Lecture 9 & 10: Economies Of Scales And Partnerships

Question 1

What is Economies of Scale (EOS) and how does it benefit shipping?

Answer 1

EOS occurs when average sea transport cost decreases with increasing ship size or output.
Fixed costs spread over more units, reducing per-unit costs.

Benefits:
1. Cost Efficiency: Larger ships reduce per-unit cargo cost.

2. Fuel Efficiency: Lower fuel consumption per ton/container.
3. Increased Demand: Globalization drives the need for higher shipping capacities.
4. Infrastructure Adaptation: Bigger ships require deeper ports, larger berths, and cranes.

Question 2

Under what conditions does EOS work in shipping?

Answer 2

Conditions:
1. Larger vessels maintain adequate capacity utilization.
2. Higher earnings per unit compared to smaller vessels.
3. not limited by terminal and port constraints if equipped for deep-water ports and efficient intermodal connections.

Question 3

What are the benefits of forming a shipping alliance? Hint: 6 benefits

Answer 3

Benefits:
1. Lower pricing through shared economies of scale.

2. Wider service coverage via slot-sharing agreements.
3. Improved service quality with frequent, direct port services.
4. Reduced overcapacity, and fewer underutilized ships.
5. Lower greenhouse gas emissions through optimized routes.
6. Share respective expertise –> Greater investment capacity for new technologies (e.g., predictive algorithms).

Question 4

How do shipping alliances operate?

Answer 4

Operations:
1. Vessel Sharing: Jointly operated ships to reduce fleet numbers.
2. Shared Networks:*Coordinated port calls for broader access and frequent sailings.
3. Cost Sharing: Reduces operating costs like fuel and port fees.
4. Service Improvement: Better sailing schedules, frequent services, and broader networks.

Question 5

What are the challenges faced by shipping alliances?

Answer 5

1. Potential Conflicts:
   Disputes among alliance members and issues with competition regulations.
2. Limited Control:
   Members may need to coordinate and compromise on operational decisions.
3. Complex Coordination:
   Challenges in aligning operations, schedules, and port calls.

Question 6

L9: What are the 5 major factors driving demand for maritime transport?

Answer 6

1. World Economy:
   - Trade in raw materials, semi-finished products, and manufactured goods.
   Geographical trade analysis (origin/destination of commodities).
   Influenced by business cycles and trade elasticity.
2. Seaborne Commodity Trades:

Affected by seasonality, demand changes, supply source shifts, relocation of processing, and transport policies.

3. Average Haul & Ton Miles:

Shipping distance × cargo tonnage; further distances increase demand.

4. Random Shocks:
   E.g., pandemics, natural disasters, terrorism, political disturbances.
   May initially decrease demand but later increase it for rebuilding.
5. Transport Costs:
   Lower costs through improved efficiency, larger ships, and high-quality services increase demand.

Question 7

L9: Explain the 4 most commonly quoted causes of business cycles in shipping demand.

Answer 7

1. Investment Multiplier & Income Accelerator:

Increased investment → higher consumption → cyclical shipping demand growth.
Example: R&D in fuel efficiency increases shipping efficiency and demand.

2. Time Lag:

Delays between decisions and implementation.
Example: Freight rate fluctuations post-shipbuilding lead to losses if demand drops.

3. Stockbuilding:

Industries adjust inventory during business cycles, creating bursts in demand.
Example: Shippers increasing cargo shipments after underestimating demand.

4. Mass Psychology:

Optimism → increased investment and consumption → economic growth.
Pessimism → reduced investment and spending → economic downturn.
Example: Low confidence in the shipping industry reduces demand and freight rates.

Question 8

How do seasonality and supply changes influence seaborne commodity trades?

Answer 8

1. Seasonality:
   E.g., higher coal demand in winter for heating.
2. Demand Changes:
   E.g., crude oil demand fluctuates with price volatility.
3. Supply Changes:
   E.g., shift from Australian to Brazilian iron ore imports increases Brazilian shipping demand.
4. Relocation of Processing:
   E.g., factories moving to Vietnam increases shipping demand from Vietnam.
5. Shipper’s Transport Policy:
   E.g., preference for maritime transport increases shipping demand

Question 9

How do random shocks impact maritime transport demand?

Answer 9

1. Decrease demand during the event (e.g., COVID-19, natural disasters).
2. Increase demand post-event for rebuilding (e.g., steel for reconstruction).
   Examples of shocks:
   Pandemics.
   Natural disasters.
   Political disturbances (e.g., Korean War, Gulf War).

Question 10

What are ton-miles, and why are they important in measuring shipping demand?

Answer 10

1. Ton-miles = Cargo tonnage × average shipping distance (in miles).
2. Longer distances increase shipping demand due to a lack of local resources or climate suitability.
   Example: Importing oil or tea from distant countries increases ton-miles as they lack resources in own domestic country.