THE NATURE OF FREIGHT MARKET

Nikita V. Shcherbinin
Admiral Makarov State University of Maritime and Inland Shipping, St.Petersburg
Maria A. Gogina
Admiral Makarov State University of Maritime and Inland Shipping, St.Petersburg
Ilya A. Romanenko
Admiral Makarov State University of Maritime and Inland Shipping, St.Petersburg

Abstract: This article provides an assessment of the freight market’s nature. Specific factors affecting changes in the level of rates and the amount of cargo transported are given. It also describes the actions of shipping companies and charterers aimed at minimizing the main risks.

Keywords: freight market, sea transport, demand, supply, freight contracts

Introduction

The purpose of the article is to highlight the main factors influencing changes in the rates of the freight market. The ratio of supply and demand for tonnage characterizes the state of the freight market, and also influences the formation of rates and the efficiency of shipping companies. Changes in trade volumes between the leading countries of the world economy determine the demand for sea transportation. The number of ships and their size form the tonnage supply. For quite a long time, situation has been observed in the maritime transport market in which demand is lower than supply. In 2020, events of a global scale took place, which have had and still continue having an impact on the freight market. The task is to analyze and study the events that characterize the freight market.

The main text

The general economic situation in the world and in the main developed countries has the greatest impact on the ratio of supply

and demand. It is the change in the volume of international trade that determines the volume of shipping and, as a consequence, the demand for ships. However, even with favorable external factors, interruptions in the volumes of demand for the fleet are possible, which, in turn, affect the freight rates. A striking example is the grain harvest failure in exporting countries. The result will be a decrease in traffic. The freight market reacts very quickly to such situations and is reflected in freight rates. State intervention, increase in duties, change in the size of quotas [1], etc. can have an impact on the decline in production, and as a result, on international trade. The freight market is heavily influenced by expectations. As a result, such factors as the deterioration of the international situation, for example, the threat of military action, social conflicts (civil war), changes in bunker fuel prices [2], a pandemic, and so on – can change the conjuncture of the freight market, depending on what consequences are expected from the upcoming or an ongoing event – an increase or decrease in shipping.

In 2020, the whole world faced the COVID-19 pandemic. It, in turn, influenced most spheres of human life, and the logistics sector was no exception [3]. Despite the fact that quarantine measures helped to contain the spread of the virus, they have impacted the economic situation in the countries and in the world as a whole [4]. Thus, the quarantine of a large number of factories around the world directly affected the supply of raw materials, finished products and various kinds of goods. It resulted in a decrease in traffic volumes and interruptions in shipments, as well as in change in demand for consumed goods and a decrease in purchasing power. The impact of the pandemic is also noticeable when concluding agreements on sea transportation. Now, when concluding charters, a separate provision on COVID-19 can be included, which specifies the obligations of each of the parties, in the event of costs associated with a possible increase in the duration of the flight.

The peculiarities of the freight market also include a cyclical nature [5]. The similarity of situations in the future is noted with a ninety percent probability. The cycle is usually measured from peak to peak and comes in different lengths. The mechanism of the freight market can be called the redistribution of the amount of money that charterers paid to the shipowner for sea or river

transportation [6]. With a shortage of tonnage, there is an increase in freight, and shipowners earn super profits, while charterers incur additional costs. In this situation, the shipowner makes the most of his fleet and is interested in building new ships, while charterers try to keep transportation costs to a minimum. As a result, more than a sufficient number of ships appear on the market, which leads to lower freight rates. Subsequently, rates may even fall below the level of profitability, which forces shipowners to reduce the capacity of their fleet. Thus, by changing the supply, the freight market comes to an equilibrium (balance) state. This algorithm demonstrates the factors that form the sharp ups and downs of the freight market. The supply of transport services is much less volatile than the demand. This is due to the fact that demand can change very quickly depending on certain changes in the global economy. The supply, on the contrary, is not characterized by sharp jumps, it takes time for it to stabilize at the level of demand. All of the above allows us to conclude that the freight market demonstrates high volatility, due to the rapid perception of even minimal changes in the ratio of supply and demand.

Еnd of introductory fragment. You may find full texts and more on the web-site https://marinejournal.info/