Maritime economics deals with pricing, profitability and sustainability of the shipping industry. The shipping industry has evolved since the first steamships were built in the nineteenth century. Shipping industry is associated with ingenuity, fabulous profits, professionalism and few disasters that have arisen out of miscalculations. The versatility and lucrative industry has thus undergone several scandals that have come up in the wake of building super tankers and its financial procurement. The essay focuses on the pricing, demand and supply of the shipping industry and the additional services demanded by shippers for maximising the use of sea transport.
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Maritime economics deals with the rules of supply and demand in the shipping market comprised of ship owners, bankers, brokers and shipbuilders whose combined action solves the complex task of transporting cargo by sea. The study of maritime economics is related to world economy because shipping is an international industry. Shipping of goods by the sea is related to the global economic activity because a change in political situation in one part of the world or a hike in oil price leads the ship owner to consider substantial changes in the shipping market. Several shipping fortunes were made out of political unrest that led to the closure of the Suez Canal. Political impact is a significant factor of the maritime market. Shipping has risen to be of international significance with the increase in the number of industrialised nations who depend on seaborne trade to export goods. The economic and political influence on the shipping industry can be better understood with the two way relationship between shipping and worldwide economic development. Economists who pioneered the concept of economics have envisaged shipping as a catalyst for economic progress. Further, shipping reduces the distance between destinations and enables traders to view business from a global perspective. The highest levels of efficiency are attained by a business when trade goes beyond the national level and explores international markets. The growth of global economy has significant links to the developments in sea trade. Maritime economics affects global economy because water carriage opens extensive opportunities for every kind of industry and surpasses the limitations of road transport. The sea coast and banks of navigable rivers gives chances for economic activity and improvements. The opportunities in the coasts and banks later penetrate into the adjacent lands and into the whole country. A cart full of load can be transported by road to a distant place whereas a ship full of load can be transported to the same place with a slightly higher number of man power and a slight increase in the duration. But the outcome of using the water mode of transport will be beyond comparison. Shipping industry has undergone a massive change with the unitisation and bulk shipping approaches envisaged during the mid 1960’s that has created global opportunities for manufacturers and raw materials.
The unitisation of the liner shipping business paved way for a revolution in the maritime market. The break bulk liner did not have the capacity to carry goods according to the momentum of world trade in the 1960’s and shipping industry analysts sensed the need for a change. Palletisation and containerisation were the initial changes made to increase the flow of cargo. The shipping industry underwent a sea change in the next twenty years. In the 1960’s, goods from Europe took months to reach the United States but with the implementation of new strategies, cargos landed safely within weeks of its dispatch from Europe to the United States with ease of handling and further transportation. The strategy used by the industry was proper organisation that solved the basic problem and opened the doors for unprecedented global economic activity. Bulk shipping strategies also created waves in the shipping industry and the related economic activity. Bulk transport of raw materials by water was evaluated as a coordinated handling operation where investment enhanced productivity. The economies of scale were implemented by investing in high speed cargo handling system and connecting the total transport systems. Bulk transport expenses were decreased to a greater extent with bulk shipping and it was inexpensive for industries to import raw material by sea from distant distributors who were located miles away rather than depend on expensive nearby distributors. Bigger ships made this possible and the size of the oil tankers became large by twenty times between the period 1945 and 1995. The size of the dry bulk vessels grew from ten to fifteen times during the same period. Hence the increase in economic activity via sea increased due to better cargo handling systems at port, improved integration with land and rail transport system and the related increase in the size of shipping vessels.
