MODULE 2: SHIPPING MARKET ECONOMICS (Found 103)

2/M JULIAN LARA TABIOS

1. Explain the meaning of equilibrium. Discuss the three periods to consider in

equilibrium.

If the desire for goods increases while its availability decreases, its price rises;
however, if availability of the good increases and its desire decreases, the price comes
down. Economically, maritime trades are necessarily observed managing balance
between its demands and supplies. It is an economic model of price to which market is
determined. The market demand may depend, though, on the world economy via business
cycles where the broad volume of goods traded by sea is determined by regional growth
trends. This is underscored, for instance, in the profound modern developments in the
steel industry across the world which generally influences the iron ore trades.
On one hand, market supply may refer to the availability of stock or the stock
transport capacity to which merchant fleet provides. When the demand becomes quite
low, the number of fleet expected to trade goods becomes greatly affected as some ships
may just be laid-up or may just serve as a storage for goods. Not only does supply nor
demand take much effect in the trade market but the freight. If demands in the market
continues to rises, more and more ships will be required thereby calling for building more
ships; however, an abrupt change in the demand or when fluctuations on demands occur,
more ships will be at rest and becomes stagnated. Control in the production of ships
becomes necessary as demands normally fluctuates and is determined by it. Fewer
number of ships, however, with an upsurge of demand may delay the market trade.
Freight market becomes of consideration especially that ton miles is used as the measure
of demands rather than the deadweight of cargo ships. Summarily, the supply and
demand are but two essential factors to consider to maintaining balance in the trade
market besides transportation or freight. Equilibrium, therefore, is the balance between
supply and demand with overmuch consideration of the price as to making it stable.

2. Why is maritime transport needed?

As economic globalization becomes of paramount consequence across countries in

the world, more and more nations are into market integration creating one global market
where all equally and economically benefit. Opening opportunities of marketing from one
particular destination to another requires the exchange goods and share of financial
advantages. Transportation, therefore, is necessitated by the common goal of importing and
exporting locally, nationally or internationally. It is accepted that more of land and air
 transports cannot carry goods of too great an amount such as those that require bulk. Most
of these means of transporting only caters to passenger demands. Sea transport,
nevertheless, answers this deficiency as demands to carry goods in bulk increases as for
instance, all countries utilize fuel to power the needs of the people consequently
demanding crude or oil which some cannot afford for themselves as resources my lack.
Importation of this will entail transportation from one country to another; who would have
oil or crude be transported through planes or land transports? In this case, demand for sea
transport arises.
Moreover, sea transports contribute to the objective of creating free market where
all can avail of leading to a world market per se. One deemed contributory to this is the
seaborne commodity trade. Maritime trades may play in short-term and long-term periods.
Most of the agricultural commodities are subject to seasonal harvests such as grains and
fruits. Some dates may also be reckoned as demands may rise during special seasons such
as Christmas or New Year. In a study, it mentioned in Northern Hemisphere, more oil is
shifted during autumn and early winter than any other seasons. Only during this season that
seaborne trades become of demand to its peak creating which is only for short term
periods. Studying the industrial economic characteristic is an advantage. Since oil, say, is a
natural and pedestrian need in the postmodern period, it may qualify as a trade for a long
term period. Long-term maritime trades however consider changes such as changes in the
demand, changes in the source, changes in the shippers’ transport policies, and changes
brought about by relocations.
As maritime transports generally open for the world market, it is necessary to
consider business cycle and trade development cycle. These are two aspects considered to
understanding world market. The business cycle becomes the foundation of freight cycles.
Considerably, this becomes one of the major causes of short-term fluctuations in ship
demands and seaborne trades. Two factors, according to economists, contribute to the
development of these economic cycles i.e. external and internal factors. External factors
involve the emergence of wars consequently bringing change in the commodity prices and
in its demands. The internal factors are but the dynamic structure of the world economy
itself and seen to be cyclical rather linear in nature. Business cycles may also be caused by
accelerators or multipliers, time-lags, and stock building. Accelerators plays around
consumption and investment and is the main internal mechanism. Time-lags, on the other
side, refers to the delays amongst economic decisions which create an extreme cyclical
fluctuation. Stock building, moreover, is the sudden bursts of demand as industries may
have adjustments on stocks during business cycles.
The ability of local resources of food and raw materials to meet local demands may
refer to the trade development cycle. Maritime trades are perhaps boosted once consumers
turn to foreign suppliers as domestic raw materials are depleted. Generally, maritime
transport helps in creating globalized industry where everybody benefits into.

