1. SHIPPING DEMAND ("What triggers global demand for shipping goods?
")
1.1. Overview: Determinants of Shipping Demand
"Shipping demand refers to the need for transportation services in global trade. It’s
not driven by the shipping industry itself but by global economic activities that
require goods to be moved across the world. Let’s look at the key determinants of
this demand."
1.1.1. World Economy
"The first and most crucial factor is the global economy. As economies grow, so
does the demand for goods, and with it, the demand for shipping. This is because
when countries produce more, export more, and consume more, they require more
transportation capacity.
For instance, during times of strong economic growth in major markets like the U.S.,
Europe, or China, global trade volumes increase, which directly raises the
demand for shipping. In contrast, during economic recessions or slowdowns,
demand drops as less goods are moved internationally.
Example: When China experienced rapid economic growth in the 2000s, its need to
import raw materials like iron ore and export manufactured goods created a huge
surge in demand for shipping services."
1.1.2. Seaborne Trade
"The second major driver is seaborne trade—the total volume of goods
transported by ships. Around 90% of global trade is carried by sea, so any
increase in international trade directly impacts the demand for shipping.
Key factors influencing seaborne trade include:
Regional trade agreements, like NAFTA or the European Union, which
create more cross-border trade and, therefore, more shipping.
Global supply chains: With the rise of globalization, companies source
materials from all over the world, leading to increased shipping needs.
Consumer demand: As demand for products rises, especially for e-
commerce, more goods need to be shipped.
Example: The rise of China’s manufacturing sector and its role as the world’s
largest exporter massively boosted seaborne trade over the last two decades,
increasing shipping demand globally."
1.1.3. Transport Costs
"Next, we have transport costs, which are a key determinant of demand. As
shipping becomes cheaper, businesses are more likely to trade globally.
Lower transport costs encourage more shipping activity by making it more
affordable to move goods. These costs are influenced by:
Fuel prices: The price of marine fuel (bunker fuel) directly impacts the cost
of shipping.
Labor: Crewing costs can vary based on labor laws in different countries.
Ship size: Larger ships (like the ultra-large container ships) reduce the cost
per unit shipped.
Technology: Technological advancements such as fuel-efficient engines or
new logistics systems can significantly reduce costs.
Example: Recent advancements in fuel efficiency have made it cheaper to operate
ships over long distances, which has led to increased demand for global trade
routes."
1.1.4. Other Factors
"Other factors also play a role in determining shipping demand.
1. Average Haul: The longer the distance goods must be transported, the
greater the demand for shipping services.
o Example: Shipping iron ore from Brazil to China requires more
shipping services (in ton-miles) than shipping the same quantity from
Australia to China due to the longer distance.
2. Random Shocks: Events such as natural disasters, political unrest, or
pandemics can unexpectedly alter demand.
o Example: The COVID-19 pandemic caused significant disruptions in
global trade, with reduced shipping demand during the initial
lockdowns and later surges as e-commerce demand exploded."
1.2. Shipping Demand Curve and Its Elasticity
"Now, let’s discuss how demand changes with price, using the shipping demand
curve."
Demand Curve: This curve shows the relationship between freight rates
and the demand for shipping services. It reflects an inverse relationship—
when freight rates are lower, more companies want to ship goods, increasing
demand. When rates rise, demand falls.
Elasticity of Demand:
o In the short-run, demand is relatively inelastic. Companies need to
ship goods regardless of price in the immediate term. For example,
essential goods like oil or food must be transported even if prices rise.
o In the long-run, demand becomes more elastic as companies have
time to adjust. They can source goods locally or find alternatives if
shipping becomes too expensive."
2. SHIPPING SUPPLY ("How does ship availability impact global trade?")
2.1. Overview: Determinants of Shipping Supply
"Supply in the shipping industry refers to the number of ships available to transport
goods.
If FR is high: More ships become profitable, that means Supply of available
Shipping Capacity rise
If FR is low: Unprofitable for some ships (Old, Less fuel-efficient), that means
they would be laid up, Supply fall
The main factors influencing supply include:
Fleet size: The number of ships available.
o New ship orders: This factor only affect in long term but it takes
years (Time-lag) for these ships to be delivered. A concern about this is
the possibility of overcapacity not matching the Demand.
o Scrapping old ships: if long period of FR decline occurs, shipping
company will scrap unprofitable ships to cut losses which result in the
reduction of shipping availability and that means the fall in Supply
Operational efficiency: For high FR, companies may increase the speed of
shipping, which means more voyages can be done within the same time,
which means Supply rise. For low FR, companies may reduce the speed to
save fuel, which means less voyages are done and result in a fall in Supply."
