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Introduction
In the shipping industry, there are four inter-linked markets which relate to each other in various capacities. For example, the transportation services being offered in sea transport are dealt with in the freight market. Ships that have been newly built and are being ushered into the market for the first time are found in the new building market. Shipowners are responsible for trading used ships in the sales and purchase market. Ships that are no longer in service are sold as scrap to the demolition market. In this essay paper, we will analyze how the four shipping markets are interconnected with each other. Give examples of some of the factors that can lead to an increase in dry bulk freight rates. Finally, will analyze the actions that shipowners of dry bulk carriers may take, taking into consideration the risks in order to take advantage of the market condition. The following are the four shipping markets that will be analyzed; the freight market, the sale and purchase market (S&P), the new building market, and the demolition market. Sometimes, trading and freight involve a steady increase in freight rates, which shipowners must take into consideration.
Interconnection Between Four Shipping Markets
Freight Market
The freight market is made up of various individuals such as shipowners, charters, and brokers. In this market, four different contractual arrangements are being used. For example, the voyage charter, the contract of affreightment, the time charter, and the bareboat charter. The shipowners make an agreement to carry cargo at a specific price per tonne, while the charter market gives out ships on hire for a certain period (Zhang and Tang, 2022, p. 115). Different shipping has different markets, whereby the market for tramp ships has been divided according to the type of vessel being used, such as dry cargo ships, refrigerator ships, and tankers. Furthermore, the shipping market for tramp ships has been subdivided into individual geographical areas, where the apparent cargoes are being offloaded. Some of these areas include the North Atlantic, South American, and Pacific regions. Shipping markets can also be distinguished by specific trade conditions since they are closely interrelated and form a single world shipping market (Adland et al., 2017, p. 112). In various tramp operations, the transportation of cargo is done by ships that have no previously fixed schedule. While in liner operations, shipments are done by those shups that work on a regular schedule.
Market For Sale and Purchase (S & P)
The sale and purchase market involves the selling of second-hand sailing ships between shipowners. The procedures of the trading process are guided by standard contracts, just like in the real-estate business. The shipowners prefer to trade the ships as their main source of income since cash is very volatile. The values of second-hand ships depend on factors like freight rates, age, inflation, and expectations (Adland et al., 2018, p. 72). A bidder percentage of this business is done by Baltic brokers. It is a general practice in the buying and selling of ships where owners will give instructions to brokers to put the vessel on the marker while the vessel is engaged in its usual trades. Hence, it is essential for inspections and eventually deliveries under sale contracts to be coordinated with the employment of the vessel and coordinated with the employment of the vessel as part of the transaction.
The New Building Market
In the newbuilding market, the transaction process is between the shipowners and the shipbuilders. The contract negotiations between the shipbuilders and ship owners can be complex and extend beyond price sometimes. The contract also covers the delivery date, ship specifications, stage payments and finance. Because the sale and purchase markets are so volatile, prices in the newbuilding market sometimes follow the prices in the sale and purchase markets (Ahn, 2019, p. 143).However, the significant difference with the sales and purchase market is that the ships that are sold here do not exist yet. The payment process is usually done in five different phases. For example, when signing the contract, the buyer should pay a 10% down payment. The subsequent payments are made in the following phases of construction: cutting of the steel, laying of the keel, launching, delivery, and prices are determined by price and demand.
The Demolition Market
The demolition market comprises the selling of ships as scrap to demolition merchants. The transaction process often takes place between the shipowners and the demolition merchants, with speculators acting as intermediaries. After the life span of a ship has reached its end, it is demolished and its components sold to the merchant dealers (Yin and Fan, 2018, p. 104). The merchants resell the parts to various stakeholders who either use them for making other ships or for other different uses. Since the work of demolishing the ship is dangerous and low-paying, the process is being done in the far east.
Increase In Dry Bulk Freight Rates and Examples
International Maritime Trade
International maritime trade is the kind of trade that involves the shipment of cargoes to different parts of the world through the sea using ships. Dry bulk freight rates increase due to multiple costs and charges involved in the international maritime trade. Transport costs, including both freight costs and time costs, comprise a key component of the total trading costs (Oprescu, 2020, p 221). These trade costs also constitute other costs involved in delivering the goods to the destined customers. These additional costs include policy barriers, information costs, and legal and regulatory costs. Therefore, these additional charges lead to an increase in dry bulk freight rates. For example, if shipowners charges while in transit to different countries are reduced, it is possible that overall freight charges will be low.
