MC Expand output

MR=MC Profits maximized, output unchanged
MR<MC Reduce output
Combining the concepts of fixed costs and variable together with that of economic
short term and long term, we have notions of fixed factors and variable factors.
Fixed factors are the factors of production that cannot be varied in the short run,
such as port infrastructure or a ship. Variable factors are the factors of production
that can be increased or decreased in the short run, such as some equipment, labor
or fuel.
Economies and diseconomies of scale concern the optimal size of production

unit. The long run average cost (LRAC) curve is U-shaped which means that, as
first, as plant size and firm output increase, long-run average costs fall. After a
certain point (point Q1), however, bigness starts becoming costly. As the plant (or
company or warehouse or vessel) continues to increase in size, average cost begin

to rise. Economies of scale are declines in long-run average cost that are due to the
increased size of production unit. Diseconomies of scale are increases in long-run
average cost that are due to the increased size of production unit.
Economies of scale is one of the major source of strength for maritime transport as
compared to other modes of transport. Even within the shipping industry itself,
economies of scale again plays an important role. This means that in principle the
bigger the ship the cheaper the unity cost of transport and consequently, the more
competitive the ship owner/operator will be in the market. Some comparative
studies (Drewry 1996) have shown that by bigger container ships, the shipping line
enjoys huge cost advantage. The following table demonstrates the degree of
savings per TEU slot between various ship sizes for different cost elements. It is
assumed that the ships are operated in the same market under the identical
conditions. A 6,500 TEU container ship enjoys cheaper average cost per TEU by
8% compared with a 4,000 TEU ship; 14% compared with a 2,600 TEU ship and
29% compared with a 1,200 TEU ship. As in container liner shipping, the profit
margin is thin, at least in the late 1990's, one percentage in cost saving is almost
equal to the same percentage of profit gain.
Table 7.6
Effects of Economies of Scale in Container Shipping
(cost per TEU, Index: vessel of 1,200 TEU=100)
Total cost
Administration cost
Port charges
Bunker cost
Operating cost
Capital cost
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
6500 teu 4000 teu 2600 teu 1200 teu
source: Compiled from Drewry Report 1996 and other sources
Notes:
1. The total cost is the average cost per TEU which includes also the cargo related variable cost such as
container cost and cargo handling cost. These two cost remain the same regardless of the size of
container ships, thus they are not included in this graph.
2. Port charges do not include cargo handling. The ships calling the same ports with same frequency per
year.
3. For bunker cost, the bunker price is the same although ships' consumption level differs according to
the size.
Natural monopoly is a monopoly that emerges because of economies of scale or

natural scarcity of a (or some) production factor(s). Some ports enjoy the situation

of natural monopoly. It happens also that the size of the market does not allow
many suppliers or there is room for only one optimal-sized firm. Liner shipping is
said to be a sector with natural monopoly because of the need for a minimum size.
Production theory
Any production or service normally require more than one production factor. One
factor alone is often useless if it is not combined with other factors (imagine seamen
with no ship, or vice versa). The factors are interdependent. The demand of one
relies on the input of the others, not only technically but economically. That means
that the price change of one of the factors will affect the kind and amount of input of
other factors (imagine that automation is always happening where the labor cost is
high). From the economic point of view, this is a problem of productivity of
production factors. In a given technical set-up, output changes as more units of one
of the production factors are added, while the others remain unchanged. In such a
set-up any production factor has a maximum output capacity. This is called the
"Production function", which is important for knowing the optimal level of production
or in other words, the having the maximum output with the minimum cost.
The Marginal product of a production factor is the additional output resulting from
one extra unit of that factor, while other factors being held constant (imagine how
much a port can gain by spending an extra US$1,000 on equipment).
Based on the marginal product concept, there is the principle of Diminishing

returns, which means that as more and more units of a variable factor are added to
a set of fixed factors, the resulting additions to output eventually will become
increasingly smaller. Diminishing return is a short-run phenomenon, as in the long
run the technical set-up may change.

Chapter 8
MARITIME FREIGHT MARKET
Chapter Objectives:
To analyze the basic structure of maritime freight of both liner and

tramp market
To discuss economics of freight market
8.1. MARITIME TRANSPORT FREIGHT MARKET STRUCTURE
As we discussed in the earlier chapters, maritime transport activities generate a series

of costs at different stages like ship acquisition, vessel operation and voyage
arrangement. These costs ought to be covered in a way or another and in the form of
a payment by the users of the service. In addition to the coverage of costs, service
providers need to make a reasonable profit for his survival and development. The
payment received by shipping companies is their revenue. Clearly, the following
formula is a basic equation applicable to all economic activities including maritime
transport:
Profit = Revenue - Costs
The aim of a commercial enterprise, such as a shipping company, is to maximize its

profit, especially in the long run. For doing this and according to the above equation,
the enterprise should maximize the revenue and/or minimize the costs. In this chapter,
we shall discuss various aspects of maritime revenue to see how maritime transport
costs are covered or in other words to see who are paying the services and in what
form the payments are made.
8.1.1. The breaking down of shipping services
Shipping services or activities can be divided in many ways. In order to examine the
revenue aspects we should come back to the breaking down of shipping costs. As
described in the previous chapter, three groups of costs are to be identified, namely:
capital costs, operating costs and voyage costs. For different types of shipping practice
such as tramp shipping or liner shipping, those costs are being covered in different
ways. The following schema is an illustration of who are paying what costs in different
types of shipping organizations.
Table 8.1
Cost Sharing Scheme
Bareboat Time Voyage Liner

Capital costs Owner Owner Owner Owner
Operation costs Charterer Owner Owner Owner
Voyage costs Charterer Charterer Owner* Owner
* for cargo handling at ports according to the charter party
A shipowner bears different items of transport costs when he deploys his ship in
different markets and similarly he does not receive the same kind of payments from
its customers who cover different proportions of the costs. As the maritime transport
payments signify different cost structures corresponding to different services provided
under different shipping organization patterns, the forms of the payments are different
CHAPTER 8 141 MARITIME FREIGHT MARKET

and the names used for the payments are also not the same. Three major distinctions
are to be made in this respect: liner shipping tariffs, voyage charter freight and time
charter hire.
8.1.2. Liner shipping and maritime transport tariffs
In liner shipping, ship owners provide the most complete transport service, which
includes cargo handling, on a regular basis between fixed ports to a large number of
shippers with a great variety of cargoes. It is not practicable for the shipowner to
negotiate a rate with each shipper, on each item of cargo and for each voyage.
Therefore a form of pre-fixed transport tariffs is used by shipping lines to collect their
payment from clients. The tariffs are normally published and not negotiable (in
practice, tariffs are object of negotiation, especially with big shippers). The tariffs can
be established by shipping conferences, by individual shipping lines or by special
agreement between shipping lines or between shippers and shipping lines.
The level of the pre-fixed liner shipping rate depends on a number of factors. As a liner
service, the ships may not be able to be filled fully each time it should leave the port,
in view of the fluctuation of shipping demand. Tariff should thus be fixed higher in
order to recover the cost of lost space. This is necessary as the market needs a
reliable regular shipping service and is ready to pay for having it. However from the
supply side, having a stable and fixed rate requires each of the individual line follows
the same rules. That is the birth of liner conference system, which was created for the
purpose of pricing control.
Conventional general cargo in break bulk and containerized cargo are the two major
groups where tariff structure differs for one another. Generally speaking, liner shipping
freight payment consists of three parts: basic rates, surcharges and rebates.
Basic rates are normally set up for different shipping routes and directions. In
the transport of break bulk cargo, the basic rates often vary according to
different kinds of cargo. This is called commodity rates. Each commodity has
its own rate for each shipping route. Similar commodities can also be put
together into groups and the whole tariff consists of a smaller number of
classes of commodities. The basic rates are relatively stable over time. They
are revised only periodically (e.g. every six months, every year or even longer).
The level of rates depend on a number of factors. Transport costs are the
principle decisive element especially in the long run. Transport characteristics
of cargo are an important consideration, which includes the quantity, the
transport and handling requirements, the packaging conditions, etc. The value
of cargo is a major element to be taken into account when determining the
commodity rates. As a rule, the higher the value of cargo, the more the
shippers have to pay. Consequently, poor commodities are being cross-
subsidized by the rich ones and the total transport quantity is supposed to
increase. Obviously, competition is another important factor which affects the
level of basic rates. The rates also depend on whether or not a return cargo can
be found for the round trip. If not the rates tend to be higher than otherwise.

In the transport of containerized cargo, whenever the quantity of cargo is large

enough to be a full container load, basic rates are often calculated per
container rather than per ton. This is also called the "box rate". According to
ISO, containers have a maximum payload, for example 15 mt for a 20-foot steel
container.
Box rates can be subdivided into commodity box rates and FAK (freight all
kinds) box rates. The former is an application of break bulk commodity rates in
the transport of containerized cargo. For each destination, different box rates
are applicable to different commodities stuffed in the container. As the transport
conditions, cargo handling for example, are standardized for all cargoes in
container transport, the discriminative commodity box rates have increasingly
been giving way to FAK rates at most shipping lines. This is a box rate charged
per container regardless of the contents of the container, except for those
commodities such as dangerous cargo, refer cargo or other special goods that
particular care is required for the transport. The level of FAK box rates depend
on factors like transport costs, competition of the market, balance of trade
(return traffic), etc.
Surcharges are collected by shipping lines to cover the additional expenses

in relation to the carriage of the goods. In the transport of break bulk cargo,
while the basic rates are kept relatively stable, many kinds of surcharges are
used to offset unpredictable increase of costs. Surcharge for cargo of over-
weight and over-dimension for instance is collected to offset the additional
costs related to the transport. Congestion surcharge is applicable, often
temporarily, during the period of port congestion. Port surcharge is collected to
cover high costs at some particular ports because of poor port efficiency or
abnormal high port tariffs. Bunker surcharge is used to cover some sudden
increase of bunker prices. Certainly, bunker surcharge can be a variable and
temporary cost. Devaluation surcharge, or currency adjustment factor, is
collected to compensate owner's loss due to changes of currency exchange
rates (mainly to the US dollar). Shipowners transfer all extra cost onto shippers
because, it is argued, that owners cannot lose money. In face of cost increase,
of whatever origin, owners can either transfer the costs onto their users or not
to provide the service at all.
In the transport of containerized cargo, there are fewer items of surcharges.

