The Demand for Sea Transport Services

Artemios Alifragis The Demand for Sea Transport

Essay Title :

“ Is the Demand of Sea Transport Services a direct demand? What are the factors that affect it? Discuss.”

I N T R O D U C T I O N

The Demand for Sea transport

As it is generally known and accepted, the shipping industry, has a specific purpose and this is not other from the moving of cargo around the world. Cargo is the only reason for ships. In order to be examined more thoroughly and be understandable the above Project, I have separated it into Chapters, in each of it there is a presentation and analysis of the subject that is examined. All the Chapters are divided into sub-chapters, which are all linked together and compose the total meaning of the demand in sea transport. The terms that are examined in my Presentation below, are the meaning of demand in shipping industry, the transport and its importance, the cargoes and their specific divisions of them (bulk and general), the types of transportation in our days and the nature of the transport demand. Also, there is an analysis in the very important term of PSDF (Parcel Size Distribution Function) which is a function that determines many components of the cargo. The demand of the sea transport is not an isolated chapter of the shipping industry. It has to be examined as a total in regards to units and terms like the world economy, the freight rate, maybe in connection to political disturbances and how these are influence the market, and many other things. It is a whole science the observation and examination of the demand for a specific good / commodity from a Port “A” to a Port “B”. They are factors that some times can not be predicted and this is happened due to the fact that the market is not a located and controlled area, in which certain and expected at time facts will happen. The global market, (as the term says itself) is an area which is effected by internal and external factors, from all over the system of the market industry in the world. So, bearing in mind that factors are influence the demand of a commodity carried, we can go ahead in the presentation of the chapters that compose the demand. All the information are gathered from books, journals, newspapers, web sites and sources of financial and shipping terms and libraries. It is well mentioned that, the chapters are all connected each other and there is a logical rank and consecution from chapter to chapter. The rank of presentation is selected with the criterion of the step-by-step elevating in the knowledge of the terms and the explaining of the units that compose the whole demand in the sea transport. The demand in sea transport is not a direct demand, and this is presented through explanation and examinations in my Project below.

Also, this kind of subject cannot be made understand only by the presentation of the chapters isolated. It has to be presented with all its units, always in good connection and relevant consecution each other. Below, you will be able to find a presentation of four chapters divided into a number of sub-chapters, in which their analysis give all the main elements for the better view/presentation and apprehension of the demand for sea transport.

A B S T R A C T

In our days the demand for sea transport is in great importance. The commodities that are transported have many differences on the type and on the groups that they divided into. Below there will be a presentation of the demand in our days for the sea transport and how this demand can be examined as a direct or not. The below project is separated into four (4), in my opinion, chapters and each one has divided into sub-chapters, so as to be understood that all the chapters are connected each other. The terms that examined in my project are all linked to the today's and tomorrow's phase of the shipping market and are all updated. However, it is well mentioned that the structure of the shipping market hasn't changed more, since their first steps after the World War II, when the demand for sea transport was in her maximum level. Since then, the commodities are traded in almost the same rhythm with differences in the types of goods and the number of the consumers, which now is more. Begging from the first chapter, I make a presentation of the nature of transport demand. It is a part that cannot be examined correctly, if we neglect the fact that it is very important and vital term in our daily life. Of course, we have to consider the factors that affect the product's service, which are all connected each other and these are the price, the speed, the reliability and the security. They are also important the factors that determine the demand for the specific product. These are the tastes of the consumers, the number of consumers, the consumers' incomes, the prices of the related goods and finally the expectations of the consumers about future prices and incomes. In this part of presentation, I have to say that all the factors are not same and they are factors that can be settled as direct and indirect. The direct ones, are the speed, the safety, the reliability and the freight market. On the other hand, the indirect are all the factors that affect the demand or supply in the product's market. Continuing my presentation, in the second chapter I am doing a report about the commodities that are traded by sea and their groups. This is a very extensive chapter, due to the fact that they exist, and so they are traded, many types of many commodities. These are divided into some groups so as to be easily accessed and examined each time. So, the commodities that are traded are collected from the Agricultural family, the Metal industry group, the forest products, the energy sector and other manufacturers and industrial materials. In today's shipping market, they are traded many types and many groups of different commodities. From bulk grain to ores and minerals. All these types of goods have not a common type of transportation and stowage, and that's why they are not available in the same time and price from other products. This division created the need for being categorized in bulk cargo and general cargo. Another type of goods being transported is the dangerous goods. In this category they belong specific commodities, which are all identified and selected from the IMO (International Maritime Organization), and divided into nine (9) classes depending on the dangerous level they belong to. The IMO also makes frequent revisions in the classes and in the types of stowage and handling with care of these goods.

