Shipping markets

1. 2
Introduction to Shipping Markets
2.1 Introduction
The shipping industry has been developed to facilitate international trade
through connecting sources of supply and demand for commodities includ-
ing raw materials, manufactured goods, and finished products, as well as
transportation of passengers, cars and even livestock, between ports and
countries. The growth in seaborne trade in the last century has led to the
expansion of the shipping industry and its related businesses and mar-
kets such as shipbuilding, ship-broking, insurance, together with shipping
finance and investment. In addition, the growth in international trade has
also been the reason behind the design of larger and more specialised ships
to carry specific commodities in order to achieve economies of scale in sea
transportation. Furthermore, the shipping market has been shaped and struc-
tured in such a way as to accommodate the needs of charterers by defining
different types of contracts varying in their duration, method of payment
and cost allocations.
The aim of this chapter is to provide a review of the shipping market
and its segmentation into different sectors and sub-sectors, as well as fleet
composition and trading patterns of main shipping sectors. We also discuss
the different types of shipping contracts and the costs involved in shipping
operations as well as the formation of freight rates under different types
of contracts. Furthermore, we explore the seasonal behaviour of shipping
freight rates and discuss differences in seasonal freight movements across
different types of ships and freight contract duration. Finally, we review the
market for newbuilding, second-hand and scrap vessels, and discuss the main
factors in ship price determination.
2.2 The world shipping industry
It is estimated that shipping contributes more than 75 per cent of the vol-
ume of world trade in commodities and manufactured products, and this
24
A. H. Alizadeh et al., Shipping Derivatives and Risk Management
© Amir H. Alizadeh & Nikos K. Nomikos 2009

2. Introduction to Shipping Markets 25
0
1000
2000
3000
4000
5000
6000
7000
8000
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Milliontonnes
Crude oil Oil products Iron ore Coal
Grain Minor bulks and general cargo
Figure 2.1 Pattern of international seaborne trade in major commodities
Source: Clarkson’s SIN.
is increasing as faster, larger and more efficient ships are designed, built
and employed. The total volume of world seaborne trade has increased over
the last 50 years due to several reasons. Firstly, discovery of new sources
of raw materials around the globe, as well as development of new sources
of demand as economies grow, have changed the international trade pat-
tern and increased the volume of sea transportation. Second, advances in
ship design and shipbuilding which led to the construction of larger vessels
for cost-effective transportation and, consequently, growth in international
seaborne trade. Third, liberalisation in international trade which allowed
companies not only to outsource their raw material and labour force, but
also to spread their operations to more cost-effective locations, and to trans-
port their finished products to the end-users’ market, has also been an
important factor in the growth in sea transportation. Finally, overall world
economic growth, improvement in economic conditions and changes in
people’s lifestyles have also contributed to the increase in demand for man-
ufactured products and goods which, in turn, requires transportation of raw
materials.
For the purpose of shipping operations, market analysis and research, the
international seaborne trade can be broadly classified into: liquid bulk; dry
bulk; general cargo; and unitised transportation or container trade. There are
also several other types of cargoes, such as natural gas, refrigerated cargoes,
automobiles, forest products and livestock, which require special types of
ships for transportation. Figure 2.1 illustrates the evolution of the interna-
tional seaborne trade in major dry and liquid-bulk commodities, as well as