Specialized Features of Shipping Industry

The particularity of an international shipping industry as compared to many other activities, often shore-based, is the primary reason why maritime economics exists. It is not sufficient for people to understand the cost and pricing and production changes of the shipping industry by applying the general economic principles to the sector, as it is the case in many other economic activities. Such particularity of shipping can be observed from various angles, mainly the following four.

1. First of all, maritime transport is a service sector with a derived demand from trade. Often, foreign trade it self is generated by economic activities of a country or a region. In other words, shipping does not create its own demand, its demand is derived from the need of trade in goods. It is quite important for those who work in maritime transport to know and fully understand that people do not need shipping, they need trade. Trade will not be completed until the good is moved from the seller's pace to that of the buyer. Shipping becomes essential just because it is part of trade chain. The dependence of shipping on world trade justifies a closer look of trade when maritime economics is discussed. Being part of the transport sector, shipping has those typical characteristics of transport industry. As a means of transportation, its output is the movement of cargo or persons. As such the output cannot be stored. When the capacity, e.g. a ship, is built, it is there and the lion's share of the total cost is fixed. Shipping is a highly capital intensive sector measured in capital required per employment created. Not only are modern and increasingly specialized ships expensive to build, a maritime transport system requires also huge investment in port facilities and in other activities such as communication, which are part of the system.

Scope of Maritime Economics

Maritime is a word with a broad sense, which covers many aspects related to the sea often beyond purely transportation. However, maritime economics, which is referred to and discussed hereafter, is exclusively limited to transportation and the directly related activities. A more accurate name should be : Maritime Transport Economics.

Maritime transport is a complex system, which can be subdivided into several groups of activities around and in support of the core activity; the movement of cargo by sea. These supporting activities are vital to the shipping industry although they often independently operated. These activities are basically either related to ships or cargo. Maritime economics is interested in those activities are basically either related to ships or cargo. Maritime economics is interested in those activities as well.

The following Graph shows the relationship between the sea transport and the related maritime activities and between shipping companies and the various organizations.

Main Relationship Within Maritime Industry

Maritime Industry Relationship

Maritime economics concentrates on the economic decisions of shipping and shipping related companies. It covers also all other maritime related activities and sectors, on which decisions are dependent to various degrees. Maritime economics is a tool, which can be used to enable decision makers to understand the relationship between economic variables within a shipping company and outside it between the shipping company and other relevant organizations. So the limited resources can be best utilized for achieving the corporate goal.

Maritime Transport Markets

Literally, a market is a physical place where commodities are sold and bought, How ever in modern and extended sense, a market can be defined as a space over which buyers negotiate the exchange of a well defined commodity, it must be possible for buyers and sellers to communicate with each other and to make meaningful deals over the whole market (Lipsey 1993).

Shipping market can therefore be physically tangible place such as London's Baltic Exchange, or it can also be intangible, such as cyber space, where good communication between sellers and buyers are available.

Markets separated from each other by the type of commodity (or service) sold, by natural barriers such as distance and by man-made barriers such as borders and customs.

Shipping is a special sector different from other service sectors of economic activities, the maritime market is also a special one. Originally, when shipping activities were at the beginning and at a low level, the market was undivided and not specialized. There were not many types of ships and the transport requirements were simple and similar whenever and wherever the transport took place. How ever , as trade increased, cargo volume grew and the market expanded around the middle of the last century, with an economic motivation for higher productivity , a specialization process started to happen in the shipping sector with new types of ships being introduce to carry particular kinds of cargo. To mention just a few examples in the recent period; containerization started in the 1950 and 1960; Pure Car Carriers in the 1960; LNG (Liquefied Natural Gas) Carriers also in the 1960.

Subsequently, shipping today consist of many distinct markets, it is now wrong, and meaningless to talk and discuss shipping as one activity. There is not one shipping market but there several markets differentiated by ship type, trade requirement and geographical location.

As a matter of fact the market of crude oil transport has little to do with that of cars, similarly regular liner shipping service between, say, New Zealand and Australia does not have much relationship with the regular sea transport between the Caribbean Island . Consequently, shipping markets should be examined as different sub-markets or categories according to the ship type (oil, tanker, bulk carrier, container ships, car carriers, etc.), shipping requirements (liner, tramp,etc.) or geographical locations of the market (intra asia, Baltic Sea, West Africa-Europe, etc.)

Economics and Maritime Transport

As defined in an economics textbook (Lipsey 1992) economics concerns :

1. The allocation of a society resources among alternative uses and the distribution of the society's output among individuals and groups at a point in time;
2. The ways in which allocation and distribution change overtime;
3. The Efficiencies and Inefficiencies of economic systems.

Economics can also broadly divided into two branches: microeconomics and macroeconomics. The different between them is at the level of aggregation used.

Microeconomic deals with the determination of prices and quantities in individual market and with the relations among these markets.

Macroeconomic focused on much broader aggregate by looking at e.g. total number of people employed, the total number of national output and consumption, the balance of trade of a country, every level of prices and its changes.

One may also conclude that microeconomics is about the economic question (e.g. allocation of resources) of an industry, a sector, a firm, a family or a person, whilst macroeconomics is about the economic decision of a country, or a region or the world.

Maritime transport is in transportation sectors, maritime economics therefore belongs to the scope of microeconomics.

Maritime Economics Described

The question that maritime economics cover are, for instance :

• How many ships are needed in the market
• What are the influential factors on the tonnage required
• Why the prices of transport service go up and down
• What are the sub-divisions of maritime markets
• Why Some people do better than others
• What is the impact of outside changes on the shipping sector
• What is optimal size of a ship or a shipping company

The questions to which answers can be found in economic analysis can also broader in scope such as : why should shipping company be so big? why is the size important for surviving in difficult times? what are the economic implications between "spot" market and long-term contracts? why should many ship be in the spot market? what is the impact of merger, acquisition and carrier consolidation on my business? The list continues to cover the market dynamism, such as: why do freight rates fluctuate? why do they change up and down so much within 1 year? what is going on in port service? how do they cope with the changes in trade and transport?

Glancing over the current maritime press headlines, one will encounter numerous stories happening  in the industry that are comprehensible only with the help of maritime economics knowledge.

Our definition of maritime economics in the sphere of microeconomic does not preclude its close relationship with macroeconomics. On the contrary, a good understanding of macroeconomics is highly helpful for appreciating the maritime transport sector and making better decision within it, in fact, because of its particular characteristics, the maritime transport industry has a special position at macroeconomic level, not only do many countries formulate their distinct policies on maritime transportation, but there are often specialized government departments set up to deal with various matters related to international shipping.