In the third chapter, I make a review to the world economy in connection to the demand for sea transport. The aim of this chapter is to locate and explain the main terms that compose the meaning of demand. These are all connected and co-exist in the world economy. Terms like the freight rate market, the types of freight that exist, the Parcel Size Distribution Function (PSDF) are all relevant to the understanding of the demand for sea transport. In the presentation of the PSDF, there is also a sub-chapter explaining the purpose of this function, which is important too, including the factors that affect the shape of the PSDF. Ending, in the fourth chapter, I selected to present all the costs that compose the transportation of the commodities demanded, from one place to another. The expenses arising from the transport of the goods, can be examined and divided into two main parts. The maritime transport costs and the overland transport costs. In the first case, the costs are al the expenses demanded for the safely transportation of the goods by sea. This include wages for the crew, fuel consumption, indemnity charges, perils, fees and port dues, operating costs, repairs and maintenance costs. The second part of costs are the overland costs and they are the expenses from the time the goods leave the ship till the time they arrive in the final destination, which is the consumers. In this case, we find costs for the warehouses, wages for the workmen, expenses arising from the operation of the railway or any other transport system the port has, the use of FLTs and many others.

Chapter No.1 : The nature of transport demand.

1.1 The meaning of transport demand in our days and how important

The transportation of goods is not something new. It started thousands of years ago, while the countries haven't even created the term of "money". Goods used to take the place of money and the exchange between each other was a commonly accepted rule. All the places in the world were not able to have and produce or cultivate the same commodities. This is happening and in our days, while in the northern places of world the cultivation, for example, of grain is impossible, due to climatic conditions. Imagine a place in the world, which is unable to produce a specific type of commodity, let's say grain. What would be forced to do? The answer is to import the commodity by transporting it. It is known those, countries with specific geological and climatic conditions are not able to have goods, and so the meaning of transportation is very important not only for these countries, but all over the world. This is happening because no country or place in the world is able to produce, cultivate and have all the commodities. So, we can say that the shipping industry has a specific and important care, which is the carriage of cargo all over the world. This is a definition (carriage of goods) usually examined from the view of shipping industry. But this is the first side of the coin. The other is the examination by the viewpoint of the customers. In this case the definition of "carriage of goods" is turned to be just "service". This is not something unexpected because the transportation of the goods around the world, even if it is the link between demand and supply, it doesn't cease to be a service. After all in customer's mind the transportation of a commodity is a service. It is rather like saying that restaurants cook food. The terms that the service is been composed of, are the following four: • The Price. The freight cost of a specific cargo should not be examined partially,

but always in connection to the overall cost equation. We have to examine it as a part of the total, and not isolated. (E.g. The freight rate of carrying grain is represented as a result of 12% of the CIF cost.).

• The Speed. This term has to do with not only the cargo, but with the voyage too.

The time of transportation is a very important factor that can be easily turned to catastrophe, if it is not examined thoroughly. This is happening due to the fact that, time incurs an inventory cost and depreciate the commodity.

• The Reliability. All the respective shippers in the shipping market are willing to

pay more for a service, in order to be carried and delivered the goods "just in time". It is promissory term that encourages the solvency of both parties.

• The Security. The secure transportation of commodity is a sensitive part, and

although in Marine Insurance the loss of or damage to a commodity is a risk insured against, the problems which are created from such a fact are always huge and the shippers are affected in many sections.

1.2 Factors that influence in the product's demand.

At first we have to define the law of demand, which says that there is a negative or inverse relationship between price and quantity demanded. As price falls the quantity demanded rises and the opposite (ceteris paribus). Economists call this inverse relationship the law of demand. As the law defines, this inverse relationship is caused due to some factors that are responsible for. The basic determinants of demand are:

1. Consumers' tastes (preferences). The taste of each consumer is not the same with another and that's why there is a wide range of services and products in the market. They exist in order to satisfy all the differentiated needs of their consumers.