Though there have been various technical developments in the shipping industry, the cost of transporting goods have not increased notably. There has been a slight increase in the cost of transporting coal and oil during the 1940’s and 1990’s. The cost of transporting coal from East Coast North America to Japan was $8 in 1950 and it cost $12.7 in 1996. But these rates have undergone several increase and decrease with specific seven cyclic changes in the year 1952, 1956, 1970, 1974, 1980, 1989 and 1995 and the average cost was maintained at $10.9 per tonne. The cost of transporting oil also underwent similar changes with the lowest being fifty cents and the highest being $2.1 per barrels during the Suez Canal crisis. In the year 1994, the cost of transporting oil was at $0.5 per barrel. The cost of maritime transport has remained without change when there is a ten to twenty fold increase in the price of commodities in the economy. The percentage of freight charges in the total cost of a product has fallen due to the stable pricing of shipping transport. For example, the cost of transporting Arabian Light crude oil formed 25 percent of the cost of barrel oil in 1960 whereas it is only five percent of the cost of a barrel in 1990. This is one of the reasons why oil companies dropped the tanker business. The cost effectiveness of the shipping industry is attributed to the perfect combination of economies of scales that comprise improved ports, modern technology and efficient cargo handling system.
Shipping economics can be evaluated after considering several factors like the importance of commercial subdivisions in the shipping market. The subdivisions include the variety of cargoes carried by liners, difference in services and the difference in the economic structure when compared to bulk shipping. Another factor significant to the study of maritime economics is when shipping industry is considered as a single market. Certain shipping companies function as both liners and bulk carriers while most of the ships are built to operate in different markets. However, shipping cannot be treated as sole entities. In a recessive market, ship owners can move their operation from one market sector to another in order to prevent economic problems. Therefore the variations in supply and demand can impact other sectors with basic changes in the maritime industry. However, it may be noted that economic analysis of the maritime industry can be conducted by considering shipping as an international business and the economic forces that play an important role subject to national and international policies and intervention. Political policies influence the cost, price and free market competition in the shipping industry (Stopford, M, 1997, p.1-7).
Shipping companies operate in the transport market where there is a combination of cooperation and competition. The competitors for shipping companies are road transporters, short sea shipping with road and rail and deep sea shipping with air freight for high value goods. The level of competition is higher than what it seems at the first impression. Deep sea carriers are in cut throat competition with rail transport system. Raw material users like power stations and steel mills have the option to choose between imported raw materials and domestic raw materials. A power station can chose between raw materials by sea or rail and the decision would depend on the lower cost. Cost is not the only reason for the choice of transport. In the case of perishable goods like asparagus and raspberries, a journey by refrigerated ship will not reach the destination in prime condition. The competition is however intensified in this sector, where shipping companies use controlled settings in the container to prevent the loss of quality and grab a share of the market for water transportation of perishable goods. In the past twenty intense competition is combined with technical integration of transport systems for the transportation of grains which is carefully handled with integrated transport through barges, rail trucks and deep sea ships. The point of transport transition is equipped with automated grain elevators that receive grains from one mode of transport, retain it temporarily and then pass it on to the other transport system to be dispatched to the final consumer. Standard containers are built so that they can be transported through all modes.
The function of the shipping industry is to transport goods around the world. But the demand for shipping business can be studied only from a customers service perspective that includes price, speed, reliability and security (Stopford, M, 1997, p.9 -11 ).
The cost factor and the demand for transportation by sea determine the market share of the shipping industry. There is a widespread notion that transportation of cargo by sea is optimized when there are free markets. In economic literature, this statement can be defined as an economic welfare where marginal utilities of customers is equal to the marginal cost of suppliers in the short run and when costs break even, the economic welfare should be provided in the long run. Until supply and demand break there are chances for a surplus of shipping facilities. In these circumstances freight charges will be less whereas the cost of ship will be high leading to a non profitable situation and there will less orders for ship building. This situation also has a reverse side. When demand for shipping increases the orders for ships will increase. Ship operators are of the idea that most often there is a surplus of ship building capacity around the world and so demands will be met in a short time. In certain countries, the newly built ship is held for a longer period leading to surplus consumers. There are other countries where consumers are more than the ship building facility. This holds true for a great trading nation like Britain where advanced shipping facilities are available and the relevance of registration, ownership or service is not significant. But Norway experiences the opposite condition where there are highly sophisticated ship building facilities but the demand within the nation is less. The Philippine Republic serves with some of the best seamen though the country does not own much fleet. Hence the concept of free market requires further evaluation because its implementation in Soviet Union has been a failure.
