Determinants of Transport Costs

Jan.Hoffmann@UNCTAD.org
Geneva, May 2009
Maritime Freights

1: Determinants
2: Fluctuations
3: What can we do?
Maritime Freights
50%
Per cent of goods' 45%

1: Determinants
market price
40%
35%
30%

2: Fluctuations 25%
20%
15%

3: What can we do?

10%
5%
0%
1970 1980 1990 2007
Jute from Bangladesh 12.1% 19.8% 21.2% 44.2%
Tea from Sri Lanka 9.5% 9.9% 10.0% 13.4%
Coffee from Colombia 4.2% 3.3% 6.8% 2.5%
Coca beans from Ghana 2.4% 2.7% 6.7% 3.5%
Maritime Freights
50%
Per cent of goods' 45%

1: Determinants
market price
40%
35%
30%

2: Fluctuations 25%
20%
15%

3: What can we do?

10%
5%
0%
1970 1980 1990 2007
Jute from Bangladesh 12.1% 19.8% 21.2% 44.2%
Tea from Sri Lanka 9.5% 9.9% 10.0% 13.4%
Coffee from Colombia 4.2% 3.3% 6.8% 2.5%
Coca beans from Ghana 2.4% 2.7% 6.7% 3.5%
Maritime Freights

1: Determinants
2: Fluctuations
3: What can we do?
Differences in maritime freights depend on…
50%
Per cent of goods' 45%
market price
40%
35%
30%
25%
20%
15%
10%
5%
0%
1970 1980 1990 2007
Jute from Bangladesh 12.1% 19.8% 21.2% 44.2%
Tea from Sri Lanka 9.5% 9.9% 10.0% 13.4%
Coffee from Colombia 4.2% 3.3% 6.8% 2.5%
Coca beans from Ghana 2.4% 2.7% 6.7% 3.5%
Differences in maritime freights depend on…

1) Distances 4) Type & value of goods

2) Economies of scale 5) Competition
3) Imbalances 6) Port characteristics
Differences in maritime freights depend on…

1) Distances 4) Type & value of goods

2) Economies of scale 5) Competition
3) Imbalances 6) Port characteristics
 Freight rates and Distance in the Caribbean
3,500

y = 0.6206x + 1019.9
3,000 2
R = 0.2058

2,500

2,000
Freight rate

1,500

1,000

500

0
0 500 1,000 1,500 2,000 2,500
Distance

UNCTAD Transport Newsletter, 1st Quarter 2007

 
Distance
• Doubling the distance
leads to a increase
of maritime transport
costs (incl. insurance)
by
about 15-20%

… averages,
empirical data
ECLAC, FAL 191, Wilmsmeier, Hoffmann
Handbook of Maritime Economics, Kumar, Hoffmann
Differences in maritime freights depend on…

1) Distances 4) Type & value of goods

2) Economies of scale 5) Competition
3) Imbalances 6) Port characteristics
 
Economies of Scale
• moving 10 000 tons
instead of 100 (in
one transaction)
reduces unit costs
by 40 to 50%
 

1100 4250 8750 13000

Feb 2008 costs TEU TEU TEU TEU

Construction costs 28 77 135 167

million USD
Construction costs 25 000 18 117 15 430 12 850
USD per TEU
Crew 15 to 17 15 to 17 15 to 17 15 to 17

Source: Dynamar, 2008, via Antonio Zuidwijk

Economies of Scale 

CRS, 28 January 2009

 
Container ship sizes
• 27.- US$ saving/ container/ trip
using “post panamax” versus “panamax”
(Drewry)
 
Mergers of shipping companies
• Savings thanks to larger volumes
(Roland & Berger)

100
90 ships
80
70 purchasing
60
50 containers
40
30 access
20
10 admin
0
medium large
 
Port operations
• 12 US$ per move savings with global
operators
Drewry
Differences in maritime freights depend on…

1) Distances 4) Type & value of goods

2) Economies of scale 5) Competition
3) Imbalances 6) Port characteristics
Imbalances 

