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Supply of Sea Transport

The document discusses the factors that influence the supply of sea transport services. It defines supply as the quantity of shipping services offered at a given freight rate over a period of time. The supply is influenced by the active tonnage trading, available surplus tonnage, and potential new tonnage. Ship owners can adjust supply through new ship buildings, scrapping old ships, temporarily laying up ships, and improving fleet performance by increasing ship speed and reducing unproductive time in port. Higher freight rates generally lead to increased supply by encouraging more active tonnage and new ship buildings.

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854 views4 pages

Supply of Sea Transport

The document discusses the factors that influence the supply of sea transport services. It defines supply as the quantity of shipping services offered at a given freight rate over a period of time. The supply is influenced by the active tonnage trading, available surplus tonnage, and potential new tonnage. Ship owners can adjust supply through new ship buildings, scrapping old ships, temporarily laying up ships, and improving fleet performance by increasing ship speed and reducing unproductive time in port. Higher freight rates generally lead to increased supply by encouraging more active tonnage and new ship buildings.

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yesuplus2
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SUPPLY OF SEA TRANSPORT

In economics terms supply is defined as the amount of a product producers are


willing and able to offer for sale at a particular price within a certain period.
Ability means effective supply. At different prices produces will produce different
amount for sale. The law of supply suggest that supply will increase if price
increases all things being equal. Since high prices will make producers put more
goods on the market, it may induce other producers to enter the market. At a
lower price many producers will hold back supply in anticipation of a price
increase.
Supply of sea transport can be defined as the quantity of shipping
services offered on the market at a particular freight rate over a given
period of time. The freight rate and time element are important because under
normal conditions, the higher the freight rate, the larger will be the quantity of
shipping services supplied .The longer the period of time , the easier it is for ship
owners to adjust the amount of tonnage offered to take advantage of any change
in freight rate. This relates to the basic law of economics; the relationship
between prices i.e. freight rate and the quantity supplied, ceteris paribus.
The supply of shipping capacity (tonnage) consists of all vessels in the world. The
total supply is made up all vessels which are capable of trading within a certain
period of time. The freight market, however, determines the total supply over
time.
TOTAL SUPPLY= ACTIVE SUPPLY + AVAILABLE SUPPLY + POTENTIAL
SUPPLY
Active supply- the trading of operating tonnage is called active supply
Available supply (surplus tonnage): made up of vessels laid up for lack of
any suitable commercial employment, tonnage undergoing repair or detained for
some reason.
Potential supply: this is made up of newly built vessels and vessels entering
operations from some other area of activity
Due to the fact that price is directly/positively related to supply; the movement
of tonnage between active, available and potential will be sensitive to freight
rates.
There are four ways supply can be adjusted: new buildings, scrapping, fleet
performance (changes in speed, Space utilisation,) and laying up.

NEWBUILDING
There are two groups of people who order for new ships

1. Companies requiring new tonnage to fulfil their actual transport


requirements. These requirement may be those of a production process as
in the case of oil companies, e.g. Shell or shipping lines to augment their
fleet or build capacity
2. Speculators: these are people who invest in new ships at a particular time
when they perceive the price to be low, within expectation of selling the
vessel later on, at a higher price. They are risk takers with the ability to
interpret price moves often based on considerable statistical and other
information.
New building is one way supply can adjust to demand in the long term. This is
because of the time lag between ordering and delivery which ranges from 1-4
years.
New buildings will not necessarily increase supply. This is because the
investment decision will be to replace old and worn out ships but where the
investment decision is to expand tonnage capacity then supply increases.

SCRAPPING
To scrap, break up, demolish or dismantle the vessel is to remove it permanently
from the total supply of tonnage. Therefore, scrapping reduces supply. The
decision to scrap is based on the vessels earning capacity as against its total
cost. It will relate to a situation where shipowners expectation about future
trading prospect and profitability for a vessel is negative.
There are usually other options -to lay up or sell- but a shipowner will be denied
this if the vessel is physically, technologically and economically. Obsolete. That is
to say that its scrap value is greater than its potential trading value. The value of
the vessel may decline due to a combination of the following factors:
technological, economic, political and regulatory changes.
Relationship between freight rates and scrap prices
1. When freight rates fall, tonnage offered for scrap increases and scrap prices
fall
2. When freight rates appreciates/increases, tonnage offered for scrap values
and scrap prices increases.
The scrap market is not interested in the carrying capacity of the vessel but the
weight (LDT), ie the light displacement tonnage.
The light displacement tonnage is the weight of the vessel including machines,
equipment and spaces.
The types of metals in the vessel is important in delivering the scrap price

Non-ferrous metals like bronze, manganese, copper etc will command higher
prices than steel.
Other resalable parts/ items like generators, anchors, pumps chains etc will also
be important

LAYING UP
Laying up is a withdrawal of tonnage from active supply. It is a temporary
solution with the assumption being that laid up vessels will eventually return to
active supply. This occurs when there is a surplus supply of tonnage in relation to
the level of demand from shippers. When freight rates are high, there is little or
no laid up tonnage and vice versa.
The trend to lay up vessels mirrors freight rates but with a time lag. Ship owners
are extremely reluctant to lay up their tonnage because such an action means
that at all revenue from the vessels operation cease. There are fixed costs
associated with vessel capital and maintenance costs even in a laid up condition.
The movement from active supply will occur when the vessels freight earning
potential falls below the cost of operating the vessel by more than the incurred
costs while laying up, plus switching costs. The level of freight rate at which this
occurs is called the vessels lay up rate or lay up point. It is the freight rate at
which it is more advantageous for a ship owner to lay up a vessel than to
continue trading.
The most important factor influencing a choice is the ship owners expectation of
freight rates

FLEET PERFORMANCE AND PRODUCTIVITY


The productivity of a vessel depends on three factors:
Speed: This is one way supply can adjust to demand or changes in freight rates
in the short term. Most vessels generally operate below their designed speed.
This is due to the economics in operating the ship. For instance, when demand
exceeds supply (too many shippers/cargo and few ship) and therefore freight
rates are high, ship owners will increase their speed in order to execute one
voyage and make space available for the next. On the other hand if supply
exceeds demand ( too many ships but few cargoes available) it is only prudent
that the speed is reduced to save cost, after all there is no cargo awaiting the
ship therefore it will be a waste to burn that much fuel. The ship owner will thus
select a speed that gives the best financial performance for a given level of
freight rates and bunker amongst other performance parameters.

Deadweight utilisation: since supply of sea transport is concerned about the


space available, when ship owners carry a lot stores, bunker, spares etc they
reduce the space available for loading cargo thereby reducing supply.
Loaded days at sea: a ship is either at port or at sea. When it is loaded at sea
it is being productive but when is off hire, at port or in ballast it is unproductive.
Reducing these unproductive days will increase loaded time at sea

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