This is mainly because the structure of basic rates is simpler and thus the level
can be adjusted more easily. In case of major changes of costs, additional
revenues may come from the adjustment of basic rates rather than from
surcharges. However, as the costs of cargo handling make up a significant part
of shipping line's total costs and this expenditure varies greatly from port to
port, many container shipping lines use a surcharge called terminal handling
charges (THC) to cover this extra expenditure on cargo handling at ports.
Rebates are the reduction of freight rates offered by shipping lines to some
clients. This has been a common practice in the liner shipping with an aim to
increase the volume of traffic in a competitive market. The two major kinds of
rebates frequently used are deferred rebate and quantity rebate. Deferred
rebate is a loyalty rebate which is offered to the shippers that give the totality

of the cargo under their control for the selected shipping routes and for the
determined period of time to the shipping line or to the members of a shipping
conference.
Quantity rebate is given to shippers that with large quantity of cargo to transport
during a certain period of time. For example, some shipping lines give quantity
rebate to shippers whose cargo on each bill of lading exceeds a certain number
of tons. In container shipping, quantity rebate is given to big shippers in the
form of "service contract", which means that the shipper will be able to enjoy a
rebate (special rate) as long as he can provide a certain number of containers
to the shipping line (or conference) during a fixed period of time (a year).
Liner shipping tariff normally covers only ocean transport costs including cargo
handling and port charges. Some shipping lines offer multimodal transport package
with a door-to-door and logistics services and therefore apply a total transport tariff.
This can be considered as an addition to ocean transport tariff. Total transport tariff
not only includes costs of various modes of transport, it covers also charges related
to warehousing, documentation and formality processing etc. In the case of
transhipment, shipping lines may collect a through transport tariff too.
8.1.3. Voyage chartering and maritime transport freight
Voyage chartering is a kind of tramp shipping practice, which is widely used in the sea
transport of bulk cargo. As demonstrated above, in this kind of shipping arrangement,
ship owner bears all the transport costs except for the cargo handling charges which
is to be discussed for each voyage charter as to who should pay the costs, the
charterer or the owner.
The payment is made based on the agreed amount of cargo to be carried from pre-
stated port A to port B starting during a fixed period of time. The payment is thus in the
form of so much US dollars per ton. As the freight is collected according to the amount
of cargo carried, to provide enough quantity of cargo on time is often an obligation of
the shipper. Normally this quantity of cargo is stated in the charter party as so many
tons with a margin, say, 5 per cent more or less at owner's (or charterer's) option. If
the charterer fails to provide the agreed amount of cargo, he has to pay for the unused
capacity of the vessel in the form of a "dead freight".
Because the freight level is negotiable, there is no need for any surcharge or rebate
in tramp shipping.
It must be clearly stated in the Charter-Party about who should pay for the cargo
handling. Sometimes ship owner pays the cargo loading cost but not the discharging
cost or vice versa. If shipowner pays the cargo handling costs, it will be in the same
situation as in liner shipping practice and then the term of payment is stated in the
charter party as "liner term" freight rate. If the ship owner does not pay for the cargo
loading costs, the corresponding freight rate will be stated as "free in" (F.I.) rate. If he
does not pay for the discharging costs then the freight is known as "free out" (F.O.)
rate. In the case ship owner is not to pay the cargo handling costs at all, then a "free
in and out" (F.I.O.) rate is to apply. In this case, a loading and discharging rate is
normally required and fixed and the time allowed to be used for cargo handling is

called "laytime". Accordingly a reward and penalty clause is also introduced. If the
cargo handling time exceeds the agreed laytime, a penalty charge is to be paid by the
charterer and this charge is called "demurrage". If the laytime has not been used up,
a reward is to be calculated according to the charter party and given by the owner to
the charterer, which is called "despatch money".
Since the margin of five per cent of cargo agreed to be loaded can lead to some
significant financial consequence to the ship owner, an alternative term of payment is
sometimes used to solve such a problem. This is the "lumpsum" basis freight i.e. it is
an agreed total figure (so much US dollars to perform the voyage) committed to be
paid by the charterer irrespective of the amount of cargo actually carried.
The payment of voyage charter for oil tankers is different from that for dry bulk cargo.
People use a system of scale in oil transport. The scale system was first introduced
during the second World War. Compared with the dry cargo market, oil tankers are
specially designed to carry large amount of one single homogeneous cargo, which is
oil. It is simpler for both owner and charterer to have a scale, which would provide the
same daily net return (i.e. freight less voyage costs) for any tanker irrespective of the
voyage performed. In September 1969 the "Worldscale rate system" was adopted and
in January 1989, New Worldscale (NWS) was introduced.
Worldscale rate system is basically a set of dollar figures quoting the freight per
ton for each of a very large number of possible voyages. The way such rates
are calculated can roughly be summed up as follows: A nominal tanker (75,000
dwt) is in theory sent on an infinite number of round voyages at 14.5 knots with
sailing bunker consumption of 55 tons per day, bunker consumption for
purpose other than steaming of 100 tons per round voyage and bunker
consumption in port of 5 tons per each port. It is assumed that the nominal
tanker has a total of 4 days' port time and 12 hours for each of additional port
other than loading and discharging ports. The tanker receives USD12,000 per
day as income. The Worldscale schedule specifies the price of bunkers in the
calculation and the Worldscale Association collects information about the port
costs for the nominal tanker in the various ports. By using the round voyage
distances, it is possible to calculate the total costs for the nominal tanker and
this figure is then divided by the total cargo that could be carried to get the flat
rate for that particular voyage.
The flat rate is called New Worldscale 100. Similar calculations have been
made for over 100,000 voyages and the flat rates for more than 60,000
voyages are printed in the New Worldscale Schedule. On request the
Worldscale Association will provide the flat rate for any other voyage not
mentioned in the Schedule. To illustrate how flat rates are presented in the New
Worldscale Schedule, we may look at the following example:
KOBE USD/MT*
______________________________
Adelaide 12.60
Aden 13.86
______________________________
* not actual figures only for illustration purpose

The port shown in capital letters is the discharge port, so the flat rate for a
voyage from Adelaide to Kobe is USD 12.60. This rate is called New
Worldscale 100 (NWS100 or W100). Depending on quantity of oil to transport
and on current market conditions, the charterer and the shipowner will agree
on a percentage of the flat rate. For instance they may agree on NWS50, which
means that the freight rate is 50% of the flat rate in New Worldscale Schedule
(it will be USD6.30/mt from Adelaide to Kobe using above example). If the
agreed percentage is NWS120, then 120% of the flat rate is applicable (from
Adelaide to Kobe it will then be USD15.12/mt).
8.1.4. Bare-boat chartering, time chartering and maritime transport hires
In bareboat chartering and time chartering, the charterer uses the vessel not
necessarily for performing a particular voyage but for a fixed period of time during
which the said vessel is under the charterer's control. The payment of bare boat
chartering or time chartering is called hire. It is paid as so much US dollars per day.
With this payment the owner covers ship's capital costs and operating costs in the
case of time charter, he needs to cover capital costs only in the case of bare boat
charter. In both cases however voyage costs are paid by the charterer.
The chartering period varies from several months to several years. The level of hire
for bare boat charter (often for very long duration) and long term charter tend to be low
and very much cost based (based on capital and/or operating costs plus a profit).
Shorter term time charter (those last less than a year), on the other hand, is largely
influenced by the current market conditions, thus the level of hire varies a lot over time.
Although calculated on daily basis, the hire is payable every month in advance. Bare
boat or time charter hire depends principally on the ship's technical details. Among the
different items of ship's particulars especial attention is often paid to the ship's sailing
speed and bunker consumption. This is first of all because for the charterer, the
quicker the vessel sails the more voyages the vessel can perform. The second reason
is that bunker costs are to be paid by the charterer, so he has to know the
consumption level. The ships maintenance record is another area to be paid attention
to. Even though the charterer does not pay for the ship repair, he generally dislike his
chartered vessel to be off-hire for repair.
The time charter hire starts to be paid from the moment the ship is delivered to the
charterer till the moment the ship is redelivered to the shipowner. Therefore the places
of delivery and redelivery are an item of negotiation and are stated in the charter party
as well.
On the tramp market which is by and large a free market, a shipowner generally has
the possibility to put his vessel either on voyage charter or on time charter
employment. What are the factors to be considered by the shipowner when he has
such a choice? It is obvious that the decision should be taken the way the profit can
be maximized. As the freight market is by nature continuously changing (see the
figures on the following pages), the idea is that on a rising market, it would be better
that the shipowner uses voyage charters, expecting to obtain higher freight for the

following fixtures, and he should fix on time charter just before the freight rates turn
down. Understandably, the charterer will try to do the opposite.
8.2. ECONOMICS OF SHIPPING FREIGHT MARKET
Ideally, maritime freight should be at a level that is just covering the total shipping
costs and leaving the shipping company with a reasonable margin of profit. However,
while the transport costs of the world fleet as a whole remain more or less constant
especially in the short and medium term, the shipping freight rates are often volatile.
They can change over 200 per cent within a single year. The pricing mechanism in
shipping has almost never been cost based. It is not difficult to imagine how risky for
a shipowner to operate in such a market. In this lecture we shall discuss briefly why
and how freight rates change over time.
8.2.1. Tramp shipping market: voyage and time charter
Who decides the level of freight rates? Shippers or shipowners? This question can
only be explained by looking at whether the market is competitive or not. It means that
the freight mechanism depends on the competitive nature of the market. If there is no
competition on the demand side but a lot of competition on the supply side or in other
words there are few shippers enjoying a monopolistic situation while many shipowners
competing for business, then the freight levels tend to be decided by the shippers.
Similarly, if there is no competition on the supply side, then shipowners will have a
dominant power over the level of freight rates. When both demand and supply are in
a competitive environment, then the freight level is decided by the balance of demand
and supply in the market.
Before discussing how freight market mechanism operates, we shall first look at an
example of a competitive market of maritime transport supply. A (perfect) competitive
market is a market place where the shipping company is a freight taker, which means
that it can change its level of transport capacity but without having any significant
effect on the freight rate levels. So the company has to accept whatever freight offered
on the market. The same can be said on the demand side. Such a market is
characterized by (a) freedom of entry and exit. Any new company is free to enter the
market and any existing company is free to exit the market if they wish. It is also
characterized by (b) homogeneous service: all companies provide similar service with
little difference in quality, (c) well informed shippers, shippers are aware of any
difference in freight and (d) big number of service suppliers or shipping companies
operating on the market, the freedom to enter does not necessarily mean the number
of competitors will be big. Other constraints and market circumstances should be
taken into account too.

Table 8.2
Evolution of the freight market
In maritime transport, chartering market is a highly competitive market. Take voyage

chartering as an example, this is an international market where thousands of
shipowners operate and compete with each other. They provide almost identical
product - the movement of cargo by sea from one port to another. There is no
restrictive regulation whatsoever, which prevents owners from starting or pulling out
of the business. On this spot market, no shipowner alone is in a position to alter the
freight rate significantly by simply increasing or decreasing his carrying capacity. As
we have seen in the previous lectures, the chartering market is a world-wide market
thanks to highly developed shipping broker and agent networks and to the use of
modern telecommunication technology. Consequently the majority of the shippers can
be and are well informed of international freight levels.
In voyage charter market, freight rate changes as the demand and the supply are out
of balance. The above tables illustrate changes of this market during the past years.
From the above tables we can see clearly that the voyage charter freight rates are very
fluctuating. This is because voyage chartering market is a highly competitive market
on which the freight rate depends on the balance of demand and supply following, as
we have explained in the previous chapter about, the law of demand and supply.

When the market demand and supply are in balance, freight rate will be equilibrated
with a certain level of price and the quantity of supply. However, as maritime demand
(and to a less extent maritime supply) is by nature constantly changing, the equilibrium
won't be fixed. Therefore, for instance, when there is shortfall of demand without any
decrease in the size of supply, there will be an oversupply of ships, shipowners will
compete with each other for cargo by lower the freight rates down. Many shipowners
will do the same if it is a significant surplus of supply - the situation, which happens
often with a sudden drop of demand due to e.g. economic recession. As a result, the
market freight level will fall. Similarly when demand increases and supply remains the
same, there will be a shortage of transport capacity, freight rates will rise. On the
supply side, If demand does not change, freight will be lower when supply increases
and it will be higher when supply falls.
Every change of freight may have different effects on an individual shipping company
in a competitive market. Because companies have different cost structures. The
company may have to face one of the three situations when the freight is in short run
equilibrium.
In the first case the shipping company is making a loss. The owner will reduce the
supply along the marginal cost curve to q1 to minimize his short run loss. In reality, the
shipowner may reduce ships' sailing speed to decrease carrying capacity and save
fuel. And furthermore, the least efficient ships in the fleet and the least competitive
shipowners will find themselves unable to cover even the variable costs. They have
to withdraw from the market by laying-up or demolition of ships or leaving the business
altogether.
In the second situation, the company is just breaking even. The freight is high enough
to cover its total costs. It may wish to keep its size of supply constant. In the third
situation, the company is earning a net profit in excess of the total costs. In this case
the shipowner will try to increase its short-term capacity by increasing ships' speed and
by putting laid-up ships back to service.
Graph 8.6

