Lecture 2: Shipping demand

Outline
1. Concepts & demand in practice
2. Difference between market demand and
individual demand
3. Demand for shipping
a) from consumer’s point of view, and
b) from producer’s point of view.
4. Practical factors affecting shipping demand
5. Shipping demand and outlook.
6. Understand the major factors
 1. Concept
• Buyer’s desire, willingness and

Price ($)
ability to pay a price for specific
goods or services. p1

– It refers to the quantity of a product or p2

service is desired by buyers at certain

price. q1 q2
Quantity demanded (Q)
– Consumer demand and input demand

Question: What are the problems/implied assumptions with the

following statement:
• The demand for container transportation service at port of Hong Kong
was 22,352 thousand TEUs in 2013.
 Growth of demand and supply in
container shipping 2007-2021

Source: Review of Maritime Transport 2021 (pp. 49)

Supply: total capacity of container-carrying fleet. Demand: million TEU lifts.

LGT 500 Shipping Economics and Markets

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@ Dr. Meifeng Luo
 Illustration of consumer demand
and input demand
G Consumer
Supply Demand
Input
s1 Demand

s2

s3
Both generate demand for shipping.
12/9/2021
LGT 5007 Shipping Economics and Markets
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@ Dr. Meifeng Luo
 More concepts
• Quantity demanded q: the number of
units the buyer wants at a price. P q=f(p, z)
z1
• Change in demand: quantity demanded
change because of the change in its own price. z0

• Demand function q=f(p, z): the p*

relationship between quantity demanded
w.r.t. its price. q* Q

• Demand curve: a plot of demand function.

• Demand schedule
• Demand shift: increase in demand not
because of its price change. (changes in z)
 Complements and substitutes
• Complements: Two commodities always consumed
together.
– Demand increase in one will bring up the demand for the
other.
• Substitutes: Demand increase in one will reduce the
demand for the other.

? Freight rail and maritime transportation

? Demand for shipping and demand for port
 Price elasticity
• The response of the quantity demanded to
price change.
– Own-price elasticity ∆Q Q ∆Q P
Ep = =
• Elastic, unit elastic, & inelastic ∆P P ∆P Q
– Relation to pricing decision
– Cross-price elasticity
• >0: Substitutes; <0: complements

∆QH QH ∆QH PS
EQH , PS = =
∆PS PS ∆PS QH
 Substitutes and Complements
Rail price($) Rail price($)

q=f(p, Q, pr, …) q=f(p, Q, pr, …)

q: shipping demand
pr: rail price
pr pr

q shipping
Quantity (tons)
E<0: complements
ex. Rail price reduction resulted in
extended hinterland area or
reduced overall transport cost
q shipping
E>0: substitutes Quantity (tons)
ex. Transcontinental rail in North America
make rail transportation more attractive
than all water services for transpacific
route to U.S. East Coast.

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Price elasticity of shipping demand
• How to define this concept?
• Demand for shipping/port is derived demand—
people interested in the cargo, not the act of
shipping itself.
• Maritime transportation cost is only a small
part of the commodity price
Total commodity cost = Raw material cost + Production cost + Transportation cost
+ Other costs
Transportation cost = Land transportation cost
+ Port cost
+ Shipping cost
Freight cost in the value of imports (%)
Maritime transport costs for importing goods, by
country and size of economy
 The low costs of maritime transportation (IMO, 2006)
Bulk shipping costs have increased by only 70% in the last 50 years. US retail prices have risen by
almost 700%
The maritime transportation cost from Middle East to US is only about US$.01/litre to a
typical US consumer.
The shipping cost for a tonne of iron ore from Australia to Europe is about US $10.

A 20 foot container from Asia to Europe carrying over 20 tonnes of cargo only cost about the
same as an economy-class air-ticket on the same journey.

Typical ocean freight cost (Asia to US or Europe) and its percentage in commodity cost
Commodity Unit Typical shelf price Shipping costs Percent

TV set 1 unit $700 $10 1.43%

DVD/CD Player 1 unit $200 $1.5 0.75%
Vacuum Cleaner 1 unit $150 $1 0.67%
Scotch Whisky bottle $50 $0.15 0.3%
Coffee 1 Kg $15 $0.15 1%
Biscuits Tin $3 $0.05 1.67%
Beer Can $1 $0.01 1%
Simulated impact of high container freight rate
2. Individual demand and market demand
From individual demand to market demand
P q1=f(p, x) P q2=f(p, x) P q1+q2

+ =
p* p* p*

q 1* Q q2* Q q1* q1*+q2* Q

Port 1 Port 2 Port market demand

In although the market demand for shipping is inelastic, the demand for one
individual can be very elastic, why?
 What is shipping demand?
International
trade

Commodity
Service
trade

Air Land Sea

Shipping
Truck
demand

Rail

• Market demand for shipping is the result of international

commodity trade that uses sea transportation services.
• Demand for individual shipping company is subjected to market
competition
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 Market v.s. Individual demand
• Market level • Individual level
Inelastic: 1. Elastic in long-run as
1. Freight rate is just a shippers will compare
small friction of the different service
cargo value; providers.
2. The need for raw 2. In short-run, elastic if
material and consumer it can attract customers
goods won’t change from other operators.
much when the freight But it is hard because
rate changes. many reasons.
 Demand estimation
• Generally, the demand for container shipping can
be estimated by analyzing the changes in regional
economic development, population, personal
income, consumer preference and commodity
price in different regions.
• However, for demand estimation of a specific port, it
needs to consider the location and facility of this port in
the overall container shipping network.
– Reading: A spatial-economic multimodal transportation
simulation model for US Coastal container ports, (MEL 2003)
 Example
• A company produces the product at country A because of
cheaper labor and material costs, and sells to country B.
• There is only one carrier from A to B.

