Nature of Sea Transport

The primary task of the shipping industry is to move cargo around the world. Although this is the correct starting point for studying ship demand, as an economic definition it is too narrow. From the customer’s viewpoint, shipping is a service. Saying that the shipping companies move cargo around the world, is rather like saying that restaurants cook food. There are sandwich bars, fast food chains andcordon bleu restaurants. Like the restaurateur, shipping companies provide a variety of services to meet the specific needs of customers. These needs may involve a whole range of factors, of which the most important are:

1. Price:

The freight cost is always important, but the greater the proportion offreight in the overall cost equation, the more emphasis shippers are likely toplace on it. For example, in the 1950s the cost of transporting a barrel of oilfrom the Middle East to Europe represented 49 per cent of the CIF cost. As aresult, oil companies devoted great effort to finding ways to reduce the cost oftransport. By the 1990s the price of oil had increased and the cost of transporthad fallen to just 2.5 per cent of the CIF price so transport cost became less important.

2. Speed:

Time in transit incurs an inventory cost, so shippers of high-value commodities value speed. The cost of holding high-value commodities in stock may make it cheaper to ship small quantities frequently even if the freight cost is greater. On a three-month journey a cargo worth $100,000 incurs an inventory cost of $2,500 if interest rates are 10 per cent per annum. If the journey time can be halved it is worth paying up to $1,250 extra in freight. Speed may also be important for commercial reasons. A European manufacturer ordering spare parts from the Far East may be happy to pay ten times the freight for delivery in three days by air if the alternative is to have machinery out of service for five or six weeks while the spares are delivered by sea.

 

3. Reliability:

With the growing importance of ‘just in time’ stock control systems,transport reliability has taken on a new significance. Some shippers may beprepared to pay more for a service which is guaranteed to operate to time andprovide the services which it has promised.

4. Security:

Loss or damage in transit is an insurable risk, but raises manydifficulties for the shipper, who may well be prepared to pay more for securetransportation of his product without risk of damage.

 

Each part of the business provides for a different combination of needs. In studying how this business is carried out, we need to be aware of the different demands which commodities place on the transport system, and to understand how the system has evolved to meet these needs.