The Organization of the

Shipping Market
Taken from Maritime Economics (Third Edition) by Martin Stopford
Slides prepared by Adrian Beharry
Introduction

 Defining the maritime market and the businesses involved in shipping.

 The Demand for international transport and its characteristics.
 Who are the customers, what services are demanded, and at what costs?
 What are the major commodities traded by sea?
 The Supply of Shipping services.
 The international seaborne transport system.
 The merchant fleet and its composition used to transport cargoes.
 The economics of supply.
 The shipping companies that run the business
 The governments that regulate shipping.
Overview of the Maritime Industry
(2004)
1. Vessel Operations
1. Merchant Shipping (31%)
2. Naval Shipping (13%)
3. Cruise Shipping (1%)
4. Ports (2%)
5. Total 47%
2. Shipbuilding- Merchant and Naval vessels (13%)
3. Marine Resources- Offshore Oil and Gas, Renewable energy, minerals and aggregates
(8%)
4. Marine Fisheries-Fishing, Aquaculture, Seaweed, Seafood processing (15%)
5. Other Marine related Industries- Marine tourism, R&D, Marine IT, biotech, Ocean Surveys,
Marine Education and Training, Submarine telecoms (18%)
International Transport Industry

 Deep Sea Shipping- transport across regions moving high volumes.

 Mainline Shipping services across oceans and seas.
 Round the world service
 Pendulum service
 Air freight- transport across regions- high value, low volumes, time sensitive cargoes.
 Short sea shipping- transport within regions moving low volumes.
 Hub and spoke service.
 Feeder shipping services.
 Land Transport and the integration of transport modes
 Intermodalism- Use of Standard units for transport and transfer across different modes of transport.
 Exporter->Container Unit->Truck-> Port (STS) ->Ship-> Port (STS)-> Truck-> Rail->Importer
 Multimodalism- Different modes of transport- air, sea, inland waterways, road, bridges, rail
Characteristics of Sea Transport Demand

 The merchant shipping industry’s product is transport.

 Sea Transportation is a derived demand for ships. The products or cargo are the primary source of
demand.
 Shipping companies work closely with companies that generate and use cargo.
 Today’s multinational companies source raw materials where they are cheapest and locate manufacturing
facilities in any low cost corner of the world drawing many towns and cities into the global economy.
 Outsourcing
 Offshoring
 Oil and Gas Companies, Chemical Industries, Steel Mill Industries
 Car Manufacturing
 Sugar Refinery Industries
 Consumer Goods Manufacturers
 Commercial and Retail Sales and Distribution
Commodities Shipped by Sea
World Seaborne Trade in (2006 mt)
 Energy trades- 44%
 Metal Industry trades- 18%
 Agricultural trades- 9.4%
 Other Cargoes- 28%
Parcel Size Distribution

 Parcel size distribution is the individual consignment of cargo carried by a

ship. It varies depending on parcel size, type of cargo, volume of cargo,
special storage characteristics, distance in transit, port constraints. Examples:
 Coal Trade- 60,000 mt and 150,000 mt
 Grain Trade- 25,000 mt and 50,000 to 70,000 mt
 Bulk Sugar- 25,000 mt
 Iron Ore- 150,000 mt
 For a particular commodity trade the PSD function describes the range of
parcel sizes in which the commodity of traded over time.
 The importance of the PSD function is that it answers the question of which
cargoes go in which ships.
Product Differentiation in Shipping

 In addition to PSD there are other factors which determine how a cargo is
shipped:
 Price- Freight cost or Freight rate.
 Speed- Time in transit incurs and inventory cost to the shipper.
 Reliability- ‘Just in Time’ management systems which are designed to reduce
the cost of inventory through better control of stocks held in inventory to a
minimum through reliable re-ordering of new shipments.
 Security- Loss or damage to cargo is an insurable risk. Shippers may be
prepared to pay more for secure transport with a lower risk of damage.
Sea Transport System- An Economic
model of Sea Transportation
 World Seaborne Trade and Major Commodities Transported
 Bulk Cargo Parcels- Crude Oil Tankers, Dry Bulk Carriers- Bulk Transport
 Specialized Parcels- LNG, LPG, Chemical Tankers, Ro-Ro Car Carriers, Lumber Ships-
Specialized Transport
 General Cargo Parcels- Container Liner Vessels and Break Bulk Ships- Liner Transport
 Bulk Ships- Bulk Cargo Shippers’ Own Fleet, Bulk Charter Market-> Shipowners’ Bulk
Fleet (investor to charter).
 Forms of Charter or Contracts of Affreightment:
 Time charter
 Voyage charter
 Bareboat charter
Definition of Bulk Shipping- Bulk Carriers
Most bulk cargoes drawn from raw materials

