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Global shipping – a dynamic market

Growth through globalization

Throughout history the oceans have been important to people around the world as a means of transportation. Unlike a few decades ago, however, ships are now carrying goods rather than people. Since the rise of intercontinental air travel, sea travel has become limited to shorter trips (ferry services across the Baltic and North Seas, the Mediterranean, Japan and Southeast Asia) and recreational cruises. The latter have recently experienced a tremendous boom and represent an increasingly lucrative source of tourist income. As markets became increasingly globalized, shipping volumes soared. From the 1950s to the latest global economic crisis, the growth rate of international trade was almost consistently twice that of economic activity as a whole. From 2000 to 2008 world trade increased by an average 5.4 per cent each year, while economic activity, as measured by the global Gross Domestic Product (GDP), increased by only 3 per cent per annum. Due to the spectacular rise of trade vis-à-vis economic growth, world trade since the 1950s has more than trebled to 45 per cent of the global GDP, while goods destined for the processing industry have in fact more than quadrupled.

With respect to the value of the goods, about 23 per cent of world trade is between countries with a common border. This percentage has remained fairly constant over recent decades. Between continents, however, it differs a great deal depending on their level of development. In Europe and North America the proportion is the highest at 25 to 35 per cent. This trade is predominantly transacted by road and rail. Cargo between countries without a common border is carried mainly by sea, although increasing quantities of manufactured goods are being forwarded by air. Growth rates for air freight are more than double those for shipping in recent years. Which mode of transport handles how much cargo depends on the (relative) transportation costs and the value-to-weight ratio of the goods – the higher the value per unit of weight, the less significant the cost of transportation. Punctuality and reliability are considered more important for valuable commodities.
According to research by economists, higher-income households purchase higher-quality products. The residents of wealthy countries therefore tend to buy more quality goods. Accordingly, rising incomes influence the demand for transport in three ways. First, quality goods are more expensive. Their value-to-weight ratio is therefore higher and the cost of transporting them is lower compared to their value. Second, as incomes rise, consumers are more likely to purchase certain expensive products and fancy goods. At the same time they expect to receive the articles within a very short time. Third, the delivery period itself is a key element of product quality, having an increasing influence on purchasing decisions; customers are no longer prepared to tolerate long delays. All of these factors have contributed to the even higher growth rates of air freight in comparison to shipping.

What fuels maritime traffic

As mentioned, the main reason behind the massive increase in shipping was the growth in world trade. But institutional and technological factors also had a role to play. In the past, the liberalization achievements of GATT and its successor the WTO provided a new momentum to world trade. China’s economic opening to the outside world, which led to their admission to the WTO in 2001, was also very significant – its exports quadrupled within 5 years. Another example of integrated markets boosting international trade is a trebling of exports from Mexico to the USA within 6 years of NAFTA being established.

The appetites of the industrial nations and newly-industrializing emerging economies, particularly China and India, for energy and mineral resources led to increasing quantities of goods being transported from far-distant countries. The information and communications technology revolution dramatically reduced the costs of mobility and accessibility. It allowed new network connections and production processes such as just-in-time production, outsourcing and offshoring, and provided a tremendous stimulus to logistics. As a result of rising demand, transportation costs fell. Ships increased in size. Economies of scale were exploited. Furthermore, there were technological advances and organizational improvements in port management – of general cargo traffic, for instance. Of overriding importance was containerization, the greatest transportation revolution of the 20th century.
The increasing spread of open ship registries, most notably embraced initially by Panama and Liberia, allowed the shipping companies to combine the relatively low capital costs in the industrial countries with the low labour costs for seafarers from developing countries like the Philippines. It became possible to compensate for sharply rising labour costs, especially in the industrial nations. Furthermore, by changing to an open registry, ship-owners could avoid very costly regulations (such as national labour and employment laws). It is hardly surprising, therefore, that according to UNCTAD, the ten top open and international registries accounted for about 55 per cent of the global merchant fleet in 2008. In 1950 this figure was only 5 per cent. This development has helped shipping to become a genuine global economic sector. As far as ownership structure is concerned, however, it is far less global. A few countries own the bulk of the fleet. About 54 per cent of world tonnage (measured by carrying capacity or “deadweight tonnage”, dwt) is controlled by owners (shipping companies) in Japan (16.0), Greece (15.3), Germany (9.5), China (8.4) and Norway (4.5). In July 2009 the global merchant fleet consisted of a total of 53,005 vessels, made up of 31 per cent traditional general cargo ships, 27 per cent tankers, 15 per cent bulk carriers, 13 per cent passenger liners, 9 per cent container ships, and 5 per cent other vessels. In terms of carrying capacity in dwt, however, the great variation in ship sizes gives quite a different picture. From this perspective tankers and bulk carriers each account for 35 per cent, container ships 14 per cent, general cargo ships 9 per cent and passenger liners less than 1 per cent. In all, the global merchant fleet has a capacity of just under 1192 million dwt.

