Introduction

LGT 5007 Shipping Economics and

Markets
 Learning outcomes

• Familiar with the history of maritime industry

• Understand the subject area—economics
• Know the market segments
• Differentiate various kinds of decision-making
process
• Understand the current market & future trends

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 Outline
1. Maritime industry and shipping
– What is maritime industry?
– A brief history in the development of maritime
transportation
2. What is Economics and the Economics of
Maritime transportation?
o Economic problems
o Individuals in the maritime industry
o Market segments in maritime transportation
3. How to make decision?
4. Choice of the society
5. Current container shipping market and the
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 1. What is maritime industry
• Maritime industry is very broad
– Maritime transportation is a major sector of the
industry
– Others include: fishing & fish farming, recreational
boating, marine tourism, offshore activity, ……
– Please watch the video from Youtube, the first
video in the blackboard
• What sectors are included as part of maritime industry
in the video?

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 The evolution of maritime centers (Stopford 2009)

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© Dr. Meifeng Luo
 Major events for significant development
• Use of compass and astrolabe in
navigation (1480)

• Four important innovations: steam

engine, iron hull, screw propeller,
and deep sea cable networks
(1833-1950)
• Containerization

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 Major events for significant development
• Use of compass and astrolabe in
navigation (1480)

• Four important innovations: steam

engine, iron hull, screw propeller,
and deep sea cable networks
(1833-1950)
• Containerization

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Port in history
Primitive ports
 Modern Ports
COSCO-HIT & HIT

YICT
 Second Video
• The second video in the blackboard talks
about the history of shipping industry. Please
take a look.

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 Specializations
• In 18th century, separation
between shipowner and
cargo owner
• The emerging of
independent shipbroker,
marine underwriter and
insurance brokers
• The emergence of
passenger and cargo liner,
as well as tramp services
• Special ships for special
cargoes, tanker, dry-bulk,
containers, multipurpose
ships, and LNG/LPG.
• Special services to
shipping—freight
forwarder, ship agent,
ship management, etc.
• Specialized ports and
terminals

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2. Economics and economic problems
• Economics
– How individuals and society decide to use limited resource.
– It includes, but not limited to, the day-to-day operation.
• Economic problems:
1. What will be produced?
2. How will it be produced?
3. Who will get what produced?
4. Is the result good or bad?
5. Can it be improved?
– Studies that answer the first 3 are called positive
economics; 4-5: normative economics;
• Difference: objective/subjective
• Micro-economics and macroeconomics
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 Shipping economics
• Apply economic theory to study the behavior of
individuals and the society in maritime transportation.
• The individuals (Shipping company):
– Shippers, carriers, ship financer, freight forwarder,
– shipowners, consignee, agent,
– ship-builders, ship operator,
– brokers,
– insurers,
– scrappers,
– ports, stevedore, etc.
• The society: local community, the coastal government,
countries, international organization
• The organization of shipping industry

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 Market segments
Market segments in maritime transportation

Freight Ship Service Other Port

Freight
Liner Tramp shipbuilding Labor Container
Insurance

Marine
Container Tanker Ship chartering Financing equipment Drybulk

Ship
management Bunker
Dry-bulk S&P Oil

Agency
Information
Liquid Scrapping services
Legal

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 Freight markets
• World seaborne trade increased about 3.8% per
year from 3.6 billion tons in 1986 to about 9.8 billion
tons in 2012, and 11 billion in 2018.
• In 2012, the cargo distribution of seaborne trade is
29% oil (crude oil and oil products), 3% Gas
(LNG/LPG), and 68% dry cargo.
Baux. Alum
Total Gas 1%
Grain Phos. Rock
3% 4% 0%
Steam Coal
9% Minor
Bulk
Coking Coal 15%
2%
Total Oil Total Dry
68% Iron Ore Container
UN Comtrade Database 29% 12% 16%
UNCTAD data tables 2018
Clarksons Sinpping Intelligence Network Other Dry
9%
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 Market freight rates
– Each sub-market has their own freight rate.
Container freight rate in major shipping routes

Container freight rate in major shipping route ($/FEU)

16,000

14,000
Far East-N.Europe N.Europe-Far East
12,000
Far East-USWC USWC-Far East
10,000
N.Europe - USEC USEC-N.Europe
8,000

6,000

4,000

2,000

– For bulk cargo, the freight rate is always using the charter
rate as a proxy, although they are conceptually different.
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 Container shipping demand, supply and freight rate
250 Container trade volume 15