CI-Online 28 January 2009

 Supply/demand

Trans-Pacific trades

18000

16000

14000
12000

10000
'000 TEUs
8000

6000
4000

2000

0
2000 2003 2004 2005 2006 2007

Carrying capacity Cargo eastbound Cargo westbound

Containerization International
 Imbalances 

In Barbados, which freight rates

would you expect to be higher:
•Those for imports, or
•Those for exports ?
Differences in maritime freights depend on…

1) Distances 4) Type & value of goods

2) Economies of scale 5) Competition
3) Imbalances 6) Port characteristics
 
Merchandize type and value

• Increase the value by 1% implies an

increase of transport and insurance costs by
around 0.3 – 0.4%
Differences in maritime freights depend on…

1) Distances 4) Type & value of goods

2) Economies of scale 5) Competition
3) Imbalances 6) Port characteristics
 
Competition with land transport
• If countries are neighbours,
with paved roads, maritime
transport costs are around 10% lower

Fotos: Jan Hoffmann

 Competition between carriers 
• Receiving 20 instead of 5 companies

freights go down by around 12%

 Competition between carriers 
Case study Caribbean
• If the company itself has no direct service
(i.e. it only has a service with
transshipment):
This company’s freight rate + $650
• If other, competing, companies do provide a
direct service:
This companies freight rate - $425
 3'500
Competition between carriers 
3'000
Case study Caribbean
2'500
-0.0671x
y = 1814.9e
2
R = 0.4348
2'000
Freight rate

1'500

1'000

500

0
0 2 4 6 8 10 12 14 16 18 20
Number of Carriers providing direct services

Source: Hoffmann, Wilmsmeier, IAME 2007

Differences in maritime freights depend on…

1) Distances 4) Type & value of goods

2) Economies of scale 5) Competition
3) Imbalances 6) Port characteristics
 Port reform 
• Difference between
“best” and “worst”
case in Latin America:
25% of worst case
Port reform 
 Dependent variable:
maritime transport costs per tonne of containerizable cargo 

Port reform

Wilmsmeier, Hoffmann, Sanchez, in: Porteconomics, 2006

 Dependent variable:

maritime transport costs per tonne of containerizable cargo

Port reform

Better port infrastructure

reduces maritime transport costs
 Dependent variable:

maritime transport costs per tonne of containerizable cargo

Port reform

Better (perceived) port efficiency

reduces maritime transport costs
 Dependent variable:
maritime transport costs per tonne of containerizable cargo 

Port reform

Better general transport infrastructure

does NOT reduce maritime transport costs
 Dependent variable:
maritime transport costs per tonne of containerizable cargo 

Port reform

Port privatization in the EXPORTING country

reduces maritime transport costs
 Dependent variable:
maritime transport costs per tonne of containerizable cargo 

Port reform

Trade facilitation in the IMPORTING country

reduces maritime transport costs
 Dependent variable:

maritime transport costs per tonne of containerizable cargo

Port reform

Better connectivity between ports/

more competition among carriers
reduces maritime transport costs
To sum up:
Differences in maritime freights depend on…
• Distances • Competition
• Type & value of goods • Economies of scale
• Imbalances • Port characteristics
Lower Transport Costs
-> More trade
-> Economies of scale
-> Lower Transport Costs
Maritime Freights

1: Determinants
2: Fluctuations
3: What can we do?
Bulker Spot Earnings $/day

Source: Clarksons Research, 27 March 2009

Containership charter rates $/day

Source: Clarksons Research, 27 March 2009

Causes of the (increased) volatility ?
50%
Per cent of goods' 45%
market price
40%
35%
30%
25%
20%
15%
10%
5%
0%
1970 1980 1990 2007
Jute from Bangladesh 12.1% 19.8% 21.2% 44.2%
Tea from Sri Lanka 9.5% 9.9% 10.0% 13.4%
Coffee from Colombia 4.2% 3.3% 6.8% 2.5%
Coca beans from Ghana 2.4% 2.7% 6.7% 3.5%
Causes of the (increased) volatility ?
1) Fluctuations in demand 4) Lower variable costs
2) The pig cycle 5) The oil price (?)
3) Speculation 6) Trying to avoid future
volatility…
 
Less trust – less demand
“If, for instance, an Indian importer wants to
buy grain from the US, the exporter might
not trust you and then the deal will not be
done.”