8.2.2. Liner shipping market
Liner shipping is different from tramp shipping in many aspects including the
characteristics of freight mechanism. In contrast with volatility of charter freight market,
prices for liner services are relatively stable. Once set, rates are modified only when
there is some valid reason for doing so (e.g increase in costs). The following graph
shows the evolution of freight rates in the world three major liner routes.
Table 8.2
Freight rates (average in market) on 3 major liner trade routes
US$ per TEU
TransPacific TransAltantic Europe-Asia 2000

Asia- USA- USA- Europe- Europe- Asia 1800
USA Asia Europe USA Asia Europe 1600
1995 1865 1473 1442 1349 1257 1455 1400
1996 1636 1417 1552 1337 1185 1333 1200

1000
1997 1403 1292 1491 1271 1039 1153 800
Asia Europe
1998 1402 1067 1475 1247 955 1205 600 Europe-Asia
400 Europe-USA
USA-Europe
200
USA-Asia
Source: compiled from Containerisation International 0
Asia-USA
1995
various issues 1996
1997
1998
Although the above graph uses the figures in the US dollar rather than index as used
in the table for charter freight evolution, it is strikingly clear that liner freight does not
change the same way as tramp freight over recent years. Not only the general level
of freight is much more stable, it is also declining, especially for the Transpacific
Westbound route. What is the reason?
This is mainly because liner shipping market is not a pure competitive market. The
number of shipping lines is relatively small compared with the number of ship
companies on tramp markets. The services provided by different lines are not always
identical in terms of quality like service package, sailing route coverage and frequency,
documentation and information service, etc. Take the liner market as a whole, it is by
and large free for any line to enter or exit, yet technical and organizational complexity
and difficulties as well as the requirement of economies of scale for operating a liner
service have prevented the majority of shipowners from entering in the market.
Besides, there still exist lots of restrictive and protectionist practices in liner shipping.
Although nowadays traditional shipping conferences, which are protectionist by nature,

have seen their market share declining over last decades, new forms of shipping
cartels have appeared. Shipping pools, consortia, joint-ventures, alliances,
partnership, slot sharing, etc. may not seem to be directly threatening to the freedom
of shipping, various freight stabilization agreements are, however, having significant
impacts on the liner freight mechanism. Despite all these, nevertheless, competition
is not absent in liner market. Independent carriers and outsiders have been gaining
ground. Competition exists among shipping conferences as well. Thus liner shipping
market can be considered as a monopolistically competitive market.

Graph 8.3
In liner shipping, a company may have a kind of monopoly on the market in the short
run. The shipping company will be able to make a net profit by fixing the price at the
level when the marginal revenue is equal to the marginal cost, as illustrated in the
following figure. As in the short run, market (e.g. demand) fluctuation has little effects
on the freight level, the freight evolution curve appears to be stable in the
monopolistically competitive market of liner shipping.
8.2.3. Freight elasticity of maritime demand and supply
By looking at the tramp market freight curve over recent years, we may question why
the freight rates change so dramatically from one direction to another within a relatively
short period of time, while the demand itself may not have changed to the same
extent. This is a problem of elasticity of demand and supply, or in other words it is the
sensitivity of demand and supply to the changes in prices i.e. freight rates.
The fact that the chartering freight rates change greatly signifies that the market is not
price elastic. For discussing the problem of elasticity we shall focus on maritime supply
side to see the sensitivity of supply to the changes in freight rates. Supposing ship
supply was highly price elastic, a slight drop in freight rates, due to changes in demand
for example, will be quickly responded by the supply in the form of tonnage reduction,
which will consequently put the market back in balance and freight rates stabilized.
However, in shipping, the tonnage is not easy to adjust apart from changing ships'
sailing speed, which has merely limited effects. This is principally because of the
special cost structure of the shipping industry, which is characterized by the high fixed
costs in the short term.

Table 8.4
Cost Structure in Short Term
Bareboat Time Voyage Liner

Capital costs Fixed Fixed Fixed Fixed
Interest Fixed Fixed Fixed Fixed
Overhead -------- Fixed Fixed Fixed

Manning -------- Fixed Fixed Fixed
Repair & M -------- Fixed Fixed Fixed
Insurance -------- Fixed Fixed Fixed
Store, supply -------- Fixed Fixed Fixed
Lubricant -------- Fixed Fixed Fixed
Bunker -------- -------- Variable Fixed

Port charges -------- -------- Variable Fixed
Canal -------- -------- Variable Fixed
Cargo handling -------- -------- Variable Variable
As the variable costs are low, in the short run, if an owner does not want to lay-up his
ships (even ships are laid-up or dry docked, a substantial part of operating costs are
still to be paid by the shipowner and an extra reactivation cost has to be paid as well,
so it may turn out to be more costly operation), he will accept a low freight rate as long
as the variable costs are covered. Consequently, in the short run, the freight rate has
to change to a great extent to make owners to reduce the tonnage meaningfully. In the
same way the market (especially when all ships are in service and run at full speed)
cannot respond effectively in the short run when there is a shortage of supply.
Because any new ship tonnage planned to fill the gap can only be built in 1-2 years
time, by then the market might have changed again.
The figure below is showing that although the shipping company is suffering losses,
he still remains in the market because the price is higher than his short run average
variable costs (SRAVC).
Graph 8.4

Graph 8.5
Trends in surplus capacity by main vessel type 1990-1997
8.2.4. Long term trends
The above analysis is a brief explanation about the freight market mechanism in the
short term. It is true that the short term evolution of maritime freight market is so
volatile that shipping may turn out to be a highly risky adventure for those shipowners
who are financially weak e.g. those who have poor cash flow situation. It is worth
noting, however, that in the long run the market mechanism will always bring the
supply level in line with that of demand. This is simply because no shipowner, no
matter how strong its financial situation is, will be able to afford continuous loss by
covering only variable costs (note: state-owned companies may be able to sustain
bigger loss, but this situation is also quickly changing). Recent experience has shown
that if the market is not recovering and the demand has always been at a prolonged
low level, new ship orders will be held and more vessels will be laid-up or scraped. The
market will be in balance in the long run. The figure on the next page is a forecast,

which demonstrates the features of the market demand and supply in the long run.
While in the short term there is always supply surplus or deficit, in the long run the
market is in balance, or more exactly the imbalance will be within a normal range.
Even in the liner shipping market, the competition and market mechanism work
perfectly in the long run. Through competition, market force will bring the freight level
in line with average cost level of the industry. This is best illustrated in previous graph
showing the liner freight evolution from 1990 to 1994. In dollar terms, the freight rate
level on one liner route has been declining whereas that on other three routes have
almost been constant. It implies a veritable decrease in freight rates taking into
account the inflation factor of the currency. This drop in freight corresponds the
improvement of liner shipping productivity during the last 15 years. The graph on the
last page is more explicit as it shows the significant drop in the freight level of
container lines in 1989/1990 compared with the freight rate for conventional general
cargo. This is because bigger container ships were put in use, which resulted in an
extraordinary improvement in cost savings.
Graph 8.6

Chapter 9
ECONOMICS OF
MARITIME REGULATIONS
Chapter Objectives:
To describe the regulatory framework of maritime transport

To discuss the economics of shipping regulation
To understand the economic implication and benefit of maritime regulations
9.1 REGULATORY FRAMEWORK OF MARITIME TRANSPORT
Shipping, as we all keep on saying, is the most internationalized activity of human

being. It has to be so because ships are, by and large, operated on the open sea:
territory of nobody. Such internationalization is characterized by a high level of
freedom of the seas: the kind of freedom that no other industry enjoys. This has
once again been reconfirmed as recently as in 1982 by the UN Law of Sea
Convention, which came into force in 1994. According to the Convention, all
vessels enjoy a freedom of navigation in the contiguous zone, the exclusive
economic zone, the continental shelf and the high sea. In other waters, ships have
rights of access, innocent passage and transit passage.
The freedom of the seas does by no means imply an absence of regulation. It

requires however that the shipping related regulations are more international than
national. Although the first pieces of shipping started regulation and law can be
traced to as early as 15 century (Farthing 1997), the real development and expansion
of maritime regulation is something remarkably recent. The following graph is an
illustration looking merely from one of the regulated areas: maritime safety. It
shows that today, the situation of maritime regulation is highly complicated.
Graph 9.1
Growth in maritime safety regulations
(index 1800=100)
Broadly maritime related regulations can be divided into three distinguish

categories: technical regulations, economic regulations and social regulations. The
technical regulations concern primarily the problems of maritime safety: the safety
of life and property on board ships. Increasingly, technical regulations cover also
matters in connection to the protection of marine environment. The economic
regulations are those aiming at regulate maritime transport according to some
specific economic principles such as faire competition (anti-trust) or protection of
national fleet. The social regulations are to set up a framework for working
conditions of seafarers whether in the field of social benefit of seamen or of the
remuneration matter.
CHAPTER 9 156 ECONOMICS OF MARITIME REGULATION

Under the above three categories, the maritime regulations can be further divided
into sub-groups such as those regulations set up by professional bodies and those
by government agencies. Or they can also be divided into those established up at
national level and those at international levels.
9.1.1. Technical regulation
Professional regulations: classification societies

Technical regulations are set at professional level by the industry regulates itself for
the wellbeing of the sector as whole. The best example in this respect is the
classification of ships. The classification society originally started with the insurance
activities. Today a ship can not be insured unless it has obtained the class,
although there isnt such a law requiring shipowners to do so. The classification
certificate is the authority document showing that the ship is properly built and in
good condition. There are actually about a dozen of classification societies in the
world (the 10 biggest societies have more than 90% of the world market). Their
activities are similar which consist of conducting technical surveys and issuing
certificates.
Official regulations at national level

At the National level, individual countries set their own rules and norms in
connection to the technical aspects of ships and navigation. This can be examined
from two different angles. The first is the ships registration. A country that
regulates the ships under its registration is called a flag state. The flag state has
the responsibility and obligation to "exercise its jurisdiction and control in
administrative, technical and social matters over ships flying its flag, these include
maintaining a register of ships, their masters, officers and crews and taking the
necessary steps to ensure safety at sea, including regular surveys". The flag states
should "ensure compliance of their vessels with international rules and standards,
through adoption of the necessary implementing legislation and effective
enforcement irrespective of where a violation occurs." (UN Convention on the Law
of the Sea 1982).
A port state means the country the ports of which vessels, regardless of their flags,
are calling. Many international conventions (e.g. SOLAS) require the inspections to
be exercised by officers authorized by the port state in order to verify that the
necessary certificates and documentation are on board, complete and valid.
Whenever there are clear evidences to believe that such certificates and
documentation are incomplete, invalid or the conditions of the ship or its equipment
do not adequately in accordance with the certificates and documentation, the
officers have the power to prevent the ship from sailing until it can do so without
endanger persons, property and the environment. This is also called Port State
Control. Regional efforts have been made to coordinate the actions of port state
control of individual countries such as in Europe (Paris MOU - Memorandum of
Understanding on Port State Control), Asia (Tokyo MOU), the Mediterranean
region, the Caribbean region, etc.

