ECSA - The Tramp Shipping Market Mar 2015

ECSA
The Tramp Shipping Market
8. Definition of the Shipping Markets
8.1 The four markets where cargo and ships are traded
In shipping there are four markets trading in different commodities. The freight market trades in
sea transport of commodities; the charter market deals in ships for hire; the sale and purchase
market trades second-hand ships; and the newbuilding market trades new ships. Beyond this there
is no formal structure.
Because the same companies are trading in all four shipping markets, their activities are closely
correlated. When rates rise or fall in the freight market the effect is transmitted into the sale and
purchase market and from there into the newbuilding 14 market. The markets are also linked by
cash. The relationship is shown graphically in Figure 8. Cash flows back and forth between the
industry's bank account (represented by the circle) and the four shipping markets (represented by
the squares). The cashflow into the shipping companies' bank account is shown by the light
shaded bars, while the black bars show outflows. The hatched bars indicate cash which changes
hands from one shipowner to another, but does not change the cash balance of the industry as a
whole.
8.2 The role of market cycles in the competitive process
The cash flowing between the four markets drives the shipping investment process. At the
beginning of the cycle freight rates rise and cash starts to flow in, allowing shipowners to pay
higher prices for second-hand ships. As prices are bid up investors turn to the newbuilding market
which now looks better value. But as the ships arrive on the market two years later the whole
process goes into reverse. Falling freight rates squeeze the cash inflow just as investors start
paying for their newbuildings. Financially weak owners who cannot meet their day-to-day
obligations are forced to sell ships on the second-hand market. These sales are often preceded by
a, usually prolonged, period of declining rates. As ships are scrapped the supply falls, freight rates
are bid up and the whole process starts again. Table 4 Type of Charter Arrangement
The cycles create a continuous movement of
companies in and out of the market. Market
cycles squeeze out the inefficient companies,
and allow new and efficient companies to enter
the market and gain market share. This is how
the shipping industry directs investment and
promotes efficiency.
Changes in supply and demand can impact the
price paid for freight very quickly.
9. “Voyage Charter” Contract
In bulk shipping, a voyage charter allows the
shipper to buy transport from the shipowner at a
negotiated price per ton of cargo transported.
The market contract suits shippers who want to
leave the management of the transport to the
shipowner, while the time charter is for
experienced ship operators who prefer to
manage the transport themselves.
Type of Charter Arrangement
Bareboat Timecharter Voyage Charter
Master appointed &
directed by:-
Master appointed by
owner, directed by
Master appointed and
directed by:-
Charterer Charterer Owner
Revenue depends on:- Revenue depends on:- Revenue depends on:-
Hire rate & duration Hire rate & duration Quantity of cargo & rate
Costs paid by owner:- Costs paid by owner :- Costs paid by owner:-
Capital Capital Capital
Brokerage Brokerage Brokerage
Wages
Provisions
Maintenance
Repairs
Stores & supplies
Lube oil
Water
Insurance
Overheads
14 There is strong competition between shipbuilding nations and yards within each nation.
Wages
Provisions
Maintenance
Repairs
Stores & supplies
Lube oil
Water
Insurance
Overheads
Port charges
Stevadoring charges
Cleaning holds
Cargo claims
Light dues
Canal dues
Bunker fuel
Contract of Afreightment (COA): cost profile same as voyage charter
Source: Clarkson
Research Services
Clarkson Research Services Limited 27 March 2015