10
200

5
150 Clarkson average containership earning ($/Day)
0
100 $/day
-5
30000
50
-10

0 -15 25000
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Million TEU % Yr/Yr (TEU)
20000

Container fleet development 15000

27,000 6,000
5,500
22,000 5,000 10000
4,500
17,000 4,000
5000
3,500
12,000 3,000
2,500 0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
7,000 2,000
,000 TEU No 1,500
2,000 1,000
1996
1997
1999
2000
2002
2003
2005
2007
2008
2010
2011
2013
2015
2016
2018
2019
2021
 Ship markets
Market players in each submarket

• New building market: the market players are

shipyards and (potential) shipowner.
• Secondhand market: it is a market between
(potential) shipowners.
• Charter market: it is between shipowner and cargo
owner or carrier.
• Demolition market: the two parties in the market are
shipowners and scrappers.

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 Service markets
• Many specialized services have been development along
with the growth of the shipping industry, to serve on some
area of the shipping activity that requires unique
knowledge and skills. Among them, some are directly
serving the cargo or ship movement, such as freight
forwarding, ship management or agency, while others can
be relatively independent, such as ship financing,
insurance, and chartering, as well as legal services.

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 Service relationships in shipping industry
Education
Education Legal
Legal service
service Consultancy
Consultancy

Classification Ship
Insurance Finance
& Registration management

Cargo Ship Freight Ship

insurance insurance derivatives financing

Cargo Ship
Chartering
insurance insurance Ship broker Ship builder
broker
broker broker

Freight
Ship agent Ship operator Ship owner
forwarder

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 Port markets
• Traditionally, port is not subjected to competition—when
there is only one port in the region, it is the only service
provider and the market is in monopoly.
– The customer can be shipper, or carrier.
• Now, there are competition among ports, and that
among terminal operators as well.
– The competition among terminal operators is often
regarded as beneficial to the port.

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 Other markets
• These are the important market segments that
shipping industry is built upon, including labor
market, marine equipment market, bunker
market, and market for information services.
These markets are less dependent on the
freight market. For example, the seafarer
market is more related to the economic status
of the traditional seafarer supply countries,
such as Philippian, and the bunker price is
more subject to the change in crude oil market
than shipping market.
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 3. The decision-making process
a) Intuition, Rule of Thumb, SWOT analysis
b) Rational decision
c) Importance of information in decision-making
process
d) Decision-making under uncertainty
e) Strategic decision-making
f) Dynamic decision-making

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 a) Intuition, Rule of Thumb, SWOT analysis
• In many situations, making a quick decision is
required to respond to emergency
• For experienced decision maker, using intuition
and rule of thumb may be the best way for simple
problems.
• In business studies, the frequently adopted
method is SWOT analysis.
• All these methods are subjective, qualitative,
cannot deal with the situations that require
making trade-offs.

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 b). Rational decision
• In economic analysis, the fundamental assumptions are
that people make rational decisions, such as
– Producers like to make more profit
– Consumers want to maximize utility
• A set of rules can be developed to describe how
individuals make decisions facing trade-offs.
– For producers, the marginal revenue should equal to
marginal cost for profit maximization.
– For consumer, the ratio of marginal utility and price
should equal across all the commodities consumed.
• In analyzing demand for shipping, shippers (the
producers of the commodity) can be consumers.

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 c). Importance of information in decision making

• Know yourself and know your enemy, and you will never be
defeated (Sunzi) 知己知彼、百战不殆 （孙子）
• Nature of global maritime industry: volatile, highly competitive,
high capital investment, high risk
• Examples:
– Whether to setup a liner services in a route, what service frequency
to provide, and how large the ship in this service should be?
– The pricing strategy for long-term customers?
– How to coordinate with the nearby ports for short-term cargoes?

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 d). Decision making under uncertainty
• Uncertainty exists everywhere in shipping markets
– Future market freight rate is very important
• For economic analysis, uncertainty and risks are always
linked with each other.
– Uncertainty without consequences is not a problem. Who
cares?
– Sever consequences that are sure to happen: it should be
avoided.
• Uncertainty can be reduced by better information, and
risk can be attenuated by insurance.
• No matter what, uncertainty exists.