Official regulations at international level

There are a number of international organizations involved in formulating
regulations in the technical aspect of maritime transport. The most important of all
is evidently IMO (International Maritime Organization). Other organizations which
cover not only maritime transport are, ISO for equipment (e.g. containers) and
quality standards, ITU (for telecommunication), etc.
IMO was established in 1948, with the purpose of providing machinery for
coordination between governments on technical matters affecting shipping in order
to encourage high safety standards. Such a technical role of IMO is reflected in the
conventions adopted in the field of maritime safety and marine environment
protection. Among the 14 IMO conventions, the most important are SOLAS
(International Convention for the Safety of Life at Sea 1974) and MARPOL (International
Convention for the Prevention of Pollution from Ships 1973). Other IMO conventions regulate
technical issues is respect of Tonnage measurement (Tonnage), Load Line (LL),
preventing collision (COLREG), standard of training (STCW), etc.
As the problem of safety and environment protection enter in the sphere of quality
of transport, therefore the technical regulations cover also those in relation to
quality assurance. Organizations that set up regulations relating to quality of
shipping services are IMO (e.g. ISM Code in SOLAS chIX whereby a Safety
Management System is required to be established) and ISO (ISO9000 and
ISO14000 series).
Graph 9.1
Technical Regulations
IMO ISO
Governmental level
Ratify Conventions Ratify
Flag IMPLEMENTATION / CONTROL Port

State State
Professional level
Classification Marine
Society Insurance
9.1.2. Economic regulation
Some regulations are established to achieve economic objectives. Governments

may see a specific importance of the shipping sector, which justifies the regulation
of the industry. At the national level, this takes often either the form of protection of

the national maritime interest or of safeguarding the health of the market (anti-trust,
e.g.).
Official regulations at national and regional level

Many countries have the regulations of cargo reservation or cargo preference in
favor of national ships. Such cargo can be for instance the government controlled
cargo or the cabotage cargo (between national ports). The definition of beneficial
ships varies from country to country. In the US, the cabotage is reserved, according
to Johns Act (Merchant Marine Act 1920), to vessels owned by US nationals,
registered in the US and built in the US. Today by and large, coastal shipping of
most countries is still treated as domestic traffic and is thus not open to foreign
participation. Some traffics, such as military materials but also the import of grain,
petroleum, are considered as strategic cargoes by the government and are
consequently reserved to the national ships for the transport.
Some national authorities regulate shipping market against monopoly or dumping

or illegal commercial practice. Obviously, the definition and interpretation of these
terms are always source of debate and disagreement. In the USA, Federal
Maritime Commission (FMC) is the body to monitor shipping market and in Europe
it is Directorate General VII (DG VII) of the European Commission that assume the
role. Recently, China also intensifies its regulation over maritime transport by
setting up the Shanghai Shipping Exchange.
Official Regulations at International Level

The organizations which have been active in regulating maritime transport at
international level are UNCTAD (United Nations Conference on Trade and
Development), WTO (World Trade Organization) and OECD (Organization of
Economic Cooperation and Development).
UNCTAD was established in 1964, with a standing committee on shipping. The

general objective of the Shipping Committee was to promote the participation of
developing countries in the maritime transport. One of the major features of
UNCTAD negotiation on maritime transport matters is that it is done between
blocks (groups) instead of between individual countries. Each block embraced
some countries along not only the line of common economic interest, but also of
the political identifications. There are four blocks, namely; the Group of 77 (the
developing countries of Asia, Africa and Latin America), the Group B (Developed
Market Economy Countries) the Group D (East European countries and Soviet
Union) and China.
During the period between 1960s to mid-1980s, UNCTAD was particularly active.
It produced a number of international conventions: The most well-known is perhaps
the UN Convention on a Code of Conduct for Liner Conferences, where for the first
time a cargo sharing formula was mentioned (the 40:40:20 principle). The situation
of UNCTAD maritime conventions as of June 1998 is shown in the table below.

Table 9.1
Signatures of UNCTAD Conventions on Maritime Transport
Number of contracting
parties or countries
Name of convention that have
ratified/acceded to the
convention
(as of 30 June 1998)
United Nations Convention on a Code of Conduct for Liner
Conferences, 1974 78
UN Convention on International Multimodal Transport of Goods,
1980 8
United Nations Convention on Conditions for Registration of
Ship, 1986 11
United Nations Convention on the Carriage of Goods by Sea,
1978 (Hamburg Rules) 25
International Convention on Maritime Liens and Mortgages,
1993 3
Source: UNCTAD Review of Maritime Transport 1998
As both political and economic environment has changed, especially after the late
1980s, UNCTADs role in the maritime transport regulations has dramatically
diminished. After UNCTAD IX (1996), the Shipping Committee discontinued.
However apart from the technical assistance activities, the influence of UNCTADs
involvement in shipping persists in many areas. Some countries, though the
number of them decreases, always use the Liner Code to regulate the liner market.
The recently adopted Convention on the Arrest of Ships (1999), together with the
earlier Convention on Maritime Liens and Mortgages (1993), is another example.
The involvement of WTO (formerly GATT) in maritime transport regulations is a

recent phenomenon. This came with the inclusion in the GATT discussions of the
service sector (GATS) in the last round of trade negotiations (the Uruguay Round).
Currently the maritime sector has not been included in the Uruguay Round due the
disagreement between major maritime countries. It was agreed that the negotiation
should resume in 2000. The impact of the inclusion of maritime transport in WTO is
far-reaching as the general GATT principles will then be applicable to shipping,
although exemptions are granted to countries in various circumstances. This
includes Market Access (which makes cargo protection illegal), National Treatment (which
means that foreign companies are to be treated the same way as national ones), Most-Favored
Nation (which means no discrimination is allowed between foreign companies).
OECDs regulations in shipping are mainly found in the shipbuilding aspect in the
field of government subsidy for the shipyard credit. As discussed in the previous
chapters, efforts are being made at OECD to eliminate all official subsidy in favor of
national shipbuilding industry.

9.1.3. Social regulations
At the social level, the regulations on shipping are first of all established by various
flag or port states. Yet, as far as international social regulations are concerned, the
most significant organizations are ITF at professional level and ILO at
governmental level.
ITF (International Transport Workers' Federation) represents the interest of trade

unions. It was created over a hundred years ago. It now has more than 400 trade
unions in around 100 countries. Although it covers all modes of transport, maritime
transport is not only the original but also the most essential aspect of ITF's
activities. ITF is against "flag of convenient" (FOC) and promote the remuneration
scheme for the minimum salary of seafarers.
At the governmental level, the most important international organization in the area
of social regulation is International Labor Organization (ILO). ILO is of the oldest
UN agencies which was started in 1919. It has produced more than 30 important
conventions dealing with the working conditions of seafarers on board ships. The
most influential conventions are
The officers' Competency Certificates Convention 1936 (32 countries
have ratified the convention). This convention requires all ship officers to
hold a valid certificate of competency.
A number of conventions establishing minimum standards, which are
often referred to as the "International Seafarers' Code". The Convention
on Minimum Standards in Merchant Ships came into force in 1981 and
has been ratified by 29 countries including major maritime nations.
ILO also made 4 conventions about port labor: The Marking of Weight Convention
1929, The Protection against Accidents Convention 1932, The Dock Work
Convention 1973 and The Occupational Safety and Health Convention 1979.
Regulations can be seen as intervention in the shipping activities. The regulations

in most cases generate a cost, which should be born by the society. However, they
are formulated and enforced because the regulators, whatever the nature or level
of them, believe that they are in the general interest of the shipping sector. But few
regulations have ever been smoothly implemented in a straightforward manner.
This is mainly because many people do not think that they are needed at all. To
them the regulations, even those with regard to technical matters, are a hindrance
to the development of the maritime sector.
To answer the question about whether a regulation is good or not, it is necessary or

not, how far it should go and to what extent it should apply, we have to look at the
economics of maritime regulations. This is an extremely important question, which
has been unfortunately overlooked in many occasions and places. The lack of
economic knowledge and analysis of the maritime regulation may be held
responsible for both chaotic situation where regulations are either absent or not
respected or the situation that is stuck due to over regulation.

The following section will concentrate on an economics of technical regulations in

the maritime sector and the analysis made and examples used are basically on
regulations in the areas of marine environment protection.
Graph 9.2
Regulatory Framework in Shipping
Economic Technical Social

regulations regulations regulations
UNCTAD IMO ILO

Liner code SOLAS Minimum
Ship Registration MARPOL Starndards
STCW Competency
WTO ISM Code certificates
Market access
National treatment ISO ITF
MFN Technical Seafarers' welfare
standards Minimum pay
OECD Quanlity
Shipbuilding standareds National
EU, USA, Classification regulators
Fair competition Society
Anti-trust
Anti-dumping Port States
National regulators Flag States
source: Ma Shuo (1999)
9.2 ECONOMICS OF REGULATIONS ON QUALITY, MARITIME SAFETY &

ENVIRONMENT PROTECTION
It may seem odd to carry out an economic analysis on environment protection

issues, as all human economic activity obtains its energy and material from either
the global ecosystem or the solar ecosystem and economic activity is, by nature,
human intervention in the natural environment. Ecology and economics are, in the
view of many, two conflicting systems. It is estimated that half of the net natural
output produced by environmental systems is now utilized by humans and the
margin for error in economic activities that can inflict irreversible changes on the
natural resource base is narrowing.

As far as the world ocean environment is concerned, the situation is no better.

Economic activities are threatening oceans: according to UNEP, every year
approximately as much as 1.5 million tons of oil from various sources are dumped
into the open sea. It is, however, not the objective of this chapter to discuss the
possibility of eliminating marine pollution. Because the elimination of marine
pollution can only be achieved by not producing polluting goods or services at all.
However, the law of thermodynamics implies that there can be no such thing as a
non-polluting product and very few, if any, as non-polluting service. To achieve zero
pollution, we would have to have zero economic activity or reduce economic
activities to a considerably low level, which are often illogical and not realistic. Take
maritime transport of oil as example. Oil transport presents a danger of pollution to
the ocean environment. The only way to eliminate that danger is not to transport oil
by sea at all. It seems that few people are ready to apt for that option at this stage.
This is because maritime transport of oil generates a benefit to the society and
most people believe that the benefit outweighs the danger. Nevertheless, it is
widely believed that the consumption of exhaustive resources can be planned so
that development can be sustainable and the pollution of the natural environment
can be managed and controlled so that the negative effects are not irreversible.
Therefore a meaningful discussion would be the one on the optimal level of
pollution which is acceptable and on how to reach it.
With regard to ocean environment, most of pollution comes actually from land-
based sources. Nevertheless, a significant amount of pollution is originated from
shipping and maritime activities in general. According to a UN source, in tonnage
terms, the most important pollutant resulting from shipping operations is oil. Such
pollution includes tanker and non-tanker accidents, pollution incidents during
terminal operations, pollutant enters the sea as a result of normal ship operations
and dry docking, etc. Although oil has been the best well known source of marine
pollution, other materials such as garbage and sewage from ships and many
chemicals carried by sea may be as dangerous as, or even more dangerous than,
oil to the marine environment.
Over the past decades, especially in recent years, an increasing number of marine
environment protection measures have been introduced both at national and
international levels. Some positive results have been registered. A 1990 report of
the US National Academy of Sciences indicated that oil pollution from ships had
decreased by 60% since 1980. Despite of the notable achievements made, it is still
widely believed that big marine pollution problems remain with us now and in the
future. Measures have not been applied with the same standards in different places
and regulations have not been implemented rigorously everywhere. A lot of
debates have been concentrated on the criteria of the most adequate and
appropriate level of environment regulations.
9.2.1. Optimal Level of Ocean Pollution
A certain level of ocean pollution can be tolerated in favor of maritime transport

activities mainly because the natural environment, e.g. the open seas, which
receives polluting products from ships and other sources, has a kind of assimilative
capacity. This means that it can receive a certain level of waste, degrade it and

convert it into harmless products. Consequently, one basic rule for ocean
environment management is to always keep waste flows to the sea at or below the
assimilative capacity of the environment.
However, the situation is not quite as simple as it appears. The natural assimilation
or the process of degradation and conversion can only complete over a certain
periods of time. Thus, a loss from pollution would be registered even the level of
pollution is within the environments assimilative capacity. In this particular regard,
shipping industry has been in an unfavorable position. Tanker accidents, for
instance, make up on average less than 10 per cent (4.7% in 1990) of the world
total oil pollution into the sea, yet oil tanker ships have been considered by the
public opinion as the major polluter of the sea. This is because tanker accidents
may lead to the spill of large quantity of oil during relatively short period of time and
within limited area, which will result in heavy losses before the polluting materials
can finally be degraded by the environment. On the other hand, if the rate is
appropriate, the discharge of oil from tanker ships into the open sea is believed to
be of little harm and thus allowed (e.g. a maximum rate of 60 liter per nautical mile
according to MARPOL 73/78),
The economic analysis of marine pollution is not only based on the physical effect
of the pollution such as oil spill, discharge of waste into the sea, etc., but it depends
also on peoples reaction to the physical effect. The peoples reaction can show up
as a form of economic loss or an expression of distaste, unpleasantness, etc. A
marine pollution (e.g. oil spill) is said to create an external cost to third parties such
as fishery or tourism industries. This external cost could be covered through a full
compensation by the polluter.
The introduction of external cost highlights the fact that the physical presence of
pollution does not necessarily mean that economic pollution exists. Discharge
limited amount of oil into the high sea does create physical pollution but it does not
necessarily generate a cost to a third party. Hence, it is not seen as an economic
pollution. Another notable feature is that even if economic pollution does exist, it
may not be the case that it should be eliminated. In Graph 9.3, the level of pollution
(P), as for example the amount of waste discharged, is shown on the horizontal
axis. Cost and benefit levels are shown on the vertical axis. MB is marginal benefit
of the polluting activity. MEC refers to marginal external costs generated by the
pollution to third parties. As the maritime transport gives rise to the pollution, with
other conditions remain constant, the more one produces, or the ship transports,
the higher the marine pollution level, and the possibility of it, will be.
Following the rule of declining rate of return, from certain moment as the level of
pollution increases, the marginal benefit of the polluting activity will slide down. The
higher the pollution level, the more difficult natural assimilation and the more costly
the pollution correction process will be.