 Liquid Bulk
 Five major dry bulks are:
 Iron Ore
 Coal
 Grain
 Phosphates
 Bauxite
 Minor Bulks are:
 Steel products and scrap
 Cement
 Gypsum
 Non ferrous metal ores, sugar, salt, sulphur, forest products, wood chips, chemicals
Definition of Liner Shipping

 The main classes of general cargo are:

 Loose cargo
 Containerized cargo
 Palletized cargo
 Pre-slung cargo
 Liquid cargo in special purpose built tanks
 Refrigerated cargo (reefers)
 Heavy, awkward cargo- out of gauge, over width, over height
Definition of Specialized Cargo

 The distinguishing feature of these trades is that they use ships designed to
carry a specific cargo type and provide a service targeted at a particular
customer group.
 Motor Vehicles- Ro Ro Car Carriers
 Forest Products- Lumber and Paper boats
 Refrigerated foods- Reefer Vessels
 Liquid Gas- Liquified Natural Gas Carriers
 Chemical Parcels- LPG Carriers, Ammonia, Methanol, Urea
The World Merchant Fleet

 In 2007 the world merchant fleet for self propelled vessels over 100 gross
registered tons (grt) was about 74,398. Can you guess what it is today?
 If you had to check that information what references would you use?
 Have a look at the UNCTAD publication-
 Review of Maritime Transport 2019
 Chapter 2, Structure, Ownership and Registration of World Fleet
Ownership of the World Fleet

 Ownership is a major commercial issue in the shipping business.

 A merchant ship must be registered under a national flag and this determines
the legal jurisdiction under which the vessel operates.
 The shipowner is subject to the international conventions to which the flag of
registry is a signatory or party.
 In 2006, the top 35 leading maritime countries controlled 95 % of the total
world fleet.
 In 2018, the top 5 countries controlled 49% of the total tonnage.
 Among the top 35 leading maritime shipowning countries 28 or more than 50%
have their fleet registered abroad in an Open registry.
Age distribution of the World Fleet

 The continuous progress in ship technology combined with the costs of ageing
over the twenty or thirty year life of a ship presents the shipping industry
with an interesting economic problem.
 How do you decide when a ship should be scrapped?
 Aging and obsolescence are not clearly defined conditions. They are subtle
and progressive.
 A great deal of trade is carried by ships which are obsolete in some ways.
 It took fifty years for steamships to drive sailing ships from the sea.
 What is currently the most important technology issue affecting the cost and
operation of international shipping?
 Hint… it is due for implementation by the IMO in 2020.
The cost of sea transport- World trade and the cost of
freight

 One of the contributions of shipping to global trade has been to make sea
transport so cheap that the cost of freight was not a major issue in deciding
where to source market goods.
 In 1950 it cost about $8.00 per ton to transport coal from ECNA to Japan. In
2006 it cost $32. The average transport cost over the period was $12.30 per
ton.
 The oil trade shows the same long term trend with transport costs fluctuating
between $0.50 and $1.00 per barrel.
 Compared with other sectors of the economy the transport industry’s
achievement has been exceptional.
 As a result, for many commodities freight is now a much smaller proportion of
costs than it was 40 years ago.
Ship size and Economies of Scale

 Ship size has increased because businesses have grown over time to demand larger parcel
sizes of cargo and port facilities have developed over time to accommodate bigger vessels.
 The unit cost generally falls as the size of the ship increases because capital cost,
operating costs and cargo-handling costs do not increase proportionally with the increase in
cargo capacity.
 The unit cost of transporting a ton of cargo on a voyage is defined as the sum of the Capital
cost (LC), the cost of operating the ship (OPEX) and the cost of handling the cargo (CH)
divided by the parcel size (PS).
 The sea transport unit cost function: Unit Cost= LC+OPEX+CH
P
Bulk shipping economics

