Determinants of Transport Costs

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Determinants of Transport Costs
Jan.Hoffmann_at_UNCTAD.org Geneva, May 2009
2
Maritime Freights1 Determinants2
Fluctuations 3 What can we do?

3
Maritime Freights1 Determinants2
Fluctuations 3 What can we do?

4
Maritime Freights1 Determinants2
Fluctuations 3 What can we do?

5
Maritime Freights1 Determinants2
Fluctuations 3 What can we do?

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Differences in maritime freights depend on
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Differences in maritime freights depend on

1. Distances
2. Economies of scale
3. Imbalances

1. Type value of goods
2. Competition
3. Port characteristics

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Differences in maritime freights depend on

1. Distances
2. Economies of scale
3. Imbalances

1. Type value of goods
2. Competition
3. Port characteristics

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Freight rates and Distance in the Caribbean
?
UNCTAD Transport Newsletter, 1st Quarter 2007
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Distance
?

• Doubling the distance leads to a increase of
  maritime transport costs (incl. insurance)by
• about 15-20 averages, empirical
  dataECLAC, FAL 191, Wilmsmeier,
  HoffmannHandbook of Maritime Economics, Kumar,
  Hoffmann

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Differences in maritime freights depend on

1. Distances
2. Economies of scale
3. Imbalances

1. Type value of goods
2. Competition
3. Port characteristics

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Economies of Scale
?

• moving 10 000 tons instead of 100 (in one
  transaction)
• reduces unit costs by 40 to 50

13
?
Feb 2008 costs 1100 TEU 4250 TEU 8750 TEU 13000 TEU
Construction costs million USD 28 77 135 167
Construction costs USD per TEU 25 000 18 117 15 430 12 850
Crew 15 to 17 15 to 17 15 to 17 15 to 17
Source Dynamar, 2008, via Antonio Zuidwijk
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Economies of Scale
?
CRS, 28 January 2009
15
Container ship sizes
?

• 27.- US saving/ container/ tripusing post
  panamax versus panamax (Drewry)

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Mergers of shipping companies
?

• Savings thanks to larger volumes(Roland Berger)

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Port operations
?

• 12 US per move savings with global
  operatorsDrewry

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Differences in maritime freights depend on

1. Distances
2. Economies of scale
3. Imbalances

1. Type value of goods
2. Competition
3. Port characteristics

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Imbalances
?
CI-Online 28 January 2009
20
?

• Supply/demand Trans-Pacific trades

Containerization International
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Imbalances
?

• In Barbados, which freight rates would you
  expect to be higher
• Those for imports, or
• Those for exports ?

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Differences in maritime freights depend on

1. Distances
2. Economies of scale
3. Imbalances

1. Type value of goods
2. Competition
3. Port characteristics

23
Merchandize type and value
?

• Increase the value by 1 implies an increase of
  transport and insurance costs by around 0.3 0.4

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Differences in maritime freights depend on

1. Distances
2. Economies of scale
3. Imbalances

1. Type value of goods
2. Competition
3. Port characteristics

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Competition with land transport
?

• If countries are neighbours, with paved roads,
  maritimetransport costs are around 10 lower

Fotos Jan Hoffmann
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Competition between carriers
?

• Receiving 20 instead of 5 companies
• freights go down by around 12

27
Competition between carriersCase study Caribbean
?

• If the company itself has no direct service (i.e.
  it only has a service with transshipment) This
  companys freight rate 650
• If other, competing, companies do provide a
  direct service This companies freight rate -
  425

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Competition between carriersCase study Caribbean
?
Source Hoffmann, Wilmsmeier, IAME 2007
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Differences in maritime freights depend on

1. Distances
2. Economies of scale
3. Imbalances

1. Type value of goods
2. Competition
3. Port characteristics

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Port reform
?

• Difference between best and worst case in
  Latin America 25 of worst case

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Port reform
?
32
?
Dependent variable maritime transport costs per
tonne of containerizable cargo
Wilmsmeier, Hoffmann, Sanchez, in Porteconomics,
2006
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?
Dependent variable maritime transport costs per
tonne of containerizable cargo
Better port infrastructure reduces maritime
transport costs
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?
Dependent variable maritime transport costs per
tonne of containerizable cargo
Better (perceived) port efficiency reduces
maritime transport costs
35
?
Dependent variable maritime transport costs per
tonne of containerizable cargo
Better general transport infrastructure does NOT
reduce maritime transport costs
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?
Dependent variable maritime transport costs per
tonne of containerizable cargo
Port privatization in the EXPORTING country
reduces maritime transport costs
37
?
Dependent variable maritime transport costs per
tonne of containerizable cargo
Trade facilitation in the IMPORTING country
reduces maritime transport costs
38
?
Dependent variable maritime transport costs per
tonne of containerizable cargo
Better connectivity between ports/ more
competition among carriersreduces maritime
transport costs
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To sum up Differences in maritime freights
depend on

• Distances
• Type value of goods
• Imbalances

• Competition
• Economies of scale
• Port characteristics

40

• Lower Transport Costs
• -gt More trade
• -gt Economies of scale
• -gt Lower Transport Costs

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Maritime Freights1 Determinants2
Fluctuations 3 What can we do?