Graph 9.3
Cost/Benefit
C D
MEC
MB
x
O P1 P Level of marine pollution

Q
Level of economic activity
As the MB and MEC are marginal curves, the area under CPO is the total benefits
and the area under DPO is the total external costs. If the aim of the society is to
maximize the total benefit minus the total costs, the optimal level of pollution is P1.
If the pollution (and the possibility of it) level is higher than P1, the marginal cost will
be bigger than the marginal benefit and it is better not to increase pollution. If the
pollution level or the possibility of it is lower than P1, benefit lost by reducing
pollution will be higher than the cost of its compensation if the pollution happened.
In this case, it makes sense not to reduce pollution level. For example, by
increasing the pollution level or the possibility of it, the ship will be able to make an
extra benefit after compensating the loss caused to the third parties.
The above equilibrium analysis is a theoretical explanation of the optimal economic

pollution level. In practice the reach of this optimization is not an automatic
process. The problem is that polluters and sufferers are difference bodies. Polluters
are mainly public or private companies or individuals while the external costs have
to be born not only by individual third parties but often also by the society as a
whole. It is unlikely that polluters would be self-bound to bring the level of pollution
to P1. by paying the corresponding compensation cost. As a matter of fact, if the
divergence between private and social cost is not corrected, the polluter will explore
all possibilities to increase profits and move the pollution level to P. In such a case,
the total net social benefit will be reduced. As the government is representing the
general interest of a society, government intervention becomes necessary for the
correction of this divergence in order to assure the economic optimal level of
pollution.
As the environment has an assimilative capability, ocean environment

management could be examined at two levels. At the first level, the degree of
pollution is not only within the oceans assimilative capacity but it does not generate
any economic cost. Therefore there is no need for intervention. To illustrate this we
may refer to the situation of marine pollution in the past when oil was not a major
source of energy and marine pollution was not so important an issue. When the
production is at a low level, pollution from ships can be within the environments
assimilative capability and incurring no economic costs. Similar situation can still be
found nowadays in some parts of the world where economic activities are mainly

carried out in a traditional way. This zero-economic-cost pollution level is illustrated,

in the figure 2, by OPo.
Graph 9.4
Cost/Benefit
C D
MEC
MB
x
O PO P1 P Level of marine pollution

Q
Level of economic activity
At the second level, the degree of pollution exceeds the natural assimilative
capability and an external cost occurs. In Graph 9.4, this refers to the pollution level
higher than Po. The objective of environment management at this level is to make
sure that the polluter covers this external cost. If this is properly done, the optimal
level of pollution can be reached. With other conditions remain constant, the
relationship between pollution level and economic activity is linear, which implies
that additional preventive measures may allow an increase in the economic activity
without resulting in a higher pollution level.
Ocean environmental costs can also be divided into two parts. One is related to the
compensation or correction of pollution effects at its optimal level. In Graph 9.4 this
is the cost represented by the area PoXP1. This cost can also be called corrective
cost. Examples for the corrective costs in ocean environmental management are
the clean-up costs for oil spills, or the compensation payment to a local community
for the relocation of its seaside activities due to a marine pollution, etc. If the
pollution level is lower than P1, the correction cost will be less than benefit, so the
polluter will increase pollution and pay for the compensation/correction cost. If the
pollution level is higher than P1, correction cost is higher than benefit, the pollution
level is to be reduced. The cost, which is involved in the reduction of pollution level
to P1 is the second part of environment management costs which is preventive
cost. Typical examples of preventive cost are the costs related to reception facilities
at ports, extra construction and operating costs for double bottom tankers, etc. The
prevention measures can help keeping the pollution not to exceed the optimal level
(P1). It is important to note that the preventive cost is worth spending only if it is
lower than the additional benefit that can be made due to the preventive measure.
To conclude the above, it is clear that zero pollution is not an realistic solution in
economics of environmental management, given the maximization of net social
benefit as an objective. Pollution and the possibility of it should be kept at an
optimal level where the marginal benefit equals the marginal external cost of
pollution. The cost for compensating the loss caused by the (optimal) pollution is
called corrective cost. To prevent pollution and the possibility of it from exceeding

the optimal level, preventive measures are required which incur preventive costs.
This means that in real life firms can increase polluting activities but keep the
pollution at the optimal level by applying preventive measures. Obviously,
preventive costs should not be higher than the extra benefit made out of the
increased activities.
As there is a divergence between private and social costs in the ocean environment
management, appropriate rules and regulations would be necessary to be
established and implemented. As marine pollution is mainly generated by profit
driven economic activities, the pollution should also be managed and regulated
based on economic principles. If this is so, the objective of environmental
management should be to maintain the optimal pollution level through relevant
corrective and preventive regulations.
9.2.2. Measuring Benefit And External Cost of Marine Pollution
The appropriate ocean environmental management can only achieve their objective
when the optimal pollution level is identifiable. There is, on the figure, a question of
identifying the marginal benefit curve and the marginal external cost curve of
pollution. The economic benefit of a maritime transport activity - an environmental
pollution source - will depend on a basic concept called individual preferences. By
aggregating the individual preference, we can secure total preferences for the
society. The benefit of having a polluting activity can be measured as the cost of
substitution, which is defined as the difference between the cost of carrying out the
polluting activity and the cost of the best alternative solution. For instance, oil
transport by sea presents a danger of pollution to the ocean environment. As we
are concerned with ocean environmental management, the question of benefit
depends on the cost of alternative transport mode if such a substitution is possible.
In most cases the only feasible alternative modes of transport of oil are road, rail,
inland waterway or pipe line transport. For instance, if the cost of sea transport of
oil is US$10 per ton and the cost of the best alternative mode is US$30 per ton,
then, roughly, the economic benefit of sea transport of oil is US$20 per ton. If the
alternative transport modes do not exist or they are too expensive (for instance,
apart from sea transport no other modes of transport seem feasible for the oil
export from the Middle East to Japan or North America), then it is not the sea
transport of oil but the oil itself that should be substituted. And the cost of not using
oil should be examined. In this case the economic benefit of maritime transport by
sea could be even higher.
The external cost of a pollution incident varies form case to case mainly depending
on the characteristics of polluting materials, magnitude of pollution, place and time
of pollution incidents and weather conditions, etc. To measure the external cost, we
should divide the cost into two parts on two different bases. The first part is the
direct external cost (such as cost of materials and cargo lost or damaged,
commercial benefit loss, time cost, etc.) and the cost of reversible loss and damage
(such as polluted water). The second part is the indirect external cost (such as
market reputation damage, economic opportunity loss, etc.) and the cost of
irreversible loss and damage (such as loss of life, damage of unique objects, etc.).

The measurement of direct cost and the cost of reversible loss and damage can be
relatively straightforward. For instance, in the case of oil spill incident at sea, this
cost is mainly the payment of the recovery of lost/damaged materials and the
clean-up bills. But with regard to the indirect external cost and the cost of
irreversible loss and damage, the calculation often turns out to be very
complicated. Often, this cost could be covered in a form of compensation to the
relevant sufferers. Such a cost corresponds, for example, to the compensation
payment to the fishery activities affected by the oil spill incident. The external cost
of a pollution incident can be measured by adding the two parts of cost together.
People argue rightly that the cost of actual use value, as we explained above, is
only a part of total economic external cost which should also include the loss of
option value (i.e. potential benefit of the use of environment) and the loss of
existence value (i.e. a value unrelated to use). To solve the problem of the
multiplicity of economic values in environmental management, one of the methods
of measuring the external cost of ocean environmental pollution is the willingness
to accept (WTA) concept. It is in fact the same principle as the individual
preference approach mentioned above for evaluating pollution benefit. WTA is
used to measure the external cost of a pollution incident. The idea is to find out
what people would accept as the amount of compensation to tolerate a pollution
incident.
9.2.3. Economics of Ocean Environment Regulations
WTA is a concept which seems correct in theory but difficult to materialize in

practice. Various economists have tried to find acceptable methods for the
measurement of WTA, but no method has been totally satisfactory and without
noticeable bias. However, if the attempt is not to obtain a mathematically precise
calculation of WTA for any particular marine pollution incident, but to get a
reasonable and economically correct principle for the evaluation of ocean
environmental management and regulations then we may have possibilities to
derive more merits from the WTA concept. As a matter of fact, it may not be
difficult to see that in real life, whether they realize it not, people do apply WTA
principles whenever they have a free decision to make on pollution related matters.
It is easier to start analyzing this principle by looking at an individual. If a person for

instance decides to live by a beach with certain degree of ambient pollution or a
potential pollution. It is said that his choice has been made freely in a rational
manner based on the weighing of benefits of living in alternative places. As shown
in Graph 9.5, the pollution level of the beach is at point P1. The curve W 1W 2 is the
willingness-to-accept curve of the person. All alternative locations are under his
WTA curve W 1W 2, i.e. no price savings are big enough to cover his loss given the
level of pollution. The amount Wa is the reduction in property price due to the
pollution P1 and this can be considered as the persons WTA (assuming that user
surplus is zero) for living in this location. The cost of pollution in relation to this
individual is the area W 1D1Wa. It is evident that different individuals would have
different WTA curves corresponding different cost. By adding up all such individual
cost, we obtain the overall external cost of pollution P1. If the pollution level
increases to P2, caused by a pollution incident or increased polluting activities, then
the extra loss of the person is the area WaD1D2Wb. This means that the person will

move away from the place unless he gets his WTA compensation -- i.e. a further
reduction of price to Wb is needed. Likewise, by adding this cost for all individuals,
we have the total external economic cost of environmental deterioration from P1 to
P2. In practice however, such an aggregate cost can, technically, never be
calculated with accuracy. What people can have, which could be sufficient for the
policy making in most cases, is an estimated total cost of reaching a specific
pollution level.
Graph 9.5
Reduction in property
WTA price due to pollution
W2
D2
Wb
D1
Wa
W1
O P1 P2 Level of marine pollution
For a given pollution level P, the WTA curve changes from person to person based
on various influential factors especially the income level. If we assume that the role
of other influential factors in the amount of individual WTA changes normally in line
with the income level, then an economic analysis of the two variables - income level
and WTA - can be carried out. Generally speaking, for a given pollution, the WTA
amount is higher for persons who have a higher level of income and the WTA is
lower for those with a lower income level. Not only personal income level varies
amongst individuals in a society, but each persons income level may change
constantly over time.
As discussed above, the optimal level of pollution is where the marginal benefit
curve and the marginal external cost curve intersect. There are two objectives of
environmental regulations. First, it is to ensure that the pollution above the natural
assimilation level is properly corrected and compensated. Secondly, it is to ensure
that the pollution is well prevented from exceeding the optimal level. However
because of the difference in income level, for any given pollution, the consequent
benefit and cost vary from person to person also from community to community
and from country to country. Thus there is no uniform optimal pollution level.
Clearly income level is not the only parameter to be taken into consideration.
Economic structure of a country or a region, for instance, plays also a role with
regard to the marginal benefit of the pollution. If we compare a country depending
on tourism with a country depending on petrochemical industry, we will find their
marginal benefit curve of ocean pollution resulting from oil transport to be
completely different.
The difference of optimal pollution level for different persons, communities, regions
or countries is illustrated in Graph 9.6. While country A has its optimal level at P1,

