Types of Contractual Agreements in the Freight Market

The freight market, which comprises ship-owners, brokers and charterers, is considered as a part of shipping markets. Under this specified market, four types of contractual agreements can be seen, which are, the contract of affreightment, the voyage charter, the bareboat charter and the time charter (Zhang and Pel 2016). A freight rate, on the other side, represents a price, which is charged to deliver cargo from one point to another. The freight rate depends on some factors, viz., type of cargo along with its weight and distance of destinations. Mode of transport like ship, train or aircraft can also influence this rate. However, the chief concern of this report is to discuss about the sea freight market and to analyze the impact of various external factors that can influence freight rates. Hence, this report has used demand and supply concept for determining the equilibrium freight rate. At the end, it has provided an overview of this entire discussion.

Shippers have demanded ships for sailing. However, this demand can also be influenced by some external factors. For instance, some basic factors like demand for cargoes and fleet availability can influence freight prices. Moreover, some other external factors like intended destination, bunker capacity and container capacity have also played important role to determine this price (Tseng and Cullinane 2018). For calculating sea freight rates, intended destination provided a positive relation between distance of journey and shipping rates. These rates can be high for longer distance while the opposite situation can also be occurred for small distance. Service charges can be considered as another important factor to influence this ocean freight rate. An extra amount of charge, implemented by port authority, can affect this rate inversely (Jugovi?, Komadina and Peri? Hadži? 2015). In addition to this, fines and fees along with terminal one can also affect this price rate by small amount. For some specific products like food items, season has also acted significantly to determine the price of freight. For instance, to transport grains and fruits during some particular season, ship-owners can increase the cargo rate, while the opposite outcome can also be observed.

 In this context, bunker capacity and container capacity can be taken as other two important factors. Bunkers are referred as containers where fuels are stored (Bernhofen, El-Sahli and Kneller 2016). Increasing prices of fuels can affect the freight rates in an opposite direction. On the other side, a shipper may not possess enough goods to fill the containers up to their optimum capacity and consequently, the freight rate for this concerned person may increase further. The sea freight rates are predetermined and standardized for all shippers. However, this rate can be discounted for frequent shippers, who can utilize their client-business relationships (Pereira, Fróis and Ferreira 2018). Hence, this area of freight market is unpredictable and to understand the actual scenario, detail discussion is required.

Factors Influencing Freight Rates

The freight rate can be determined with the help of demand and supply concepts. Hence, it is important to indentify both demand and supply side factors, which can influence this concerned market. The demand for maritime transport can be influenced by five factors, which are world economy, average achieved profit, transport costs, political events and international maritime trade ((Bernhofen, El-Sahli and Kneller 2016). The supply within maritime market can also be determined by some other factors, for instance, world fleet along with its productivity, ship breaking, shipbuilding and freights (Semini et al. 2018). The demand for shipping under this maritime market is generated by the world economy, where different companies, through a series of activities, produce goods for which maritime transport is required. On the other side, a fixed market of shipping capacity can be represented by merchant fleet, which in turn can control the supply side. New orders or limited number of ship-breaking can increase the supply of merchant fleet. In addition to this, policies of shippers and legal regulators can influence this supply to develop further within this market.

After the above discussion, it is essential to understand the way by which demand and supply operate their functions. Within this maritime market, shipowners act as suppliers while shippers can be said as customers. They negotiate with each other to determine the level of freight rate, which in turn can help to balance between cargo and ships, available within the market. With the help of equilibrium concept of demand and supply this negotiation can be done (Yip 2018). For instance, excess availability of ships can lead the freight rate to decrease while the opposite situation can also be occurred.

Represented the supply function of a ship. The supply curve has represented the amount of transport, which the owner has supplied for every level of freight. This curve has both horizontal and vertical segments to represent elastic and inelastic supply, respectively. The ship-owners have decommissioned their ship for restricting transport below level A. however, above the level A; shipowners have commissioned the ship again. At this level, the ship sails at a slower rate to save fuel. However, at higher levels of freight, the ship sails at a higher speed (Goulielmos 2018). The supply curve can be obtained under a perfectly competitive market, where the ship-owner, through sailing at the speed of marginal cost, tries to maximize the profit. thus, the shape of this supply function is derived from the relation of speed and freight.

Demand and Supply Concepts in the Sea Freight Market

The demand function of this maritime market is drawn in figure 2. The inelastic nature of this demand curve can be explained with some economic concepts. As the shipping market has limited method of transport, the shippers demand cargo without considering higher costs (Goulielmos 2018). On the other hand, lower prices of ships cannot attract shippers to buy another one.

With the help of these two curves, the concerned market can obtained its equilibrium freight rate at which, both buyers and sellers can obtain an acceptable price. In figure 3, B has represented this equilibrium price at which each buyer or shipper can buy certain number of ships while the owners also want to provide one. This equilibrium price is chiefly depended on the time duration, which both buyers and sellers need to establish their position within the market. The time duration can be divided into three sections, viz., present, short-term and long-term equilibrium (Lee, Boile and Theofanis 2018). Under present equilibrium, freight levels are contracted based on urgent ships while ship-owners have received the main benefit. On the other side, short-term equilibrium indicates the situation where both shippers and owners have obtained enough time for decommissioning or commissioning ships. In the long-term, new ships can be ordered or the old one can be removed. Under this long-term condition, three types of markets regarding adjustment mechanism can be seen. Those markets are the new building market, the sale- purchase market and the demolition market.

In this context, it can be said that, freight rate acts as a regulator between demand and supply. An increasing freight rate influences ship-owners to build more ships and this situation is described in figure 4, where bar diagram has represented the amount of ships that are ordered. In addition to this, the line graph has represented the dry bulk shipping stock (Arslan and Papageorgiou 2017). According to this diagram, as freight rate changes, order book and price of ships changes accordingly.

On the other side, the impact of decreasing freight rate can be seen in figure 5 where, due to low freight rate, the number of ship removal can be changed in an inverse direction. This trend of removal is shown by the yellow bar diagram of figure 5. This in turn has decreased the number of ship availability within the maritime market.

Conclusion:

Hence, in conclusion it can be said that the maritime market is chiefly depended on the demand and supply of ships like other commodity markets, which operate under the perfectly competitive environment. Ship-owners supply ships while shippers demand one for sailing. The equilibrium freight rate is determined in the market where demand and supply of ships equate with each other. In this context, freight rate has played an important factor to build or remove ships. During low level of freight, owners remove excess freight from the market. On the other side, increasing demand from shippers has led those owners to build new ships. In this context, it can be mentioned that demand and supply of freights depend on various external factors like weather, availability of other mode of transport, freight rate and political factors so on.

References:

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