Martin Sommerseth Jaer, shipping analyst at Arctic Securities in Oslo,

as quoted in Fairplay on-line, October 2008.
 
Less trust – less demand
THE IMF predicted today a near-total standstill
for the global economy in 2009, with sharply
lowered trade projections.
(…) world growth is expected to fall to its lowest
rate since the Second World War

Fairplay on-line, 28 January 2009

Causes of the (increased) volatility ?
1) Fluctuations in demand 4) Lower variable costs
2) The pig cycle 5) The oil price (?)
3) Speculation 6) Trying to avoid future
volatility…
 

The shipping cycle

A presentation of four years ago…

 5
15
25
35
45
55
06.94
09.94
12.94
03.95
06.95
09.95
12.95
03.96
06.96
09.96
12.96
03.97

Data from Clarksons Research

06.97
09.97
12.97
03.98
06.98
09.98
12.98
03.99
06.99
New contracts

09.99
12.99
03.00
06.00
09.00
12.00
03.01
Charter Rate

06.01
09.01
12.01
03.02
06.02
09.02
12.02
03.03
06.03
09.03
12.03
Pork meat is expensive:
the farmer “orders” piglets

03.04
06.04
09.04


12.04
10000
15000
20000
25000
30000
35000
40000
 5
15
25
35
45
55
06.94

09.94
12.94

03.95
06.95

09.95
12.95

03.96

06.96
09.96

12.96
03.97

06.97
09.97

12.97

03.98
06.98

09.98
Deliveries

12.98

03.99
06.99

09.99

12.99
03.00

06.00
New contracts

09.00

12.00
03.01
06.01
09.01

12.01
03.02
06.02

09.02

12.02
03.03

06.03
Piglets take time to grow

09.03

12.03

03.04
06.04


09.04
12.04
5
15
25
35
45
55
 10000
15000
20000
25000
30000
35000
40000
06.94
09.94
12.94
03.95
06.95
09.95
12.95
03.96
06.96
09.96
12.96
03.97
06.97
09.97
12.97
03.98
06.98
Charter Rate

09.98
12.98
03.99
06.99
09.99
12.99
Deliveries

03.00
06.00
09.00
12.00
03.01
06.01
09.01
12.01
03.02
06.02
09.02
12.02
03.03
06.03
09.03
Pigs enter the market:
Price of pork meat falls

12.03
03.04
06.04


09.04
12.04
5
10
15
20
25
30
 
The model of a cycle

ORDERSt =  CHARTERRATEt

CHARTERRATEt =  (1/DELIVERIESt )

DELIVERIESt =  ORDERSt-24
 0
10
20
30
40
50
60
70
01.05

07.05

01.06

07.06

01.07

07.07

01.08

07.08

01.09

07.09

01.10

07.10

01.11

07.11

01.12

07.12
DELIVERIES

01.13

07.13

01.14

07.14

01.15

07.15

01.16
CHARTER RATE

07.16

01.17

07.17
A “forecast”

01.18

07.18

01.19

07.19

01.20

07.20

01.21

07.21

01.22

07.22

01.23

07.23

01.24

07.24
0
10000
20000
30000
40000
50000
60000
70000
 
“The shipping industry is now attempting to
undo the self-inflicted damage of a bloated
new building order book, the growth of
which has encouraged a near doubling of
shipbuilding capacity in the past ten years.”
Lloyds List, January 2009
Causes of the (increased) volatility ?
1) Fluctuations in demand 4) Lower variable costs
2) The pig cycle 5) The oil price (?)
3) “Speculation” 6) Trying to avoid future
volatility…
 
More “speculation”
… i.e. more traders who are not themselves
users or providers of the goods or services.
More traders are participating in the market
who are not themselves users or providers of

transport services, but purchase future
positions aiming at speculative capital gains.
As has been seen in other markets, such as
shares, crude oil, or food commodities in early
2008, the expectation of future gains
encourages traders to hold on to positions, thus
further worsening the shortage of supply and
increasing the prices - until the bubble
bursts…
Causes of the (increased) volatility ?
1) Fluctuations in demand 4) Lower variable costs
2) The pig cycle 5) The oil price (?)
3) “Speculation” 6) Trying to avoid future
volatility…
 