country Bs optimal level is at P2, which means that it benefits less from the
polluting activity but has to pay a high cost for corrective and preventive measures
due to, say, a higher national income. Likewise, country C may have its optimal
pollution level at P3 with higher marginal benefit level and lower marginal external
cost level with the pollution.
Graph 9.6
Cost/benefit
C
MEC2
MB3
MB
MEC
MB2
MEC3
Y X
Z
O Po P2 P1 P3 P Level of marine pollution
Level of economic activities
The difference in optimal pollution level is the biggest difficulty for policy makers
and the establishment and implementation of effective environmental regulations. It
is believed that the impact (both benefit and cost) of a pollution should determine
the application scope of relevant environmental regulations to see whether
regulations should be better implemented at regional or national or international
level. Once the scope is identified, ideally, environment protection regulations
should be made according to the optimal pollution level based on the average MB
and MEC so that the maximum net benefit is obtained for the society.
Although many countries have set up their own marine pollution regulations at
national level, ocean environmental problems, especially those related to the
pollution of oil transport by sea, are widely considered to have a world-wide impact
so that they should be dealt with at international level. This explains the
involvement of IMO in the establishment of a large number of influential ocean
environmental regulations.
The above economic analysis signifies that if an environmental regulation is

targeted at the whole world, then the optimal pollution level, based on which the
regulations are to be made, should be determined by the average benefit and
external cost of the pollution in question for all countries in the world. Such
average-figure-based regulations are certainly the most appropriate regulations
that will create the maximum value to the whole international community, although
they would be probably disliked by countries of both very high income and very low
income due to their different optimal pollution levels. To some extent, the large
gape between optimal levels of various nations generates difficulties for
environmental regulations at international level but it may justify the introduction

and implementation of some environmental regulations at regional or national

levels, provided of course that the major pollution impact is also region- or nation-
wide.
The International environmental regulations evolved by IMO are known as

conventions. These conventions tackle the problem of marine pollution in both
preventive and corrective ways.
Obviously, ratifying an international convention is by no means a simple outcome of

an economic analysis. Political and other factors play a role in it. Nevertheless in
many cases, economic considerations remain as an end objective and the decisive
element in the process. Two particular features about the introduction and
ratification of international conventions in the field of ocean environment protection
deserve a further discussion. The first is that some conventions, although adopted
by the Assembly meetings at IMO, have been ratified by only a small number of
countries especially at the first stage. The second is that most conventions are
introduced merely after big pollution disasters. Many people consider these two
situations to be a big pity for the effectiveness of ocean environment regulations
and protection.
However, the economic analysis of optimal pollution level may allow us to better
understand those particular features of international environmental regulations.
Very often, an international convention is aiming at some particular marine pollution
problems normally by either preventive or corrective arrangements. As per previous
analysis, we can say that:
Benefit of having the pollution = cost of not having the pollution (by
regulations)
Cost of having the pollution = benefit of not having the pollution (by
regulations)
When benefit of having the pollution = cost of having the pollution, the
pollution is at its optimal level. And likewise,
When benefit of the regulation = cost of the regulation, the regulation is at
its optimal level (because as long as benefit of regulation > cost of it,
stricter regulations should be introduced).
At the international level, when a new regulation is to be established, naturally

every country will examine the implications of the regulation to the country in terms
of cost and benefit. Those countries which consider that the benefit is equal to or
greater than the cost will accept the regulation and other countries will evidently not
accept the regulation. For those regulations (conventions) that the majority of
countries have ratified (and hopefully implemented too, as ratification can
sometimes be just a political commitment while implementation is more based on
economic decisions), the benefit must have largely exceeded cost for many of
them.
The fact that some conventions have been adopted by only a small number of
countries shows, probably, that the benefit of those conventions is considered by
many countries not to be bigger than the cost. As those countries develop socially

and economically, their WTA and MEC level for marine pollution and thus the
benefit of environmental regulation will change which will in turn alter their optimal
level of pollution. Clearly, such changes can lead to the countrys reconsideration of
the ratification and implementation of the conventions. Similarly, as countries
develop socially and economically, the cost of pollution (or the benefit of regulation)
may become higher which implies that stricter regulations are to be introduced (e.g.
the liability limits were increased in the IMO CLC and Fund Convention 1992
protocols).
International conventions in the field of ocean environment protection are often said
to be left behind the damaging incidents. It has been argued that regulation makers
should be able to anticipate pollution dangers and adopt conventions before
instead of after disasters. However, the economic analysis of optimal pollution level
demonstrates that the external cost of pollution includes an element measured in
WTA. People may not be able to fully realize the potential danger of pollution
disasters caused by some economic activities and be ready to pay for the
prevention of them by applying stricter regulations. In reality, peoples WTA may
only increase dramatically to a higher level after big pollution events. It is true that,
in this respect, the media can play an important role in influencing the WTA level.
Any changes in the substitution cost for polluting activities will have major impacts
on economics of environmental management. Improvement in maritime transport
technologies in connection with marine pollution control, for instance, may mean
that the substitution cost of a polluting activity is reduced and it can in turn be
considered as a drop in the benefit of having the old and more polluting transport
technology. Consequently as the MB curve changes, the optimal pollution level
would be lower which then justifies the introduction of stricter regulations.
9.2.4. The cost of safety and environment protection in shipping
Quality is not free, but it pays back. Costs related to safety and environment
protection or quality of shipping can be divided into two parts (1) the preventive and
appraisal costs. Such costs may include the expenditure related to design review,
special training, audits, quality planning, prevention equipment and activities,
quality measures and qualification, test and inspection equipment and activity, etc.
(2) the failure cost or the losses. This cost may include design changes, client
rejects, re-deliver, fault finding, insurance, warranty, commission loss, etc. If there
is no quality investment in preventive and appraisal measure, the failure cost will be
high. On the other hand if the failure cost is to be brought to a very low level, a high
preventive and appraisal investment will be needed. The economic principle
described above implies that a trade-off between the two cost elements is required.
The optimal level of both costs will be found when the total cost is at the minimum.

Graph 9.7
Optimal quality investment
It is difficult to estimate the exact cost of quality in shipping as not only the number
of variables affecting it is big but also the investment in quality may be direct or
indirect, short term or long term. As a matter of fact, investment in quality has a
long-term positive effect, although, more than often, it gives a negative financial
return in the short run. This is the essence and real meaning of sustainable
development. Any reasonable and responsible enterprise will certainly be eyeing its
over all benefit and profit in the long run. The following graph illustrates this specific
feature of quality investment, i.e. short-term loss versus long-term gain.
In some industries, quality related costs vary between 5% and 25% of the total
turnover. In shipping, the SOLAS convention for instance has included a safety
management code (ISM Code), which requires a safety management system to be
set up by the shipping companies. It is estimated, depending on whether such or
similar system has already in place, that the implementation of ISM Code may cost
a shipping company as high as US$400,000 as introduction cost and another
US$25,000 every year.

Graph 9.8
Effects of quality investment
Table 9.1
Indicative safety and environment protection cost rise by shiptype
(average annual recurring cost plus annualized capital cost over period 1998-2202)
In US$ '000
During the recent years, the number of international regulations in relation to

maritime safety and environment protection has increased dramatically. There is

clear tendency that more and stricter regulations will be expected to come in the
shipping industry. Consequently, such a movement incurs an additional cost to the
shipping companies. The table below is an illustration of the estimated additional
cost that the shipping industry has to bear as a result of the new conventions
(amendments).
New trends: deregulation and re-regulation
Most polluting economic activities generate a benefit and at the same time an
external cost to the society. The main objective of environmental management is to
ensure, through appropriate regulations that the pollution is kept at its optimal level
at which the maximum net benefit can be made. The scope of pollution impact
should determine the level of the application of environmental regulations.
Therefore, at each level there are two changes that would lead to the introduction
or the modification of environmental regulations. One is the change in marginal
economic benefit curve due to new economic/technical development and structure.
The other is the change in marginal external cost curve due to higher income level
and peoples increased sensibility to pollution, increased cost of pollution correction
and compensation, etc. Because of the different optimal pollution levels among
countries and regions, the introduction of environmental regulations on world-wide
bases have not been a very smooth and automatic process. It is in this sense that
wherever the marine pollution is considered to affect only local environment, it
might be advisable that locally applicable regulations should be established, based
of course on local optimal pollution level. However this alternative does not solve
the problem of the pollution which has a global effect and for which regulations are
only meaningful if they are made and applied at international level. More and more
national as well as international decisions on environmental regulation issues are
increasingly being influenced by public opinions. The national public opinion on
environmental issues can be seen as having a direct link with the countrys WTA.
Obviously awareness is playing a decisive role in the level of WTA. Many people
whose work or life is not directly related to marine environment situations may not
be able to realize, correctly appreciate and evaluate the economic and
environmental implications of the marine pollution. Therefore, providing information
through education, training, public media and other channels can be of great
importance to alter peoples WTA levels and thus the public opinion. Only when
people are fully aware of the cost and benefit of ocean environmental pollution, true
optimal pollution level can be identified and the adoption and implementation of
appropriate environmental regulations can be less difficult and more effective.

Chapter 10
TRANSPORT AND SHIPPING

INDUSTRY IN TRANSITION
Chapter Objectives:
To explain the main aspects of transport economics

To describe some specific features of shipping industry
To discuss the development trends of maritime transport
10.1. TRANSPORT ECONOMICS
The aim of the following sections is to provide an introductory and overall view on
transportation economics. Maritime transport, as a mode of transport, carries all
common features of the transport industry, while at the same, it has its specifications
and particularity of its own. One should keep in mind that maritime transport is merely
an integral part of total transportation. It is rare that such a movement of persons or
freight starts or ends with maritime transport. It is under such an understanding and
in this perspective that two objectives have been set for these lectures on transport
economics: 1) to study the common aspects of transport economics, 2) to appreciate
maritime transport in the context of transport as a whole.
10.1.1. Transport and economic development
Before the development of railway transport in the early 19th century when steam
engine and locomotive were invented, over land transport was slow, expensive and in
small scale. Water transport was the only means of long haul movement of freight as
it was less costly than land transport. Consequently, the world's largest commercial
capitals were mostly port cities. The improvement in transportation has had multiple
effects on economic development of human beings.
Transportation makes goods available in distant places. Nowadays, just looking

around and observing what people eat, wear and use, we can realize how many
goods that we consider necessary, or even indispensable in our daily life are not
produced locally. Imagine without those things which have been made available
to us, or have some of them but at a price of a local production, how our life will
become. A rough estimate suggests that in such a situation, one would be 80%
poorer than before.
Transportation equalizes markets. It equalizes prices (of goods, property/land,

etc.), as it facilitates exchanges. Land prices increase when transport services are
available or improved. Distance is a natural barrier which differentiates various
markets. Transport, by definition, is an activity to move goods and persons over
distance, therefore it brings markets together and consequently it reduces the
differences amongst markets. As transport becomes more efficient and cheap,
differences will further decrease and markets (prices as well as conditions of
production) away from each other equalize. This has already happened in places
between which effective and efficient transportation system exits and this is
becoming increasingly true on a global basis as the situation of transport in general
is improving.
Probably the most important role of transport is that it equalizes the economic
development among different regions and areas. Transportation does not only
carry goods and people, it brings ideas, knowledge and equalizes the level of
wealth and job opportunities. It helps people develop and explore internal as well
CHAPTER 10 177 TRANSPORT AND SHIPPING INDUSTRY IN TRANSITION

as external markets. Ultimately it enables a rich country to be better off and a

poorer country to get rid of poverty.
Transportation enhances specialization, thus increases economic efficiency.