 

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Modern ships – large, fast and highly specialized

Marine innovations have helped to fuel the growth of maritime freight traffic. The following are significant:SIZE: The average size of ships has increased substantially. Larger vessels reduce the shipping costs per load unit for crew, fuel, demurrage, insurance, servicing and ship maintenance. Port authorities must respond to increasing vessel sizes by expanding port infrastructure (wharfage, transport connections inland) and improving port access (e.g. by deepening fairways). Therefore they too face increasing costs. This can bring the owners – usually the State or local authorities – into financial difficulty: the capital investment is usually funded from the public purse, but the full costs are not passed on to port users.

SPEED: The average speed of a merchant ship is about 15 knots (1 knot = 1 nautical mile per hour = 1853 metres per hour), or 28 kilometres per hour, the equivalent of about 670 kilometres a day. Newer ships are capable of 25 to 30 knots (45 to 55 kilometres per hour). Marine propulsion has improved considerably since the inven- tion of the screw propeller, particularly the double propeller. This development reached its peak in the 1970s. Achieving even higher speeds is a challenge and is likely to prove extremely expensive. Experts are therefore predicting only limited increases to average commercial shipping speeds.
8.3 > General cargo ships are in fact shipping specialists. A large proportion of the goods they transport are awkwardly-shaped and bulky, and do not fit into standard containers. Their cargo includes heavy goods and project cargo for major building projects such as power stations, offshore installations and mining. Some pieces of cargo weigh more than 1000 tonnes. © maribus (after Beluga Shipping GmbH)General cargo ship8.3 > The capacity of the global oil tanker fleet is huge: in 2009 it was 418 million tonnes. This makes oil tankers the most important cargo ships in the global fleet next to bulk carriers. Interestingly pollution from tanker accidents has reduced considerably in past decades, despite the increased volumes of oil transported. This can mainly be traced back to improvements in shipping technology. © maribus (after Schulte Group/www.eiga.de)Oil tanker8.3 > The total capacity of passenger ships and cruise ships, accounting for only one per cent of the global fleet, is relatively small. Nonetheless the sector is booming and has become a lucrative and growing business for tour companies. Despite the economic crisis the major shipyards are continuing to build bigger and increasingly elaborate ships. © maribus (after TUI Cruises GmbH)Cruise liner8.3 > The container shipping industry has grown considerably in importance over past decades. Standard container sizes have led to significant savings of time spent on unloading and transferring cargo to trucks and rail. In terms of capacity per ship, container ships left general cargo ships behind long ago.  © maribus (after Rickmers Holding GmbH & Cie. KG)Container ship8.3 > Bulk carriers, like oil tankers, accounted for 35 per cent of the total capacity of the global fleet in 2009. These ships transport goods such as ores, coal and cereals. The principal routes for ore shipments are from South America to Europe and Japan as well as from Australia to Japan. The major shipping routes for coal are from the major exporters of Australia and South Africa to Western Europe and Japan.  © maribus (after Rickmers Holding GmbH & Cie. KG)Bulk carrier
  • Tankers for crude oil, petroleum products, chemicals, liquid gas and fruit juice concentrate;
  • Bulk carriers for bulk goods such as ores, coal, grain;
  • Bulk carriers for large-volume unit loads such as motor vehicles and iron;
  • Refrigerated vessels (reefers) for fruit from the Southern Hemisphere;;
  • General cargo ships;
  • Container ships, which are increasingly taking on the tasks of general cargo ships on long-haul routes;
  • Ferries for shipping trucks as well as roll-on/roll-off (Ro-Ro) ships, which carry articulated lorries to drive the cargo onto the ship. These two are taking over the tasks of general cargo vessels on short-haul routes.