2.2. Short-Run and Long-Run Shipping Supply
"In the short run, shipping supply is fixed because it depends on the number of
ships already in operation. Shipping companies cannot easily add or remove ships
to meet demand spikes, so supply is relatively inelastic in the short term. For
example, when demand rises suddenly, shipping companies may increase ship
speeds or reduce time in port to maximize efficiency, but these are limited
adjustments.
In the long run, supply becomes more flexible. Companies can have enough time
to build new ships or scrap old ones to adjust to market conditions.
Example: After a period of high freight rates, many shipping companies
order new ships. However, it takes time often 2 to 3 years for these ships to
be built and delivered."
2.3. Rigidity of Supply (Tính cứng nhắc của Cung)
"The supply of ships is rigid due to several factors:
High capital costs: Ships are expensive to build and operate, it can be even
riskier for investors because of long investment cycles, which is often 25
years to get the money back.
Long construction times: It takes around 4 years to build a new ship.
Port capacity constraints: Even if more ships are built, port infrastructure
may limit the number of ships that can be accommodated at a time. The
water depth, for example, may not qualify
These factors make it difficult to quickly increase or decrease the supply of ships in
response to changes in demand."
3. THE FREIGHT RATE MECHANISM (Cơ chế giá cước vận tải) ("What drives
the ever-changing freight rates?")
"The freight rate mechanism is driven by the interaction between supply and
demand. When demand for shipping exceeds the available supply of ships, freight
rates rise. When there’s an oversupply of ships and not enough goods to transport,
freight rates fall.
The point at which supply meets demand is known as equilibrium, where both
shippers and carriers agree. This is the amount of shipping capacity supplied by
carriers matches the amount of capacity needed by shippers.
Adjustment over time: FRM helps balance shipping market overtime
Example: During the COVID-19 pandemic, a surge in e-commerce led to high
demand for container shipping, while a shortage of containers and port
congestion pushed freight rates to record levels."
4. SHIPPING CYCLE (“Is there anything that can help forecast the
movement of the Shipping Industry?”)
4.1. Shipping Cycle: Origin and Characteristics
"The shipping cycle refers to the repeating pattern of booms and busts in the
shipping market, which are driven by changes in supply and demand.
There are some main drivers that cause the cycle to repeat:
Demand increases
Ship shortages
New ship order
Oversupply of Ships
Market-self Correction: As FR decline -> Ship would be laid-up to cut losses->
The market eventually balance -> Cycle start over
It’s important to note that the length of a shipping cycle is unpredictable, but it
generally includes economic highs and lows that directly impact freight rates and
profitability."
4.2. Stages of the Shipping Cycle and Real-Life Example
"There are four main stages in the shipping cycle:
1. Trough: When demand is low, and there’s excess shipping capacity, freight
rates drop to very low levels.
2. Recovery: As demand picks up, freight rates rise, and shipping companies
start making more money.
3. Peak: Demand is at its highest, and shipping rates hit their maximum.
Companies are highly profitable during this period.
4. Collapse: Over time, too many new ships are added to the market, creating
an oversupply. This causes freight rates to fall, leading to financial losses.
Example: After the 2008 financial crisis, the shipping market collapsed because
there were too many ships and not enough demand for shipping services, causing
freight rates to plummet."
4.3. Managing the Shipping Cycle
"Shipping companies can manage these cycles through smart strategies, such as:
Timing investments: It’s wise to invest in new ships during downturns when
prices are low and sell ships during the peak.
Operational efficiency: Maximizing ship utilization when demand is low
helps reduce costs.
Market forecasting: Using data to predict future cycles allows companies to
adjust capacity before the market changes."
5. CONCLUSION
"To wrap up, we’ve explored the freight rate mechanism in shipping:
1. Demand is driven by global economic conditions and the volume of trade.
2. Supply is rigid in the short run but flexible in the long run as new ships are
built.
3. Freight rates are determined by the balance of supply and demand.
4. Shipping cycles are a key part of the industry, and companies must manage
their strategies based on these cycles.