As transportation enlarges the market by making cheaper and better products
available in remote places, it leads to a larger scale of specialization. Imagine
without efficient transport, everything needed had to be produced locally, whether
or not right expertise or other inputs exist. This was very much the case in pre-
steam-engine era and this is still the situation in some places nowadays where
adequate transport facilities and services are lacking. As specialization develops,
large-scale production will be possibly organized and subsequently, efficiency and
productivity will certainly improve.
Transportation facilitates the process of economic globalization.

Today's economic globalization process, which is changing the world and almost
every aspects of our life, would never have come true had a modern transportation
system not been in place. It is the efficient transport, together with
telecommunication, that makes distance shorter and the world smaller.
Transport makes the globalization of national economies possible.
It is to be noted that better transport not only globalizes production, it globalizes

competition, market. It challenges even local commercial practices and forces
policy makers to review their policy measures in a new and global context.
The effect of transportation on social-economic development of a region or a country

is big and far-reaching. Yet putting an effective transport system in place is not easy.
Transport is a special sector which is difficult and expensive to set up and operate.
10.1.2. Characteristics of transport
Transport economics is mainly a part of applied microeconomics. Although standard

theories and techniques of economic analysis apply in the transport sector, transport
economics faces a number of specific problems and has particular characteristics that
justify its consideration as a specific branch of the discipline.
Apart from the facts that the demand for transport is a derived one, which is totally
dependent on trade; that each voyage is unique in time and space and that the supply
of service cannot be stored or transferred, transport sector in general has also the
following common characteristics.
Monopolistic situation
Because of the specific requirements in the infrastructure, the limitation of the
available facilities on one hand and the needs for scale economies on the other,
there is more than often a situation of natural monopoly in the transport sector. For
instance, in most cases, a nation has only one single railway service provider, one
airline company, or one shipping firm or a city has one public transport system. In
most countries there are always limited number of ports and airports in each
region.

The danger of monopoly is that the producers could restrict output and force up
prices, especially in the short run. Therefore, it gives the justification for the state
intervention in transport. State intervention in transport takes different forms from
implementing regulations to setting up state-owns companies. The drawback of
state-run transport is, as it is generally believed, the lack of efficiency. Therefore
how to choose between monopoly and inefficiency, or how to avoid both, has been
a lasting topic of debate.
Social cost and effects

An airport will bring planes to a region and boost local economy. But at the same
time, it will disturb the quiet life of the neighborhood. Transport is polluting air and
it may create congestion. There is a social cost incurred by transport. Transport is
also very much an important source of accidents which often result in heavy social
cost in the form of the loss of life and/or property and may sometimes lead to more
serious pollution.
Infrastructure investment requirements

Compare to other industrial or service sectors, transport is very capital intensive in
the sense that large investment is needed in the building of transport infrastructure.
Railways, roads, ports and airports are expensive to build and maintain. It also
takes a long time to complete such construction work. The heavy investment
makes the pricing in transport sector difficult and complex. The requirement in
capital investment and the relatively long pay-back period form another reason for
the state intervention in the transport sector, as the private sector may be unable
or unwilling to be involved.
10.1.3. Different modes of transport.
There are six modes of transport to be distinguished: rail, road, sea, air, inland
waterway and pipeline. An economic comparison of transport modes is made
through the following table.
The economical distance varies amongst different modes of transport. In general, a

transport user can choose appropriate modes of transport and carriers to ensure the
supply of materials or the distribution of products depending on his specific
requirements. No matter what mode of transport he chooses, in general the longer
the distance the greater the transport expenses that he must bear. However, it is
common in all transport modes that cost does not increase in direct proportion with
distance. This is mainly because there are terminal costs, for example, terminal
charges, the costs of cargo loading and discharging, packing, insurance,
documentation and formalities, and the cost of time lost in relation to terminal
activities.

Table 10.1
Comparison of Major Transport Modes
Rail Road Sea Air Inlandwate

r
Speed Low High Very low very high very low
Cost saving high low Very high very low very high
Reliability very high very high high high high
Safety very high high high very high very high
Flexibility low very high Very low low low
Availability low very high low high very low
Environment friendly good very poor Very good good very good
Infrastructure cost very heavy heavy Heavy heavy various
Infrastructure maintenance high high Low low various
cost
Vehicle size <3000 t <40 t >3000 t <100 t <5000 t
Door-to-door potential low very high Very low low very low
Suitable cargo (packing) All general all general all
cargo cargo
Economical distance Long short Long/very long/very long
long long
As the transport service in the great majority of cases includes terminal activities, the
cost of transport then is very much determined by the relative proportion of terminal
costs to total transport cost. Comparatively, for those modes of transport and/or
types of vehicle of which terminal costs constitute a bigger part in the total costs, the
slope of the curve of transport cost will be flatter with increasing distance.
Consequently, such modes of transport and types of vehicles are more competitive
in long distance transport rather than in transport over shorter distance. The following
graph reveals this point.
Graph 10.1
Relationship between distance and cost for different transport modes
Air
Road
Rail
Sea
cost
distance

Main international conventions concerning transport business
Sea transport
The international convention on the Unification of Certain Rules of Law relating to
Bills of Lading (hague Rules)
The Protocol to amend the Brussels International Convention of 25 August 1924
for the Unification of Certain Rules of Law relating to Bills of Lading (Visby
Protocol or Hague-Visby Rules), (amended by the 1979 Protocol)
The United Nations Convention on the Carriage of Goods by Sea (Hamburg
Rules)
Road and Rail transport

The Convention on the Contract for the International Carriage of Goods by
Road (CMR)
The International Convention concerning the Carriage of Goods by Rail
(COTIF/CIM)
Air transport
The Convention for the Unification of Certain Rules relating to International
Carriage by Air (Warsaw Convention)
Port
The United Nations Convention on the Liability of Operators of Transport
Terminals in International Trade (Vienna 1991)
Intermodal transport
The United Nations Convention on International Multimodal Transport of Goods
(MT Convention) and The UNCTAD/ICC Rules for Multimodal Transport
Documents
Major International Transport Organizations
Air transport
ICAO (a UN agency, 1944) International Civil Aviation Organization
IATA (NGO, 1945) International Air Transport Association
Sea transport
IMO (UN, 1948) International Maritime Organization
BIMCO (NGO-1905) The Baltic and International Maritime Council
ISF (NGO) The International Shipping Federation
INMARSAT International Maritime Satellites Organization
Ports
IAPH International Association of Ports and Harbors
ICHCA International Cargo Handling Coordination Association
Transport in general
FIATA International Federation of Freight Forwarders Association

10.1.4. Infrastructure
For all modes of transport, it is important to distinguish infrastructure from transport

services. Infrastructure includes not only the construction but also the maintenance
and operation of it. Transport services mean those services provided by
transportation companies with transport vehicles. The two sectors are quite different
from technical as well as economic points of view.
The transport infrastructure has the specific feature of indivisibility which is reflected
in the extremely high portion of fixed cost in the total costs. The following economic
features are to be identified with regard to the two sectors: infrastructure and
services
Transport infrastructure has a declining average total cost (ATC) curve. This is
because the reserved capacity is generally quite significant, although the situation
could be very different from one place to another. Therefore, the marginal cost
curve is constantly below the ATC curve.
cost
ATC
Marginal
traff
Consequently, based on the maximum customer benefit principles a marginal

cost pricing should be applied which implies an operation of transport
infrastructure in deficit. Average cost pricing can help the firm from making a loss,
but it distort the best (efficient) allocation of resources by having an optimal level
of output. This explains to some extent why states are involved in transport
infrastructure activities.
The above graph also shows that the marginal cost curve in the transport
infrastructure is in most cases increasing, though the increase is always at very
limited level.
10.1.5. Competition and service substitution in transport
As we previously said that in the transport sector, there is tendency of natural

monopoly. This does not mean, however, that competition is totally absent. As a
matter of fact, the degree of competition in transport industry has been increasing
during recent years. One important indication of this is the constantly declining prices
or transport freight rates. Benefits of cost savings in the transport sector have been
mostly or sometimes entirely passed on to the users. The principal reasons are:
1. Deregulation

2. Advanced technology (especially in the telecommunication aspect)

3. Improvement in infrastructure.
Transport competition is focusing on

1. Service quality
2. Total price
3. Transit time
Transport competition is coming from

1. Other service providers within the same mode of transport
2. Other modes of transport
3. Freer movement in capital, people and know-how
10.2. FUTURE DEVELOPMENT TRENDS OF MARITIME TRANSPORT
Maritime transport is one of the oldest activities of mankind. At the same time it has
always been one of the most free and open industries. It has the most developed and
complex market system with the most sophisticated market segments. It is one of the
most internationalized activities in the world. It is one of the most capital-intensive
private sectors. It embraces almost all new developments of transport and
telecommunication technology. It is one of the few economic sectors that have made
tremendous contribution to the world economic development in general and to the
formidable process of economic globalization in particular.
Maritime transport is a business that:
You can get in easily
You can get out quickly
You can earn money easily
You can loose it quickly
You can participate slightly
you can be involved heavily
You can look at it as a game
You can treat it as a mission
You can operate ships by direct control form a port

You can operate ships by remote control from an inland place
You can do it alone
You can do it with many others
You can have ships without being a shipping company
You can be a shipping company without having ships
You can operate in the most traditional way
You can operate in a state-of-the-art manner
MARITIME TRANSPORT IS INDEED AMAZING AND STIMULATING !
Risks and profitability
Maritime transport offers a formidable opportunity with plenty of choices and

alternatives for the ambitious young managers. Maritime transport is by and large a
business of risks, due to free and severe competition, volatile market and high fixed
costs. This is particularly true in tramp shipping. However it can also be very lucrative,
especially when market is in its up-turn. That has exited and attracted many able and
clever people to come, but from time to time speculators and crooks have come too.
Many people believe that there is no rule of win in shipping except ones luck. The
relationship between risks and profitability may be linear in shipping which simply
means that generally you can expect to make a quick fortune, sometimes very quick
as many people have done, only when you are prepared, financially and
psychologically, for a bigger loss.
We argue however that shipping is not always a simple question of risk taking, it is
more often a question of competence and increasingly a question of strategy. Are you
clear about your strengths and weaknesses and your competitive advantages. Are you
ready to share the revenue with others? Besides, what is extraordinary in maritime
transport is that people can have much more possibilities and options of doing
business than they have in other activities.