3. Explain the impact of the world crisis to the Philippine Maritime Industry.
 As records may unveil, Philippines has since been one of the world suppliers of
seafarers. This showcases how the Filipino people plays a consequential part in the global
seafaring industry and world economy. As transporters and shippers of world commodities
across various nations, its impact in the world market and amongst consumers nationally and
internationally has indelibly impacted. This may be substantiated by the continuous demand
of mariners abroad to which a great percentage are Filipinos. Externally, Filipinos become
overly known. However, not only do Filipinos work on board across countries for the
Philippines per se interplays in the world maritime industry. This would mean that any
potential occurrences along maritime industry draws an immense effect to it. When, for
example, a war between or among countries sparks to which these countries are considered to
have been massively contributing to the world market, a great majority of nations will be
greatly affected too. In early January of 2020, an impending struggle between Iran and the
USA started to heat. If the struggle between these nations persists, world economy will be
greatly affected as each contributes largely to global transactions. Regions from the Middle
East provide a large amount of crude and US, on the other hand, may seem to be one that
colossally contributes in the world stock market. Once Iran suppresses the exportation of
crude oil to different nations, economic tendencies may seem to be at hand.
Localizing the economic effects of Iran’s control of crude oil transportation, the
Philippines may suffer an increase amongst the prices of its local goods and commodities.
People will surely feel its effect gradually as one satisfies the needs. In addition, when global
stock market drops down to an extreme level, the monetary exchange is greatly suffering
such as the rate of US dollars to Philippine peso or the otherwise. In addition to this world
crisis, an increase in fare from public utility vehicles will also be imminent. Therefore, as
countries aim toward a more developed economic globalization, one should consider the
effects of any industrial struggles of the other.
World crisis is not new. Several times did it strike, which to effect, brought numerous
potentially dangerous economic corollaries. Often that maritime transactions are greatly
affected by these creating economic shocks. They may root from different contributory
disturbances such wars, revolutions, political nationalizations of foreign assets, or strikes.
Many disruptions have already occurred such as the 1930 Depression, 1950 Korean war,
1956 Suez Canal crisis, 1967 Israel and Egypt 6-day war, to name a few. These crises may
seem to be distant from the Philippines but they have an extensive effect as Philippines chips
in to the global economy where it exports resources and commodities and equally imports the
same from other countries. When global crises strike, the maritime industry, along with other
factors, suffers.

4. What are the key influences of supply of sea transport services and demand for sea
transport services in the Philippines? Explain them.
 Several factors influence the supply and demand services in the Philippine maritime
industry such as the world market, seaborne commodity trade, average haul and ton miles,
impact of random shocks on ship demand, and the transport costs and the long-run demand
function (demand), and the merchant ship, fleet productivity, ship building production,
scraping and losses, freight revenue and rate mechanism (supply), respectively.

Influences of Supply of Sea Transport Services

It takes about a year or so before merchant ships are built. Its delivery may even
extend from two to three years. Therefore, if too great a demand is called for, this may
prevent the market to promptly respond to any sudden upsurge. Normally, ships’ physical life
endures fifteen to thirty years. There will be different factors controlling the supply of ships
such as the ship owners’ decisions, as shippers may become ship owners themselves, bank
lending, and regulatory authorities. One that influences the supply of sea transport services is
the merchant fleet. Since ships may be legally operable for 25 years, few number of fleet are
being scrapped yearly. Therefore, when the ship demand does not turn out as bargained for,
supply will adjust. Fleet productivity is another key influence. This pertains to the
productivity rate that a ship can exhaust regardless of its fixed size. Ton miles per DWT is
used to measure the productivity of s fleet of ships. Additionally, four major factors have to
be considered along productivity such as the speed which tells the time a vessel operates, port
time which refers to the ships’ physical performance in consideration of the port terminals,
deadweight utilization which refers to the cargo capacity, and the loaded days at sea. Ship
building production, in principle, plays importantly in the process where the level of output is
adjusted to changes in demand. Since vessels consider time or age in consonance with its
operations, it is important to note that the older the vessel the more costs are at stake to
continue its maintenance. Freight revenue and rate mechanisms are key influences also as
these regulate decisions to adjust the capacity and reduce the cost while the service; and these
link the supply and demand maintaining balance or economic equilibrium between the two.

Influences of Demand from Sea Transport Services

On ship demands, the World Market essentially influences. Considering the business
cycle deemed the foundation of freight cycles, causally, it creates short-term fluctuations in
seaborne trade and ship demand. Internal and external factor are considered though. During
wars, an abrupt change in the commodity prices likely to happen. This is an external factor.
On one hand, the internal factors may include the structure of the economy itself. Multipliers
or accelerators plays an important role to which it stresses on consumption and investments.
When severe fluctuations are caused by the delay in the economic decisions, it is called time-
lags. Stock building, however, produces sudden bursts of demand during the business cycle.
When the local demands of local resources of food and raw materials are met, trade
development cycle happens. Aside from the world market, the seaborne commodity trade,
too, is a key influence. It may be is short-termed or long-termed.
Transport costs and long-run demand function is also one key influence in the
demand of sea transport services. Since distance plays an active part in the maritime industry
transactions, costs for the demands need cautious consideration. More of raw materials will
be transported from distant sources once cost during its operations is reduced to a reasonable
level or a great benefit may be derived of the product being transported The tonnage of cargo
shipped multiplied by the average distance is how distance is considered in economic vessel
operations. This is termed as ton miles. This too is essentially considered a key influence on
demand of sea transport services. In addition, world crisis greatly affects this demand. Once
the vessel operations are affected by economic struggles amongst countries, an impact of
random shocks occurs hitting the ship demands.