This is an attempt to study the Supply and Demand Curves in shipping and see how this affects the freight rates.
The demand for shipping, like that for all forms of freight transport results from the final consumers demand for goods; it is not a direct demand but a derived demand. Shipping is a factor which is not demanded for its own sake but is derived from the demand for the goods that are being transported. This demand is closely related to the growth in world income, which has a major influence on the level of seaborne trade. The average distance of hauls, cost of transportation and other factors particularly international crises have an important effect on the demand for shipping.
Demand for shipping
The demand for shipping is dependant on the amount of international trade generated between countries. Seaborne trade accounts for about 75% of international movement. The most important factors affecting trade are
The level of world economic activity and particularly OECD countries
The volume of seaborne trade generated and its major components
Distance over which the cargo is hauled
Freight rates and external factors and events
Demand Curve in shipping.
The Demand for shipping is inelastic. A customer for shipping services will not stop importing the commodities only because the freight rates are too high. Consider for example a steel plant even if the freight rates are high the import of coal and iron will continue. In the short term and industrial company will need to continue to buy and ship the goods that are need for continuing the production. In the medium to long term however alternate means of transport, or even alternate sources maybe considered to offset the increase cost of shipping. Hence the shape of the demand curve would be as below.
The total of the world merchant fleet is the total supply in tonnage terms. The shape of the supply curve in the short run is as shown below....