The economies of scale is applied in major ports with modern cargo handling facilities and most of the ports have only one operator to shift the containers or handle bulks of cargo. If there is only one operator in a port there is room for competition and change of operators from time to time. In countries like Britain tax is imposed per ton handled in ports and this holds well if marginal rate of substitution is higher in the shipping.
Conventional economic concepts are best for problems in the shipping industry to solve the surplus and demand. A three point recommendation to convert shipping business into a lucrative one is to adopt a new policy that suggests the use of high speed twin hulled ships which are sometimes called catamarans. This will give rise to technologically advanced vessels that lead the sea borne trade in the world. But all ideas cannot be substantiated because unfair competition will lead to price cuts that does follow the safety norms with regard to capacity and will result in unfair buying and selling strategies of private vessels. Hence profits can be optimized by adopting the long term average return by considering current profits and capital gains. However, if the shipping company sense risk with this policy it is not advisable (Gross, R. 2004).
Privatization of ports and the subsequent revision of pricing is a factor that is included in Maritime economics. Ports were privatized in more than fifty countries from 1991 to 1998. The privatization policies transferred the operations like yard handling, line handling, pilotage, and stevedoring and gate security to private operators while the control of infrastructure and ownership remains with the public or port authority. Privatized ports implement new pricing strategies by considering their areas of operation, new organization and the competitiveness of the market created by the regional and local privatization procedures. Pre privatization pricing is also considered before the new price is implemented in ports. Private ports implement new pricing by envisaging the cost of modern facility and marginal social costs and improving asset utilization by improving productivity and by imposing multi level port tariffs with price elasticity for users. Privatization of ports include additions charges where certain services are outsourced to private providers and the port charges these cost to users like stevedores for berth and yard wharfage, charges lines for vessel dockage and cargo wharfage for empty boxes, charges shippers for cargo wharfage for full boxes, stevedores charge lines for vessel stevedoring and charge shippers for yard handling, lines charge shippers for port handling to cover port expenses and terminal handling charges. The commonly used pricing strategy at private ports is multi-layered structure and multiple levels of charges where charges are imposed on several intermediaries who are contracted to carry out the tasks of the port. Hence the latest trend is to combine various charges and impose an all inclusive charge for using ports by liners (Ashar, A, 2001).
Shipping lines are always under pressure to extend their services to distant geographical locations and make investments in value added services. Distant and far locations are covered though slot charters, mergers, alliances and acquisitions however value added services remains a challenge. The challenges for liners are with respect to terminal management, logistic services and inter-modal services. The prevailing services of liners are closely integrated for inter-modal service and logistic services. Value added services are different from shipping. Value added services will help liners to maintain a good relationship with shippers though this would attract a higher pricing for the special services (Heaver, T.D. 2002).
It is important for liners to manage time and design their services to avoid congest at port and infrastructure shortages. Delays and waiting times put pressure on the liners to maintain customer reliability and prevent additional cost to the shipper. Liners are required to follow well planned measures and tool to maintain schedule reliability and thereby retain the confidence of customers (Notteboom, T.E. 2006).
In conclusion, Maritime Economics deals with the pricing strategies of shipping companies to maximize profits, and manage costs and services efficiently for the overall profitability of the industry.
Ashar, A. 2001. Strategic Pricing in Newly Privatised Ports. International Journal of Maritime Economics, 3, (52-78). Available: http://www.palgrave-journals.com/ijme/journal/v3/n1/pdf/9100002a.pdf. Retrieved: August 19, 2008.
Goss, R. 2004. Economic Welfare and Maritime Economics. Retrieved August 19, 2008 from http://web.deu.edu.tr/smbm/RGoss.pdf
Heaver, T.D. 2002. The Evolving Roles of Shipping Lines in International Logistics. Retrieved August 19, 2008 from http://www.palgrave-journals.com/ijme/journal/v4/n3/abs/9100042a.html.
Notteboom, T.E. 2006. The Time Factor in Liner Shipping Services. Retrieved August 19, 2008 from http://www.palgrave-journals.com/mel/journal/v8/n1/abs/9100148a.html
Stopford, M. 1997. Maritime Economics. New York: Routledge.