Cost structure of a representative container line
Options for being involved in Maritime transport
To be as a shipowner in (with various degree of involvement):
The most comprehensive liner company offering logistics services

Port to port transport liner company
Liner service through joint ventures
Voyage chartering based
Short medium term time chartering based
Long term time chartering based
Bare boat chartering / ship leasing
Simple share holding
To be as a maritime service provider in (with different shipping related

activities):
Ship and equipment building

Ship registration
Ship inspection and classification
Crew services
Insurance service providing
Brokerage and agency and freight forwarding
Nvocc activities
Ship repair/equipment leasing
Cargo handling/warehousing
Consultant & training services

Ship management services.
When you leave WMU, you may be able to modify these two lists and probably make
them longer. The attraction of shipping may exactly be in its variety and uncertainty.
People in shipping should feel lucky for having those alternatives that their
counterparts in other activities do not have.
Globalization and the Challenge to Maritime Policy
The government's attitude towards shipping can sometimes play an important role in
the development of a country's maritime industry. Such an attitude is generally
expressed through various measures taken by the authorities, which can be called the
national maritime policy. Maritime policy can be understood as an integral part of the
overall economic policy of a country. It embraces regulatory, financial and fiscal
measures to be employed by authorities in relation to the countrys maritime transport
sector.
Many people believe that maritime policy is of great importance to the development
of shipping and the related activities. This is to say that having or not having authoritys
involvement and the kind of involvement in the maritime sector may make a big
difference. As a matter of fact, a great number of WMU research projects have been
written on policy issues with recommendations formulated to the attention of national
policy makers rather than anybody else. Maritime policy of a country is a system
consists of a number of specific policy measures in connection with different areas.
These policies should be consistent and interrelated.
If maritime policy is an integral part of the countrys general economic policy, This
policy then should to be formulated based on two understandings. The first is what is
the role of maritime transport in the development of the country and the second is what
measures are really needed to be taken for the general interest of the maritime sector.
In other words, how to enhance the effectiveness of maritime policy measure in the
short and long term. The first understanding is straightforward. From the discussion
of maritime economics, we all know what the role of maritime transport in a countrys
development is. As almost every country in the world nowadays has recognized that
international trade development is the only way that can lead a country out of poverty
towards prosperity. And about 90 per cent of world international trade in volume is
moved by sea (the percentage is even higher for most countries of our students), the
vital role of maritime transport is self-explanatory.
The second understanding is however much more diversified and deserves more in-
depth discussions. Nowadays, few people deny the important role of maritime
transport to a country, but people often disagree on who should play that role. Is it
worth helping national maritime sector to grow or better spending the resources
elsewhere and let others, wherever possible, to fulfil the role? Certainly, the ultimate
and fundamental question may finally be of the objectives of maritime policy. Is the
building of a countrys maritime power is itself an end objective or this is rather a
means to achieve something else? Assuming that the policy objectives have been

clear and a great majority of people are in favor of a policy that helps the development
of national maritime transport sector (to some extent, that is why people come to
WMU), then the whole question becomes how to help and regulate or in other words
what policy measures should be taken and how to take them.
According to their own environment and understanding of maritime policy, different

countries may employ similar or different measures to help the countrys maritime
transport sector. What seems a little bit paradoxical in this aspect is that in many
cases same policy measures adopted by different countries have led to totally different
results. On the other hand, different policies employed in two or more places may lead
to almost identical results. While the rich and less rich countries are constantly
questioning the effectiveness of their own maritime policy and trying to figure out why
it has not brought the expected results, other countries provide serious challenges to
the basic ideas altogether. What the Greek authority has done in the building of its
immense fleet. Somebody says, very little or much less, at least, than many other
countries whose merchant marine industry has poorer performance. It is true that their
ships are relatively old, that they are not in liner market and they general dont service
the countrys trade. All these are correct, but still they have the world biggest fleet. If
we visit the two biggest container ports in the world - Hong Kong and Singapore, we
will find a lot of similarities between them in size, productivity and efficiency. But what
are the authoritys port policies behind them: they are completely different. In Hong
Kong the authority is doing very little, while in Singapore it does almost everything.
How to explain this and many other examples both positive and negative?
There are three possibilities: 1) maritime policy is irrelevant, 2) successful countries

are lucky to just have adopted the right policy, 3) there must be something else that
have been missed by some policy makers but are vital for the success of maritime
transport sector. What it is true is that as far as maritime policy measures are
concerned, a lot of things remain to be discussed and discovered.
Apart from the above-mentioned challenges to the maritime policy, there is another
aspect, which has become increasingly an urgent issue. That is the scope of maritime
policy and the effect of globalization on it. We have been saying that the policy we are
interested in is at the national level. Or it is about the governments attitude towards
the maritime transport sector. But it seems that this definition has been less relevant
day by day. Two major reasons should be cited for the explanation of this point.
The first is that the effect of maritime sector has never been restricted to within the
national boundaries, and it is more internationalized nowadays. Safety and
environmental problems are those that can be better solved at global level. The role
of international organizations, like especially IMO, but also ILO, OECD, ITF, WTO and
also regional ones such as EU, is constantly increasing. This of course may and does
modify the nature of national policy. More and more national policy makers find their
ability of making or changing policies being subject to the pressures from foreign
countries and international bodies of which they are a member. Generally speaking,
the scope of manoeuvring left to national authorities as regards their maritime policy
issues is shrinking in favor of regional (e.g. EU) and global institutions (e.g. WTO) on
one hand and of increasingly powerful multinational companies on the other. This
trend is most likely to continue in the future.

The second reason to mention is the current process of integration of national

economies into a global economic system, i.e. globalization. Shipping has always been
international whereby a mixture of inputs from various country origins is found in a
single shipping activity. However, not only this tradition has been largely generalized
in virtually all economic sectors, in shipping itself, new development has been
observed. Flag, capital, accounting, crew, management and operation, marketing, etc.
all are being fragmented and piece-by-piece being globalized to an ever greater
extent.
Until recently, ports had been well sheltered as a pure national activity. No more, such
a picture is fading out too: port investment and operation have become an emerging
international business. All this makes up a serious challenge to the policy makers in
a country, in the form of the lost traditional identity of the object of policy. Nowadays,
the question about the maritime transport is a simple, but it can also be very
complicated one: Who are they? Only after answering this question, one should
proceed to detailed policy measures. Again, in this respect, there is a lot to discuss
and discover.

Reference readings
General coverage
Lipsey R. G. An introduction to Positive Economics 1987
Samuelson P., Nordhaus W. Economics 1990
Stopford M. Maritime Economics 1997
UNCTAD Review of Maritime Transport various years
Evans J., Marlow P. Quantitative Methods in Maritime Economics (1990)
Goss R. Studies in Maritime Economics 1970
Sturmey S. G. British Shipping and World Competition 1962
Maritime Policy and Management Magazine, various issues
SSY Consultancy and Research Annual Shipping Outlook, 1998
Chapter 1.
Rinman The commercial history of shipping 1983
WTO Annual report (vol. 1&2) 1998
Abrahamsson B. International Ocean Shipping 1980
Chapter 2.
ISL Shipping Statistics Year Book, various years
SSY Consultancy and Research, Annual statistics
Fearnleys World Bulk, various years
OECD Maritime Transport and other publications, various years
UNCTAD Imbalance of Demand and Supply
Chapter 3.
Alderton P. Sea Transport, Operation and Economics 1995
Rayder S., D. Chappell Optimal Speed and Ship Size for the Liner Trades
(1979)
Containerisation International, Yearbook, 1998 and various years
Paris MOU, Annual report 1998
Tokyo MOU, Annual report 1998
Bimco & ISF A survey on world seafarers' market - Manpower Update, 1995
189 REFERENCE READINGS

Chapter 4.
Metaxas B. The Economics of Tramp Shipping (1981)
Branch A. E. Economics of Shipping Practice and Management (1982)
Gilman S. The competitive dynamics of container shipping 1983
International Symposium on Liner Shipping VI, Conference Report 1998
Chapter 5.
UNCTAD A Handbook for Port Planners (1990)
Baudelaire Port Administration and Management (1986)
Gorton B., Ihres, Sandervarn Shipbroking and Chartering Practice (1999)
UNESCAP Handbook on Freight Forwarding (1990)
Loyds List Why brokers should learn from the Luddites April 8, 1999
Various websites of shipping companies (OOCL, APL, Maersk, Sealand,
Evergreen, etc)
Chapter 6.
Stopford M. Maritime Economics (1997) (chapter 2, 5, 6)
Drewry Shipping Consultant Shipping Finance and Investment (1983)
Peter Stone Ship Finance (1997)
Paine F. Financing ship acquisitions, 1990
Lloyds Shipping Economist various issues
Chapter 7.
Downard J.M. Running costs 1982
Goss R. Advances in Maritime Economics 1982
Akatsuka Maritime labour standards, Proceedings of WMU Maritime Policy
Seminar 1996
Chapter 8.
Bennathan E., A. Waters The Economics of Ocean Frieght Rates 1969
Chrzanowski Shipping Economics 1985
Drewry Ship cost in the 1990's - the economics of ship operation and ownership,
1994
Chapter 9.
McBurney S. Ecology into Economics Wont Go Green Books 1990
Pearce D.W. & Turner R.K. Economics of Natural Resources and the
Environment 1992
P&I Club (UK) Analysis of Major Claims 1998
INTERTANKO Annual Report 1997
Sustainable Development for Ports UNCTAD Unctad/Sdd/Port/1 1993
National Academy Press Washington D.C. 1994

The Protection of the Marine Environment Amended Act No. 181 Ministry of the
Environment, Denmark, National Agency of Environmental Protection 1987
Drewry "Cost of Quality in Shipping" 1998
Farthing B. International Shipping 1997
Chapter 10.
Locklin D.P. Economics of Transportation
Thomson J.M. Modern Transport Economics
Stubbs P.C., al. Transport Economics
Cjrzampwslo I. Shipping Economics and Policy 1979
Journal of Transport Economics and Policy, various issues
World Bank Annual report (various issues)
World Table (various issues) The World Bank

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World Maritime University

1. Introduction to maritime economics

2. Demand of maritime transport

How is the maritime

How is the maritime

Where do the demand

6. Maritime transport cost

7. Cost analysis and principles of pricing

8. Maritime freight market

What are the rules of

Where is the 10. Transport and shipping industry in transition

List of references and extra reading 195

To understand the basic concerns of maritime economics

1.1 ECONOMICS AND MARITIME TRANSPORT

As defined in an economics textbook (Lipsey 1992), economics concerns:

Maritime economics described

The questions that maritime economics covers are, for instance:

CHAPTER 1 2 INTRODUCTION TO MARITIME ECONOMICS

proposed and perhaps built by 2003 in 1996 a feasibility study started to

Maritime transport markets

What is a shipping market? Literally a market is a physical place where

CHAPTER 1 3 INTRODUCTION TO MARITIME ECONOMICS

Scope of maritime economics

Maritime transport is a complex system, which can be subdivided into several

CHAPTER 1 4 INTRODUCTION TO MARITIME ECONOMICS

Ship registration and National and Shipbuilding

Bunkering, provision Insurance, Second-hand market,

Source: Ma Shuo (1999)

Maritime economics concentrates on the economic decisions of shipping

Special features of shipping industry

The particularity of international shipping industry as compared to many other

CHAPTER 1 5 INTRODUCTION TO MARITIME ECONOMICS

The dependence of shipping on world trade results in maritime transport

2. Openness and freedom is the second feature of maritime transport.

3. The overwhelming sources of competitiveness of maritime transport are the

CHAPTER 1 6 INTRODUCTION TO MARITIME ECONOMICS

4. Shipping is a marvellously well-structured and well organised industry. Again,

To study maritime economics, the above features of shipping industry have to be

1.2. WORLD ECONOMY AND INTERNATIONAL TRADE

The logic of trade

Due to natural and economic reasons, a specialization occurs in the production of

- Labour (differences in costs, habits, regulation...)

Two attitudes towards trade

CHAPTER 1 7 INTRODUCTION TO MARITIME ECONOMICS

self- or auto-sufficiency with the aim to ensure the economic independence of

Basic trade theory

For example: differences can be found in production factors such as natural

We can illustrate the absolute advantage by a concrete example of paper produced

CHAPTER 1 8 INTRODUCTION TO MARITIME ECONOMICS

Even when the difference in the factor of production between countries is

CHAPTER 1 9 INTRODUCTION TO MARITIME ECONOMICS

Nowadays, it is mainly the Graph 1.3

CHAPTER 1 10 INTRODUCTION TO MARITIME ECONOMICS

source: compiled from WTO World trade in 1997

source: WTO World Trade in 1996 (1997)

CHAPTER 1 11 INTRODUCTION TO MARITIME ECONOMICS

Recent trade development

World exports World output World GDP (volume)

Source: World Trade Organization, Yearbook 1998

CHAPTER 1 12 INTRODUCTION TO MARITIME ECONOMICS

1. The open market economic development policy has been adopted by an