By speeding up cargo handling, specialization has been responsible for reducing the costs per transported unit. Where special ships can be utilized to capacity, there- fore, economies of scale have been achieved.AUTOMATION: Various automation technologies have been introduced to shipbuilding and ship operations, including self-loading/unloading systems, computerized navigation, and the global positioning system (GPS). Automation has markedly reduced the number of crew needed and at the same time substantially improved safety standards. According to data service provider “IHS Fairplay”, total vessel losses (due to accidents or sinking) have declined from more than 200 a year in the mid-1990s to about 150 now – a remarkable improvement in safety when measured against the sharp rise in fleet numbers. Maritime freight traffic was booming for many years. The amount of cargo transported by sea exceeded the 8 billion tonne mark for the first time in 2007. Global shipping had therefore doubled since 1990 (an average annual increase of over 4 per cent). Transport capacity, too, virtually doubled in the same period to almost 33 trillion tonne-miles.

The global recession in 2008/2009 triggered a massive slump in world trade and, accordingly, shipping. Following a modest rise of nearly 3 per cent in 2008 – trade nosedived by about 14 per cent in 2009. Freight rates fell to historic lows on many sub-markets. As at the beginning of 2009 about 9 per cent of bulk carriers worldwide lay idle, unutilized, in ports, this capacity is coming back only slowly to the market in the 2010 recovery.

What ships carry – Oil, containers, and dry cargo

Ocean shipping can roughly be divided into two sub-markets – on the one hand liquid cargo such as oil and petroleum products, on the other dry cargo. Dry cargo is made up of bulk goods, the five most important being iron ore, coal, grain, phosphates and bauxite. Other dry cargo consists of bulk materials such as non-ferrous metal ores, feed and fertilizers, and particularly a variety of goods packaged in smaller transportation units. The latter are labelled as general cargo and shipped on liners, i.e. vessels with scheduled sailings, chiefly in containers. Liner shipping usually offers its services according to fixed conditions that are agreed on between competitors at so-called liner conferences.

The single most significant type of cargo worldwide is crude oil, which alone accounts for roughly a quarter of all goods transported by sea. The major importers are the European Union, the United States of America and Japan. All three are supplied by the Middle East, the most important oil-producing region. North America also obtains oil from West Africa and the Caribbean, while Europe imports from North and West Africa. The main shipping lanes therefore stretch westward from the Arabian Gulf around the Cape of Good Hope or through the Suez Canal, and from Africa northward and westward to Europe and North America. Others connect the Arabian Gulf to East Asia and the Caribbean to the Gulf Coast of the United States.