 Many different ship types are used for bulk transport but the main ones fall
into four groups: tankers, general purpose dry bulk carriers, combined
carriers and specialist bulk vessels.
 Several different bulk cargoes may be carried in a single ship each occupying
a separate hold or part of a hold in a traditional tramp operation.
 The foundation of bulk shipping is economies of scale.
 Moving from a handy to a handy max saves about 22% per tonne.
 Upsizing to a Panamax bulk carrier saves 20% per tonne.
 An increasing to a Capesize vessel saves 36% per tonne.
 Large companies shipping significant quantities of bulk cargoes run their own
fleet to handle a proportion of the transport required.
Liner Shipping economics

 Liner shipping companies offer the following services:

 Regular shipping service for many small cargo consignments.
 Used a fixed vessel route and rotation.
 Load and discharge cargoes to facilitate vessel rotation and ports of call
 Operate the service on a fixed schedule of arrival and departure.
 Use a fixed tariff structure and rates across all customers
 Plan the tonnage availability to service the trades including repair and
maintenance, construction of newbuilds and chartering of additional ships to
meet cyclical demand and supplement the fleet of owned vessels.
 Operate Liner Conference systems and Shipping Alliances to control market
competition on some routes.
Shipping companies that run the
business- types of shipping companies
 Private bulk company. A tramp company owned by a family, which runs a fleet of about 5
vessels. Vessels may be on time charter or voyage charter. Small office run by a chartering
manager and a secretary.
 Shipping corporate. A liner company in the container shipping business owned corporate
shareholders, who operate a fleet of over 20 containerships from a corporate head office
with a network of offices, and a large staff involved in operations, marketing,
administration and documentation.
 Shipping division. A large multinational oil company, which has a shipping division to
manage its fleet of company owned vessels and chartered tonnage.
 Diversified shipping group. A company listed on the stock exchange in which the majority
of shares are owned by institutional investors so that its financial and managerial
performance is closely followed by investment analysts and specialists.
 Semi-public shipping group. A shipping company, which is family owned and controlled but
listed on the stock exchange, which runs a fleet of ships.
Joint Ventures and Shipping Pools

 A fleet of similar vessels with different owners in the care of a central

administration and organization, which is administered by a Pool Manager.
 The Pool manager markets the vessels as a single fleet and collects the
earnings which, after deducting overheads, are distributed to Pool members
under a pre-arranged weighting system or distribution key, which reflects
each ship’s revenue-generating characteristics.
 The revenue sharing arrangements are of central importance and are almost
always restricted to ships of a specific type so the revenue contribution of
each vessel can be assessed accurately.
 From the shipowner’s perspective the Pool is rather like having the ship on a
time charter but with variable earnings. When the ship enters the Pool its
distribution key is agreed and this determines its share of the net earnings.
Joint Ventures and Shipping Pools

 The Pool pays all voyage related costs such as port costs, cargo handling costs
and bunkers.
 The shipowner continues to pay capital costs, manning costs and repair and
maintenance costs.
 After deducting overheads and commission the net earnings are distributed
between Pool participants.
 A Pool agreement generally includes a non competition clause which prevents
the participant from using other ships to compete with the Pool.
 Shipping Pools are found in all segments of the tramp/ non-liner shipping
market- product tankers, parcel tankers, chemical tankers, gas tankers and
VLCCs segments of the bulk carrier market (Handy, Handymax, Panamax and
Capesize), reefers, LPG tankers and forest product trades.
Functions of the Pool Manager

 Arranges the employment of the fleet including spot freight negotiations, time
charters and longer term Contracts of Affreightment (COAs).
 Collects freight and pays voyage cost out of earnings
 Manages the fleet’s commercial operations, including giving instructions to the
ships, nominating agents, customer communications on ship movements,
issuing freight and demurrage invoices, collecting claims and ordering bunkers
 Distributes the net earnings of the Pool to participants based on the agreed
key distribution.
 To succeed Pools usually specialize in a specific trade or ship type where it is
possible to offer members better than average earnings, more cost effective
marketing of COAs and time charters with lower marketing costs per ship, long
term planning, cost savings and economies of scale.
The role of Governments in Shipping

 Because shipping is concerned with international trade it has to operate

within a complicated pattern of agreements between shipping companies,
understandings with shippers and the policies of government. Government
policies are usually guided by international law and conventions (International
Maritime Convention) to which its is party and national legislation (Shipping
Act), which promulgates and brings the law into enforcement through a
system of rules and regulations.
 SOLAS
 STCW
 MARPOL 73/79
 International Tonnage Convention