Economy
An economy refers to the state of a country in terms of the production and consumption of goods, services, and money supply. An economy is the largest set of inter-related production and consumption activities that help in the allocation of scarce resources. When the economy is hit by catastrophes like earthquakes, flooding, or other natural calamities, businesses tend to underperform (Kronfeld-Goharani, 2018, p. 113). As a result, there will be less travel and a corresponding increase in freight charges.in inflation in an economy leads to a reduction in trading activities, and this leads to an increase in charges for freight commodities. For example, the emergence of acCOVID-19 reduced trading activities between countries, meaning freight charges had to be raised in order to cover other extra charges pending due to the smaller amount of cargo being transported.
Political Events
Political instability in some countries around the world has been a stumbling block to freight activities. For example, civil unrest in some Sub-Saharan countries has reduced trading activities immensely. This has forced shipowners to either diversify goods for processing elsewhere or increase their charges for transporting cargoes to those places in order to cater for any possible unforeseen risks that might happen along the way (Halterman, A., 2019, p. 124). As a result, political unrest or events can cause freight charges to rise or even halt the freight process.
Intended Destination and Service Charges
Freight charges will be imposed depending on the destination of the cargo being transited. For example, when the whip is expected to take about two months to reach the intended destination, payment charges wont be the same compared to when the ship is expected to take two weeks to reach the destination (Atletiko et al., 2019, p.120). While at the port, any extra charges that might be levied by the port authorities may also lead to an increase in the freight rates.
Bunker and Container Capacity
Bunkers are containers used to store fuel. When the prices of fuel are increased, the freight rates will definitely have to increase to match the prevailing fuel prices. The containers which are used to store the cargoes work on the principle known as the economies of scale (Wang et al., 2019). For example, if the ship is in transit but the shipper did not fill all the containers to their full capacity, it will affect the freight charges. Hence, the shipper will have to pay more in spite of the lower quantity.
Currency
In todays trading world, the standard and dominant currency being used for trading is the dollar. Therefore, the exchange rate for the dollar differs between different countries around the world. This means that the shipper is likely to be levied on the latest prevailing exchange rates, depending on the country of destination (Putri et al., 2020, p.115). For example, shipping a cargo from the USA to China will incur different charges than shipping a cargo from the USA to South Africa due to differences in exchange rates.
Actions That Shipowners of Dry Bulk Carriers May Adopt
Trained and Qualified Personnel
It is necessary to have personnel managing and handling cargo have the training needed to ensure that the cargo is transported safely. In the event that shipowners prefer to use freight forwarders to deal with customs, the shipowner must ensure that those individuals are qualified customs brokers (Formela, 2019, p.114). Those people who are being hired to drive trucks to the ships, those operating shipping cranes and those managing customs processes must be well trained and qualified.
Implement and Maintain Security Practices
Thieves will always target highly valuable cargoes that are easy to transport. Therefore, there are several security practices that shipowners must employ to prevent the risks associated with cargo transit. For example, Carry out a serious check on the new employees and brokers. Ensure that all products are sealed with the companys logo or name and seal numbers (Dalaklis, 2017, p.110). Use discretion about shipment storage sites, delivery and pick-up dates and times. Finally, avoid taking direct routes to avoid spending too much time in transit.
Take Advantage of Technology
Having a range of technological solutions is essential, especially in the world of today. For example, one should use tamper-resistant seals and packaging for satellite tracking technologies. The use of plastic pins or tags that will break to indicate that the box or cargo has been opened (Hoem et al., 2019, p. 156). Finally, is the use of steel cable electronic locks for container doors and GPS trackers to monitor and prevent thieves from accessing the cargo.
Communicate Clearly and In A Timely Manner
The ability to communicate well is an important part of reducing risks. Ensuring that detailed information is provided within a given time frame can help in reducing the occurrence of extra costs. A shipper would communicate the right information to the shipowner, especially when the cargo is hazardous, so that appropriate measures can be taken to mitigate any risks (Thieme et al., 2018, p.113). To ensure that customs documentation is completed on time, the importer would be informed of the expected time when the cargo would be delivered.
Conclusion
There exists a very interesting link between the four shipping markets that have been discussed above. Trading and transportation are an important part of the growth of any industry and economy. Hence, shipment activities will only increase and grow better if there is better trading activity and policies between different countries. The process of transporting cargo by sea is handled in the freight market. When one wants to purchase newly made ships, they are found in the new building market. Trading of already used ships is done through the sales and purchase market. The demolition market is where all the ships that have been used and are now too old or obsolete to be used again are sold as scrap. In light of the risks involved in cargo transportation, shipowners should adopt stringent measures to ensure cargo safety while also taking advantage of the available market. Dry bulk freight rates have been increasing due to several factors like international maritime trade, the economy, political events, intended destination and service charges, bunker and container capacity, and currency.
References
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