Higher fix costs – lower variable costs
 
Change of freight rate
Freight OLD Demand 1
rate Demand 2

change short term

in capacity limit
freight
rate Supply with
high variable and low fix costs

Volume of trade
change in volume
 
Change of freight rate
Freight NEW Demand 1
rate Demand 2

change short term

in capacity limit
freight
rate

Supply with
low variable and high fix costs
change in volume Volume of trade
Causes of the (increased) volatility ?
1) Fluctuations in demand 4) Lower variable costs
2) The pig cycle 5) The oil price (?)
3) “Speculation” 6) Trying to avoid future
volatility…
 
What about the oil price?
 200
400
600
800
1000
1200
1400
1600

0
Q1 2001

US$
Q2 2001
Q3 2001
Q4 2001
Q1 2002
Q2 2002
Q3 2002
Q4 2002
Q1 2003
Q2 2003
Q3 2003
Q4 2003
Q1 2004
Q2 2004
Q3 2004
Q4 2004
Q1 2005
Q2 2005
Q3 2005
Q4 2005
Q1 2006
Q2 2006
Q3 2006
Q4 2006
Q1 2007
Q2 2007
Q 3 2007
Oil price and freight rates

Q4 2007
Q1 2008
B unker Prices

Freight Rate Pacific
Freight Rate Asia-Eur ope

Freight Rate Transatlantic

Causes of the (increased) volatility ?
1) Fluctuations in demand 4) Lower variable costs
2) The pig cycle 5) The oil price (?)
3) “Speculation” 6) Trying to avoid future
volatility…
 
And if I want to protect myself…?
 
The higher the volatility…
… the more the traders and providers will
want to purchase protection, i.e. future
contracts (e.g. Forward Freight Contracts –
FFCs)…
… and the more future contracts there are, the
more volatility we get.
Causes of the (increased) volatility ?
1) Fluctuations in demand 4) Lower variable costs
2) The pig cycle 5) The oil price (?)
3) Speculation 6) Trying to avoid future
volatility…
Maritime Freights

1: Determinants
2: Fluctuations
3: What can we do?
What can we do?
 To reduce fluctuations of freights

• Carriers:
Think long term
 To reduce fluctuations of freights

• Carriers:
Think long term
• Ports:
invest and reform
to avoid congestion
 To reduce fluctuations of freights

• Carriers:
Think long term
• Ports:
invest and reform to avoid congestion
• Governments:
Do not re-invent “national fleets”.
 To reduce fluctuations of freights

• Carriers:
Think long term
• Ports:
invest and reform to avoid congestion
• Governments:
Do not re-invent “national fleets”.
this would be a pig cycle of ideas…
Maritime Freights

1: Determinants
2: Fluctuations
3: What can we do?
What UNCTAD does…
UNCTAD’s Trade Logistics Branch

Sections:
Trade Facilitation
Transport
Legal and Policy
UNCTAD’s Trade Logistics Branch

Activities:
Meetings and seminars
Research and publications
Technical cooperation projects
UNCTAD’s Trade Logistics Branch

Activities:
Meetings and seminars
Research and publications
Technical cooperation projects
“Expert Meetings”
Conference on ICT and Logistics
Workshops on
WTO – Negotiations
on Trade Facilitation
UNCTAD’s Trade Logistics Branch

Activities:
Meetings and seminars
Research and publications
Technical cooperation projects
Review of
Maritime Transport
UNCTAD
Transport Newsletter
Quarterly
Electronic distribution
Articles,
and news
about publication and
events
Studies

e.g. on legal aspects of

international trade
UNCTAD’s Trade Logistics Branch

Activities:
Meetings and seminars
Research and publications
Technical cooperation projects
 Global Projects:
e.g. Customs Automation
e.g. “Capacity Building in Trade and Transport Facilitation
for Land Locked and Transit Developing Countries ”

Corridor:
Asuncion - Corridor:
Montevideo Bangkok - Vientiane

Corridor:
Walvis Bay - Gaborone
Port Training Programme
 Integrated country projects:
e.g. Afghanistan
“Emergency Customs Modernization
and Trade Facilitation project”
Maritime Freights

1: Determinants
2: Fluctuations
3: What can we do?

Thank You