Chapter 4 - demand variables

Question 1

What are the five demand variables in the shipping market model?

Answer 1

1. The world economy
2. Seaborne commodity trades
3. Average haul
4. Random shocks
5. Transport costs

Question 2

Who are the people central in the model?

Answer 2

Demand side - cargo shippers
Supply side - shipping investors

Question 3

Discuss the World Economy and some aspects that bring about change in demand for sea transport (demand side)

Answer 3

*Most important influence on ship demand, generates demand for raw materials/manufactured products
*The two aspects that may bring about change in demand for sea transport:
1. Business cycle (lays foundation for freight cycle):
*Business cycles mirror freight cycles as fluctuations in growth rates work through into seaborne trade - creating cyclical demand for ships
*Business cycles is most important cause of short-term fluctuations in seaborne trade and ship demand
2. Trade development cycle - long term.
(a) Economic structure of countries generating seaborne trade changes over time - mature
*Developing countries demand lots of bulk commodities driving seaborne trade
*Moves on to service-based demand as maturation reached
(b) running out of local resources to meet local demand

Question 4

Why do business cycles arise?

Answer 4

1. Multiplier - internal mechanism creating cycles is the interplay between consumption and investment. Investment increases = new consumer demand from workers hired, creating more investment and more consumer demand etc.
2. Time-lags - delays between economic decisions and their implementation make cyclical fluctuations more extreme. Shipping example of new ships
3. Stockbuilding - Sudden bursts of demand. In a recession, stocks run down, intensifying downturn in ship demand. In recovery, sudden rush to rebuild stocks taking shipping industry by surprise.
4. Mass psychology - trend will build up to level where the whole economic system is affected

Question 5

How can business cycles be predicted?

Answer 5

Leading indicators - OECD index based on orders, stocks, laid off staff, financial statistics. Ultimately few believe business cycles are reliably predictable

Question 6

Discuss the long- and short-term natures of Seaborne Commodity Trades (demand side)

Answer 6

Short-term:
*Seasonality - agriculture and oil, Christmas - high effect on spot market as difficult to plan

Long-term:
*Studying economic characteristics of the industries which produce and consume the traded commodities.
*Four types of changes to look out for:
1. Changes in demand for that particular commodity
2. Changes in the source
3. Changes due to relocation
4. Changes in shippers transport policy

Question 7

Discuss the average haul and ton/km (demand side)

Answer 7

Distance effect - referred to as average haul
Sea transport demand measured in terms of ton miles (tonnage of cargo X average distance its transported)

Question 8

Discuss the impact of random shocks on ship demand

Answer 8

Can be economic shocks, political shocks, weather, war, strikes
These are superimposed on business cycles