Transport direction Land Transportation

port

A B
Sea Transportation

Origin Destination
 The Company’s Decision
Maximize π=P*Q - Total Cost
by choosing price and quantity.
The optimal quantity (Q*) and optimal price (P*) are should
satisfy following condition:
Marginal Revenue = Marginal Cost
The optimal quantity, which is the production decision of
the company, is then the demand for transportation, also the
demand for the shipping company.
Using the following exercise to understand the demand
for transportation service:
Considering origin A and destination B. There is only one
shipping company from A to B. The market demand
function for this product at B is:

Q = 1000 − 10 × P
The product is produced at origin A, and the production
cost function (include raw material cost) is
C1 = 5 + 5 × Q
The transportation cost function, including both the
maritime shipping and land transportation costs, is

C2 = 3 × Q
Both the production and transportation are operated by
a private company, whose seeks to maximize its profits
by selling the product at B. Now please calculate:
• The demand for the shipping company
• The change in quantity demanded if transportation
cost is doubled
Practical aspects

World Trade
economy pattern

Business International
cycle trade
Random
shock
Commodity
Service
trade

Air Land Sea Distance

Shipping
Sub. Truck
Comp. demand

Rail
The OECD Industrial Production Index and indices for the world GDP,
merchandise trade and seaborne shipments, 1975-2016 (1990=100)

Source: Review of Maritime Transportation, 2017(pp.3)

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 Causes of business cycles:
both general business and shipping

• The nature of business operation

– The multiplier and accelerator.
• The interplay among income, investment,
employment and consumption
– Time-lag
• The delays between economic decisions and their implementation.
– Stockbuilding
• Recession: manufactures run down stocks, intensifying the downturn in
demand for sea transport.
• Recovery: rush to build stocks, lead to a sudden burst in demand.
– Mass psychology: non-compensated errors
• When individual’s decision making is not independent, one decision maker’s
pessimistic behavior will affect other players in the market

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 Seaborne Commodity Trade
• Short-term seasonal variation in seaborne trade
• Long-term trends
– Business operation pattern, consumption pattern,
transportation technology development
• Changing consumer test
• Changes in commodity supply
• Global logistics practice
• Shippers’ transport policy

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12/9/2021 LGT 5007: Shipping Economics and Markets © Dr. Meifeng Luo
 Transportation distance
• For analyzing demand for shipping, shipping distance is
very important.
• For the same trade volume, the distance between the OD
pair matters:
– important for determining freight rate and number of ships in
liner services
– Generally, freight rate should be lower for shorter route; more
ships are required in the longer routes to maintain the same
frequency.
• Ton-mile / TEU-mile is used in many transportation
demand statistics.

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World seaborne trade 1980-2017 (billions of ton-miles)

Source: Review of Maritime transportation, 2018(pp.5)

Estimated containerized cargo flows on major East-West
container trade routes, 1995-2018 (million TEUs)

Source: Review for Maritime Transportation, 2018(pp.14)

Main east-west shipping route and
location of large container ports

Source: Review for Maritime Transportation, 2014

 The impact of random shocks on ship demand

• Random shocks – unpredictable events

– Weather changes, wars, new resources, commodity price
changes (ex. Bunker price)
• Most severe impacts are the economic shocks
– 1929 Wall Street Crisis, 2008 financial crisis
– Two oil crisis in 1973 and 1978
– Next figure
• Refer to (Stopford, 148) for major political events
and wars that have major impact on oil trade
• Covid-19

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12/9/2021 LGT 5007: Shipping Economics and Markets © Dr. Meifeng Luo
 World GDP and seaborne trade

•
 Substitute of other transport modes
• Large scale transportation facility development, such as
highway system, rail and air transportation, can affect the
demand for shipping.
– The substitution of passenger vessels with air transportation;
– The transcontinental railway over North America substitutes the all
water route through Panama Canal;
– The national highway system, especially around the coastal area,
substitutes the short-sea shipping
• The demand for a shipping company will be affected by the
price of other shipping companies.
– When two shipping companies working on the same route, they are
close substitutes with each other.
• The impacts of above mentioned on shipping demand are not
necessary negative, depends on the specific situation.

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 Seaborne Trade Outlook
• Read Clarksons Seaborne Trade Monitor
– Volume 8, No. 11, November 2021.
– Understand:
• Commodities share;
• Seaborne trade as % of world trade
• Past growth rate, estimated future growth rate
• Major export/import countries
• Major trade routes
 Outlook of seaborne trade
• New-globalization/regionalization
– Its impact on the trade
• Global environmental policy (ex. CO2)
• Chinese economy
– More open or closed, production/consumption
• Emerging economy
• Vaccine for Covid-19
• Policy for Pandemic control
 Summary
• In practice, the demand for shipping will
affected by:
– Any factor that changes the world economy
– Preference for different cargo types
– Transportation distance
– Random events
– Development of other transportation facility.
– Future?

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