derived demand
A critical feature of the demand for most shipping services is that it is a derived demand. Discuss with the aid of examples, the implications that this feature creates both for ship owners and for shipping management.

Derived demand is a sort of demand for a service or goods that depends on the demands for the outputs - so in the case of shipping demand, it depends on demand in the world for the goods being shipped (e.g. as demand for grain trade increases, so demand for shipping grows with it).
Shipping is a derived demand, which means that shipping as an industry depending on people who are willing to trade by sea using ships. The efficiency of it stimulates sea trade and even though there are numerous factors that have their effect on shipping, ultimately it reacts to demand and therefore grows in proportion with world trade.

The demand for sea borne trade is influenced by the 5 factors listed below, as Martin Stopford suggests (Stopford, 1991):
The world economy
Seaborne commodity trades
Average haul
Transport costs
Political events

All the above factors will be looked at during the course of this work together with the way that each factor influences ship owners and management. However, it is wrong to think that ship owners themselves do not influence the supply and demand balance - on the contrary, sometimes ships can be slowed or extra ports called on, repairs may be delayed or sped up (e.g. tanker companies tend to decelerate their trips in slow-moving summer season as that is when demand is at its lowest point).

The world economy is the most influential factor for shipping demand. However, there is more to the statement above than meets the eye - one of the facts about world economy is that it has ,what is known as business cycles (Stopford, 1991). Their definition being that world economy moves in cycles of 4 to 5 years, with alterations of increases and decreases in the degree of economic growth. This results in shipping demand developing not smoothly but in chains of periods of high and low advance. For example, until the early 1970s speed of growth of industrial output was lower than speed of growth of shipping trade; whereas in 1970s the shipping trade increased more gradually.

Another interesting factor about world economys influence is that industrial growth causes changes in demand for bulk commodities (e.g. iron ore). Industrial growth may be influenced in future by new number of countries - as new countries will come into view or some countries may weaken in significance. Japan is an example of such a process - it came out as an industrial economy during 1960s, which resulted in Japanese imports generating 54% of the increase of the world deep sea dry cargo trade between 1965-1972 (Stopford, 1991).

One of the possible future trends in shipping industry would to be to expand and improve its waterways - one of the examples that will affect future of the industry, is Russia. Russia is about to open up its enormous and abandoned river navigation system to Western shipping. These news have already attracted much attention from Western ship owners - they are waiting to develop opportunities of various Caspian trade and in the longer run to participate in Russias industrial future potential (Thomas Ország-Land, 1999).

Effect of sea borne commodity trades on the demand in shipping industry can be either short or long-term.
The short-term type is influenced by seasonal stimulus and stock building. When seasonal effects take place it is usually agricultural commodities that are the subject of change (during harvest time). For example, in grain, trade exports from US Gulf decline during summer and rise in September - when the crop is harvested; therefore achieving 50% of increase in shipping activity between September and December. Another example is oil trade which has its series of seasonable variations due to changes in energy use in Northern hemisphere - resulting in more oil being shipped in autumn and early in winter than during summer and spring seasons.

The other type of short-term component is stock building, meaning that any particular industry accumulates stock in case of future scarcity or rise in prices. For example, mini tanker booms in 1979 and 1986 - instigated by brief stock building in the world oil industry.

One of the examples of long-term influence is that of the OPEC (Organisation for Petroleum Exporting Countries) oil price hike in 1973 , when tanker industry has been running at a loss (and dry cargo had short phases of success) right till the 1990s recovery. Corporate performance of shipping management companies during that time was low, which resulted in bad news for shareholders and providers of debt. Some well known names in the industry have even gone bankrupt. As a result, most of the ownership was transferred from single owner operators and private family companies to banks, cargo movers and governments (Spruyt, 1990).

Meaning that the demand for shipping is generated by the distance over which the goods are transported. For example, a ton of crude oil shipped from the Middle East area to USA, generates a higher demand for shipping then the same ton going to Europe. So that, crude oil cargoes from Middle East going to powerhouses in Japan, USA and Europe increased tonnage carried by sea. Long haul steam coal and ore cargoes from South America, South Africa and Australia to industrial consumers had similar effect.

The transport cost factor is of a very important nature to the whole shipping industry, as according to European Commission (1985), transport costs added up to 20% of the cost of dry bulk cargo within Europe. Due to the new technologies, bigger ships and therefore better efficiency, transport cost has been considerably reduced over the last century.

Political changes tend to affect demand in shipping very abruptly and without warning. Events like that may range from war and revolution to non-straightforward governmental decisions. One of the non-violent examples of political problems: developing countries - members of UNCTAD (United Nations Conference on Trade and Development) had attempted to take control over local shipping, affecting local freight taxes and therefore changing freight patterns and increasing complication.
However, not all events have direct effect on shipping industry - usually indirect influence is more important. Example being Suez Canal proximity to Israel and Egypt wars and significance of this route to the course of trading.