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 e). Strategic decision making
• When there are few players in the market, one
player’s strategy may affect the performance
of the others.
– Liner shipping in a specific route, Asia-Europe
Route
– Port market
• At 1998, the port development proposal in Rhode
Island, USA
• The port competition between Hong Kong and
Shenzhen
• The competition for transshipment hub between
Shanghai and Busan.
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Example 1

The Hypothetical New Port

at “Quonset”
30
Container port development initiatives in Rhode Island, USA, 1999
 Example 2

31
Port throughput and capacity 1991 to 2008

32
 0
5
10
15
20
25
30
1993
1994
100K TEUs
1995
1996
HKP

1997
1998
1999
SZP

2000
2001
2002
2003
GZP

2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
A comparison among Three Ports
 f). Dynamic decision-making
• Many decisions in the shipping industry have long term
impacts.
• When is the good time to make new order?
– When the freight rate is high or low?
• High: good to have more capacity, but the ship price is also high, means the
company will have higher capital cost in the future.
• Low: Good because the ship price is also low at this time. The problem is that
there is no guarantee that the freight rate will rebound soon. If not, the
company may have cash flow problem.
– From the perspective of the whole industry
• Invest at low freight rate will make the life of individual carrier in the market
more difficult, so it should be discouraged.
– From the society’s point of view: low freight rate is good, as it can
reduce shipping cost, as long as the carriers does not receive
government subsidy.

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 4. Choice of the society
• Shipping industry has significant public interest
– Its role in international trade and economic
development at global and national levels.
– The negative impact from international shipping
• GHG emission from international shipping
• Marine environmental pollution from shipping activity
• Negative impact of shipping emission at hub ports on
human health
– Other issues of public concerns
• Condition of crew (ILO MLO come into force in August,
2013)
• Shipping safety and security
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 5. Current container shipping
market and the future trend
Next few slides are mostly from the data provided by Alphaliner.
The maritime library (FJ 620) has a subscription of this online
database. Since it is single user license, it can only be accessed
from the desktop in the maritime library. When you can visit PolyU
campus, you can pay a visit there.

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 Existing Container Fleet Capacity
and Order Structure 21/12/2021

• Due to the continuous pursue of Economies of Scale, ships are getting

bigger. How will it affect the shipping industry, ship-owners, cargo owners,
port and liner shipping market...?
A.
World Cellular Fleet
Before WTO: The number of ships increases faster, but the average ship size is stable—indicating an increasing trend
of trade routes.
B. After China enter WTO to 08 financial crisis: fleet number increases faster, especially in the later half, while the
average size also increased faster than before.
• Fast expansion due to China factor.
C. Between 08 and Covid-19, the number of ships increases at slower speed, but the average ship size increases much
faster.
• Larger ships deployed on relatively stable routes.
D. Since Covid: number of ships increases faster again, not the average ship size.
 Risk of over-supply after Covid.
D
A C K TEU
6,000 27,000

5,500 B
5,000 22,000

4,500

4,000 17,000

3,500

3,000 12,000

2,500

2,000 Number 7,000

1,500 Average TEU

Total Containerships Fleet Development
1,000 LGT 5007 Shipping Economics and Markets 2,000
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1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
© Dr. Meifeng Luo
 Ten biggest containerships in 2020
• A video about the 10 biggest containerships in
2020 is in blackboard. Please take a look.

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 As of Dec, 2022

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 Liner performance before COVID-19

Average lifting increase only 1.8% yoy Average freight rate decrease by 1.8% yoy

long term: Moderate increase in lifting,

but a large overall decrease in freight rates.
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Ten main carriers: Average core EBIT margin by quarter 08-22
08-16 China Port’s Annual Rates of
Throughput Growth

Alphaliner newsletter No. 21

Top 30 container ports
 Evolution of container shipping market &
market share of top 10.

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© Dr. Meifeng Luo
 What’s up next?
• Demand
• New • China factor
technology • New market in Asia
• BlockChain • Global political-
• Big data，AI economic factors
• eCommerce
• Unmanned
ship/terminal
• New energy • Policy factors
• Anti-government
subsidy
• Anti-trust
• Shipping
Emission
 The future trend
World GDP growth is slowing down. The container growth is slowing even faster!
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© Dr. Meifeng Luo
 Summary
• History of shipping industry, major technology development
and specializations in the past that lead to the development of
the industry.
• Economics and economic problems in shipping industry
• Elements for the economics of maritime transportation
– Individuals
– Market segments

• Decision making process

• Choice of the society
• Current situation in liner market and future

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