2. The number of consumers in the market. This is a very important factor that affects the product's demand. And it can be made understood if we make an example. For example, if a Tsunami happens then there will be a number of dead people, let say 1,000,000. Then the decrease of the population will have a decrease of the product's demand because there will be less people (=consumers) to demand the product. A decrease in the product's demand will process a decrease in the quantity of the product. We can see that, a change in one level of the pyramid has always coincidences in the chain/pyramid as a total.

3. Consumers' incomes. For the factor "income" (I) we have to mention that, if the incomes of the consumers increase, then the demand of the product will increase. This will have a result to be increased the price (Pe) and the quantity (Qe) of the product, which will affect the demand for sea transport service (DSTRS) to be increased. So, the increase of demand in sea transport service will influence the freight (FRe) and the quantity (QSTRS) to be increased too.

4. The prices of related goods. In this category, we have two types of related goods. The substitutes and the complementary goods. For the substitutes, it is marked that if the price of one product increase then the demand for the other will increase. For the complementary goods, it is marked that if one good is expensive then, the other will be reduced.

5. Consumer expectations about future prices and incomes. It can be examined with the common logic of the market, which says that if -for example- the price of grain is going to be higher in a period of 2 months from now, then the consumers will increase their demand for purchase of this good, and so they will seek for buying it before it gets a high price. The same is done from the viewpoint of income. If the consumers know that their incomes, will be increased than they will demand for more quantity of products. If we want to give a definition about the demand for sea transport, then we have to say that its curve is a downward sloping curve, indicating the inverse relationship between the freight rates (FR) and the quantity (QSTRS) of sea transport services demanded by the shippers. It has a geographical and a time dimension and it is affected by factors that are direct or indirect. The direct factors are (1) the speed, (2) the safety, (3) the reliability and (4) the freight rate, and they are all mentioned and examined above. Regarding the indirect factors, we have to mention that these are all the factors that affect the demand or supply in the product's market.

Chapter No.2 : The commodities that are traded by sea and their

groups. 2.1 The Group of Commodities.

Below, there will be a presentation of the commodities that are being transported, divided always into categories and groups, helping us to locate the relevant vessels that carry the mentioned commodities. The trade is consisted of many different commodities and each of it must be analyzed in the context of the world economy. All the goods that carried are in relevant connection between each other, and we must bear in mind that although we are refer to different types, all of them have a common point. This is not other of the demand. The variety of goods carried by sea is enormous, and along with relative quantities and modes of transport, presents an ever changing scene. Recent years, moreover, have seen intense development in transportation systems, whereby packaged goods, perhaps in containers or on pallets, can be moved from one mode of transport to another without costly and time-consuming transfer expenses. 2.1.1 The Agricultural Family.

In this family, they are including goods like the cereals, such as wheat and barley, animal feedstuffs, sugar, molasses, oil, fertilizers, oil and fats. Also very important commodities that belong to this family are the coffee, the coir, the copra, the cotton, the cotton-seeds, the rubber, the fibres and the hay. Of course, there are many others that are important too, but the importance of a commodity is always examined in the view of specific terms like the profit, the cost, the demand of the specific good, and the interrelationship between them. The income of a consumer and the population of a country that order the product of this family, are important factors that influence the demand for the specific commodity. 2.1.2 The Metal Industry.

It is one of the major commodity groups, which has a very share in the market of commodities carried. 25% is the estimated share in the shipping industry that the metal industry has and it is continuously increasing, if we bear in mind that the big newcomer country of China, has made one of the greater imports all over the world, maybe in History. The most known and common carried commodities of this group

are the iron ore, the metallurgical grade coal, the non-ferrous metal ores, the steel products and of course the scrap which is and the most well-paid cargo in freight rate. 2.1.3 The Forest Products.

In this group, we can locate as main goods the timber, which are logs and lumbers, the wood pulp, the paper and its various wood products, like pit-props, railway sleepers and telegraph poles, all of which are liable to be creosoted prior to shipment. The share market is estimated in the amount of 3-3,5% of the total commodities carried, always measured in million tons shipped per annum. 2.1.4 The Energy Sector.