As it was stated in the very beginning of this work, demand for shipping depends on demand for carried cargo (among other influences on shipping). So, an example of such relationship is a grain trades impact on shipping industry. As stated in Grain report of the Seaborne Trade and Transport (1988), grain holds the third biggest ranking within the dry bulk trade and shipping demand (behind iron ore and coal) - therefore it is an example worth looking at.
The influence of grain trade on sea borne trade demand does not depend only on the tonnages shipped but also on developments of trade. So that changes in regional or overall geographical pattern of supply and demand alter the overall demand for ships (grain report, 1988).

Grain trade (and therefore shipping demand) is affected by two types of factors:
Long-term effect of trade, like population growth and economic development, which produce fundamental demand for traded grain.
Supply factors (not discussed in this paper), which reproduce weather impact on output of grain and therefore affect short-term variations in demand.
An example of a short-term change in demand has occurred in 2002 - the harvest of grain was a very good one, meaning that there was an excess of cargo within Mediterranean market. As a result, freight rates for dry bulk carriers went up by 100% and stayed there for 2 months.

As a result of physical, political and economic stimulus, world grain industry has moved to a spot of oversupply (even though it still stays vulnerable to episodic environmental and climatic changes). These trends in grain trade mean good news for shipping demand - as it closely follows the increasing interest and movements of grain within the world trade market.

However, the success of grain trading also depended on latest shipping technologies and liberalisation of trade. These have helped the increase of flow in various materials and goods, including grain. The modern shipping became very efficient as it has familiarised itself with trade flows; has got bigger in order to manage with increased volume and last, but not least, stayed cheap. So, as the cost of grain increased by 10-15 times within the last 50 years, sea borne freight has just doubled.

However, even though the influence of demand works in both directions for grain and shipping, there is also a double-side effect in other section. Congestion or delays in ports influence turnaround times and also mode of shipping (bulk or bagged), which at the same time affects size of the ship - as shipper often has no choice but to use a small ship, so that it can make considerable change to freight rate achieved.
However, because of the nature of the product such as grain - demand in the grain trade is for any ship type (not complicated in design).

The globalisation of shipping industry is under way and with the period of the most confusion being over, management of ships became a worldwide successful fraction of the industry. Managers made the most of disorderly phase as they understood the new techniques (such as open registers, IT systems, economies of scale, etc) - owners at the same time were too busy saving their businesses from going bankrupt and therefore did not have time to welcome new strategies. However, ship owners have been learning within the last decade and they are now willing to take back ship managers contracts that were signed in the previous years (Spruyt,1990).

The derived demand for the shipping industry means that both ship owners and ship managers are constantly under threat of sudden changes in demand. As seen from the various examples mentioned in this work, there are thousands of possible driving forces of developments in demand and therefore individuals within shipping industry have to have a sharp mind to predict the changes.

It can be concluded that shipping market is a volatile filed and can change rapidly, so that decisions by ship owners depend essentially on timing. Because of the nature of the market, there is small chance of making a right decision and forecast more than only short time into the future (Stopford,1991). So, with that in mind what really counts is not forecasting the long time future ahead but understanding and catching the turning point of the market before everyone else.

As it is seen from the above, ship owners are more under pressure to keep up with the latest news in politics, economics and trade changes than shipping management. However, both of the groups are in most of the cases vulnerable towards changes in demand due to the various reasons listed above. Therefore, it is essential for them to understand and to follow closely all the available data in order to be able to predict future developments and therefore protect their businesses from volatile trends. It is all the more easier to do due to the worldwide availability of data, however, it is important to have a long-time experience in the market in order to make use of the knowledge that modern technologies offer. Close inspection of world economy will be able to offer early caution of recurring changes in demand for ships. Therefore, to catch market turning points in time, ship owners and ship management should understand workings of world sea transport demand function together with up-to-date knowledge of global, economic and political issues (Stopford, 1991).


- Grain - Seaborne and Transport Report (June 1988, London: Drewry Shipping Consultants Ltd)

- Gwilliam K.M. ed. (1993) Current Issues in Maritime Economics (Netherlands: Kluwer Academic Publishers)

- Ország-Land, T. (1999) Russia prepares to open its inland waterways to EU shipping European Business Review Vol.99, number 3

- Spruyt, J (1990) Ship Management (London: Lloyds of London Press Ltd)

- Stopford, M. (1991) Maritime Economics (London: HarperCollinsAcademic)

- Stubbs, P.C., Tyson W.J. and Dalvi M.Q. (1980) Transport Economics (London: George Allen & Unwin Ltd)


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