Contents :
FACTORS AFFECTING DEMAND FOR SHIPPING
The most important single influence on ship demand is the world economy. Since the world economy generates most of the demand for sea transport (import of raw materials for manufacturing industry, trade in manufactured products), the growth of sea trade follows closely the growth of world economy (growth of trade).
There are three different aspects of the world economy that may bring about change in the demand for sea transport.
1. The occurrence of business cycles (alternate increases/reductions in the rate of economic growth). These fluctuations work through into seaborne trade so
that demand for sea transport is unlikely to grow smoothly.
2. We also need to consider the long-term trend relationship between the growth of seaborne trade and the growth of the world economy. There are three
reasons to expect that over long periods such changes will occur:
a) domestic sources of raw materials may become depleted, forcing users to turn to foreign suppliers leading to imports growing faster than industrial production.3. The occurrence of economic 'shocks' also affects the impact of the world economy on seaborne trade. These differ from cycles because they are unique, often precipitated by some particular event, and their impact on the shipping market is often very severe (1930s depression-Wall Street crash 1929).
b) industrial development brings changes in demand for bulk commodities which make up a large part of seaborne trade.
c) Economic activity tends to become less resource intensive, and the emphasis switches from construction and stockbuilding of durables to services with the result that there is a lower requirement for imported raw materials.
d) status of countries generating industrial growth may change - new countries emerge, others decline in importance (Japan,Korea).
The effect of individual commodity trades on the demand for sea transport falls into short-term and long-term components. The principal short-term influences are seasonal effects and stockbuilding (harvesting period of agricultural commodities; oil consumption - higher in autumn/winter than in spring/ summer).
Both have a significant impact on the demand for shipping services during a short period (medium-term growth of demand and the employment prospects for particular ship types).
More important is the impact that developments in particular commodity trades have upon the medium-term rate of growth of demand for sea transport. Particular commodity trades may follow a different growth trend from the world economy as a whole due to changes in the demand for that particular commodity (e.g. coal to oil as primary energy source), a change in the source from which supplies of the commodity are obtained (new North Sea and Alaska oil reserves), a change in the production technology, or a relocation of processing plant.
For industrial raw materials, processing before shipment can have a direct effect on the volume of cargo shipped by sea and the type of ship required.
The demand for sea transport depends upon the distance over which the cargo is shipped. A ton of oil transported from the Middle East to W.Europe via the Cape generates two or three times as much demand for sea transport as the same tonnage of oil shipped from Libya to Marseilles. Consequently the average haul in the oil trade depends upon the balance of output from the groups of suppliers (Middle East, Alaska, North Sea, Mexico).
Sea transport demand is measured in terms of 'ton miles', which can be defined as the tonnage of cargo shipped, multiplied by the average transportation distance.
Many of the developments in sea trade depend on the economics of the shipping operation. Raw materials will only be transported from distant sources if the cost of the shipping operation can be reduced to an acceptable level or some major benefit is obtained in quality of product This makes transport costs a significant factor for industry.
Improved efficiency, bigger ships and more effective organization of shipping operations have brought about a steady reduction in transport costs and higher quality of service m and contributed to the growth of international trade.
Political developments may bring about a sudden and unexpected change in demand. The term 'political event' is used to refer to occurrences as a localized war, a revolution, government policies, or the political nationalization of foreign assets.
Events of this type do not necessarily have a major impact on the ship demand in their own right but their indirect consequences are significant.
International Effect:
a) Suez Canal opening and closure.
b) World War I & II.
c) Tap Line oil pipeline closure between Saudi Arabia and the Mediterranean.
d) OPEC production cut backs.
Localized effect:
a) Cuban crisis - sugar exports diverted to the USSR and China.
Price elasticity of demand (h) refers to the responsiveness of quantity demanded to a change of price.
For maritime economics, elasticity of demand indicates the responsiveness of the demand for the different shipping services to a change of the various freight prices. An increase of freight rates will lead to a proportionate decrease in demand and vice versa.
The actual responsiveness of demand to changes in freight rates depends upon:
1. The availability of alternate transport modes (e.g. trains, air lines). The more
elastic the demand for services offered by one form of transport, the easier it
is to substitute these services by those of another form of transport.
2. The quality of services provided. The demand tends to be inelastic to changes in price, if the quality of services provided is of high standard.
3. The time over which the adjustment occurs. Elasticity of demand tends to be
greater the longer the time over which adjustment occurs.
4. The actual income or any change to the income of people determining
demand. The smaller/larger the freight is in relation to the income, the more
inelastic/elastic respectively will demand be.
The demand for a specific shipping service can be influenced by competition from within the shipping industry or from other transport modes. Demand will be determined by evaluation and comparison of the following factors:
a) Level of quality of services.
b) Frequency of services.
c) Speed.
d) Freight costs.
e) Economies of scale.
f) Efficiency/ reliability.
In a free competition market, customers assess the above factors and decide which service best suits their interests.