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Bulker Spot Earnings /day
Source Clarksons Research, 27 March 2009
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Containership charter rates /day
Source Clarksons Research, 27 March 2009
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Causes of the (increased) volatility ?
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Causes of the (increased) volatility ?

1. Fluctuations in demand
2. The pig cycle
3. Speculation

1. Lower variable costs
2. The oil price (?)
3. Trying to avoid future volatility

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Less trust less demand
?

• If, for instance, an Indian importer wants to
  buy grain from the US, the exporter might not
  trust you and then the deal will not be done.
• Martin Sommerseth Jaer, shipping analyst at
  Arctic Securities in Oslo, as quoted in Fairplay
  on-line, October 2008.

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Less trust less demand
?

• THE IMF predicted today a near-total
  standstill for the global economy in 2009, with
  sharply lowered trade projections. () world
  growth is expected to fall to its lowest rate
  since the Second World War
• Fairplay on-line, 28 January 2009

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Causes of the (increased) volatility ?

1. Fluctuations in demand
2. The pig cycle
3. Speculation

1. Lower variable costs
2. The oil price (?)
3. Trying to avoid future volatility

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The shipping cycle
?
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A presentation of four years ago
?
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Pork meat is expensive the farmer orders
piglets
?
Data from Clarksons Research
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Piglets take time to grow
?
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Pigs enter the market Price of pork meat falls
?
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The model of a cycle
?

• ORDERSt ? CHARTERRATEt
• CHARTERRATEt ? (1/DELIVERIESt )
• DELIVERIESt ? ORDERSt-24

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A forecast
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?

• The shipping industry is now attempting to
  undo the self-inflicted damage of a bloated new
  building order book, the growth of which has
  encouraged a near doubling of shipbuilding
  capacity in the past ten years. Lloyds List,
  January 2009

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Causes of the (increased) volatility ?

1. Fluctuations in demand
2. The pig cycle
3. Speculation

1. Lower variable costs
2. The oil price (?)
3. Trying to avoid future volatility

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More speculation
?

• i.e. more traders who are not themselves users
  or providers of the goods or services.

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?

• More traders are participating in the market who
  are not themselves users or providers of
  transport services, but purchase future positions
  aiming at speculative capital gains.
• As has been seen in other markets, such as
  shares, crude oil, or food commodities in early
  2008, the expectation of future gains encourages
  traders to hold on to positions, thus further
  worsening the shortage of supply and increasing
  the prices - until the bubble bursts

60
Causes of the (increased) volatility ?

1. Fluctuations in demand
2. The pig cycle
3. Speculation

1. Lower variable costs
2. The oil price (?)
3. Trying to avoid future volatility

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Higher fix costs lower variable costs
?
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Change of freight rate
?
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Change of freight rate
?
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Causes of the (increased) volatility ?

1. Fluctuations in demand
2. The pig cycle
3. Speculation

1. Lower variable costs
2. The oil price (?)
3. Trying to avoid future volatility

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What about the oil price?
?
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Oil price and freight rates
?
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Causes of the (increased) volatility ?

1. Fluctuations in demand
2. The pig cycle
3. Speculation

1. Lower variable costs
2. The oil price (?)
3. Trying to avoid future volatility

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And if I want to protect myself?
?
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?

• The higher the volatility
• the more the traders and providers will want to
  purchase protection, i.e. future contracts (e.g.
  Forward Freight Contracts FFCs)
• and the more future contracts there are, the
  more volatility we get.

70
Causes of the (increased) volatility ?

1. Fluctuations in demand
2. The pig cycle
3. Speculation

1. Lower variable costs
2. The oil price (?)
3. Trying to avoid future volatility

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Maritime Freights1 Determinants2
Fluctuations 3 What can we do?

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What can we do?
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To reduce fluctuations of freights

• Carriers Think long term

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To reduce fluctuations of freights

• Carriers Think long term
• Ports invest and reform to avoid congestion

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To reduce fluctuations of freights

• Carriers Think long term
• Ports invest and reform to avoid congestion
• Governments Do not re-invent national fleets.

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To reduce fluctuations of freights

• Carriers Think long term
• Ports invest and reform to avoid congestion
• Governments Do not re-invent national fleets.
• this would be a pig cycle of ideas

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Maritime Freights1 Determinants2
Fluctuations 3 What can we do?

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Maritime Freights1 Determinants2
Fluctuations 3 What can we do?

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