Of course, crude oil is not the only commodity transported by sea. Smaller, specialized ships (product tankers) carry processed petroleum products from major peripheral refinery locations to the consumption areas of North America and Japan. This amounted to about 815 million tonnes worldwide in 2007. In terms of quantity, iron ore and coal are significant dry-bulk goods. Iron ore is transported over long distances in very large ships, mainly from Brazil to Western Europe and Japan, and from Australia to Japan. The most important coal routes are from the major export countries of Australia and South Africa to Western Europe and Japan and also from Colombia and the East Coast of the United States to Western Europe, as well as from Indonesia and the West Coast of the United States to Japan. Most of the coal transported is utilized as steam coal to generate electricity in power stations. A third is used as coking coal for smelting in the iron and steel industry. Dry bulk goods also include grain and oil-bearing seeds (wheat, barley, rye, oats, sorghum and soya beans). Here however, the quantities and direction of transport routes fluctuate much more than other vital commodities de- pending on harvest seasons and yields. The USA, Canada, Argentina, Australia and France are the major grain exporters. Africa and East Asia are major importers due to frequent local shortages. Although the main grain producers (the United States, Russia, China and India) retain most or even all of their production in their own country, what remains for global trade is still enough to include grain among the bulk commodities.
Increased international division of labour, in motor vehicle production for instance, has led to general cargo such as cars and parts accumulating in such large quantities that entire shiploads can be forwarded on specialized ships outside the scheduled liner services. Large car carriers and special tankers for chemicals or fruit juice concentrate also belong to this special shipping sector, operating on contracted routes. Today most other dry cargo is transported in container ships. These standardized containers have brought a flood of technical innovations (such as special cranes at transshipment points) and fundamental organizational innovations in their wake. Being standardized, they can be transported with any mode of transport and rapidly transferred to trucks or railway cars fitted with the appropriate equipment. From an economic point of view this has dramatically reduced transportation costs, mainly as a result of faster loading and unloading. Capital investment along the entire transport chain was necessary to ensure the containers were used efficiently, considerably increasing capital intensity. In contrast, labour intensity was sustainably reduced, as fewer dockworkers were needed for loading and unloading. Since 1985 global container shipping has increased by about 10 per cent annually to 1.3 billion tonnes (2008). During the same period its share of the total dry cargo transportation rose from 7.4 per cent to a quarter. A total of 137 million containers, measured in TEU, were transported in 2008. This quantity, however, decreased again in 2009 by 10 per cent. Typically the cost of transporting a TEU containing more than 20 tonnes of freight from Asia to Europe is roughly the same as a one-way Economy Class flight along the same route. This weight in everyday goods such as electrical appliances in most cases represents a transportation cost of less than 1 per cent of the selling price.

The key shipping routes

If all commercial goods are taken into account it becomes clear that there is a relatively small number of principal transport routes, and these pass through only a few areas of the oceans. The busiest are the approaches to the ports of Europe and East Asia, particularly Japan but also Shanghai, Singapore and Hong Kong, and the United States. The East Coast of the United States in particular is a major sender and receiver of cargo. Narrow straits further concentrate maritime traffic. Bottlenecks include the Straits of Dover, Gibraltar, Malacca, Lombok and Hormuz, and the Cape of Good Hope at the southern tip of Africa. Traffic builds up in these areas, making ships vulnerable to attack by pirates.

Cargo imbalances are a typical feature of the traffic with Asia – depending on the trade balance. Much more cargo is being shipped from Asia than in the opposite direction. This imbalance is particularly notable on the Pacific route, at almost 10 million TEU (2007). From Asia to Europe it is almost 8 million TEU. The North Atlantic traffic between the highly-developed economies of North America and Europe, however, are much better balanced, registering a difference of barely 2 million TEU. The reason for this situation is that since the mid-1980s so many manufacturing processes have been relocated from the traditional industrial countries to the developing nations and emerging economies, particularly China and the countries of South East Asia. With the prevailing exchange rates, China in particular has become the cheap “workshop of the world”. This process has been promoted by the introduction of the container and the corresponding increase in shipping productivity. The transportation costs between where goods are manufactured and where these goods are consumed have been reduced considerably. Dry cargo such as automobile and machinery parts – until now transported by conventional means – has been increasingly containerized, contributing to the growth in container traffic. Until the global economic downturn the demand for new ships was great, but as the effects of the crisis were felt the tide turned and many companies cancelled their orders. All the same we can assume that even more ma- rine transport capacity will become available in the near future as new ships are delivered, overtaking demand. Freight rates are therefore unlikely to recover from their current all-time lows any time soon.

 

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