This is the most important sector of commodities carried globally, taking as granted that the importance of a commodity is estimated in the examination of specific terms. Energy dominates bulk shipping. The market share of this group is in the amount of 45% of the total commodities transported all over the world. It is the first ranked sector with the higher demand. The products that including in this family are the crude oil, the coal, the liquefied coal, the thermal coal, the oil products, the gas, the steam coal and many other substitutes. The competition of these energy sources is excessive and the demand is the reason of this situation in regards to the need for use the energy in all the sectors of our daily life. It is not surprising the fact that everyday, in our activities we use many units of energy in order to do our jobs, or satisfy our needs, personal or not. For example, when we go to our jobs, we use our cars, or the busses, and so we spend energy units for the achievement of our purpose. The same is made, when we want to get warmed and we use thermal coal. 2.1.5 Other manufacturers and industrial materials.

This group comprises goods like gypsum, cement, salt, asbestos, mineral sands, chemicals and many others that own a share of 9-10% of the whole. Also, there are and the remaining of the manufacturers like the textiles, the machinery, the vehicles and the capital goods. The last one holds the amount of 3% of the whole. From the above sub-sections, we can say that over an amount of 70-75% of the tonnage of seaborne trade is associated with the energy sector and the metal industries, in a level that the shipping industry is depended from these two “heavy” industries. 2.2 The Cargo.

The definition of the cargo is composed in the phrase that “the cargo is the only reason for ships”. The explanation which is given in this phrase is that without cargo there would be no need for transportation and so there would be no reason for

the existence of ships. The cargo is examined from many angles, and each of it has a specific and some times unique explanation and rank in the general meaning of the cargo. But, it is not only the definition of the cargo. There are so many terms co relevant with the cargo that gives us the complete meaning and feature of it, in connection always to its demand in the world shipping industry. The co relevant terms are not others from the dunnage, the distribution of the cargo, the stowage and discharging and the care of the voyage. In brief, dunnage is anything used to protect the cargo. The term of distribution of the cargo is a very important unit and it is not separated from the rest. Of course the ship has to cover all the four general principles in descending order of priority. These are:

(a) Safety of ship and crew, (b) Safety of cargo, (c) Highest possible port speed and (d) The most efficient use of space.

The better distribution of the cargo a ship has, the better advantage will be able to take in respects to the speed of the delivery of it, the situation (not damaged) and there will be less time of discharge of the cargo, and so less expenses which are added to the price of the cargo. The shipper must take care into the cargoes with special features that have to be handled, stowaged, discharged and transported with care, due to their conditions. These are for example, the cement, which has to be kept dry in paper bags or bulk. Others are the coal, a self-ignition cargo, which is more dangerous in temperatures up to 35 degrees of Calcium, the copra, the flour, the iron and steel, the rice and many others. The cargo is divided into two main categories. General and bulk. They are two types that determine the types of vessels needed for the transportation of the specific goods. 2.2.1 The General Cargo.

The general cargo has a level of difficulty in the transportation, due to the fact that the commodities do not have the same size and capacity. Also, there are cargoes that the stowaging is doing in holds, others in refrigerators, or even in container boxes. So, it is not standard the type of carrying, stowaging or transportation of the general cargo. The general cargo is divided into many categories and the most commonly known are the following:

• The Loose cargo. They are individual items, pieces of machinery, boxes and each of which must be handled and stowed separately.

• The Containerized cargo. This division of general cargo includes standard

boxes, with standard dimensions the TEUs (twenty equal units) and the FEUs (forty equal units).

• The Palletized cargo. These commodities are packed onto a pallet for easy

stacking and fast handling. • The pre-slung cargo. These are small items, such as planks of wood lashed

together into standard-sized packages.

• The Liquid cargo. From the name we understand that they travel in deep tanks, liquid containers or drums.

• The Refrigerated cargo. The commodities carried in this section, must be in

frozen or chilled condition and the vessels that do these transportations, called “Reefers”.

• The heavy and awkward cargo. For this category of cargo we must mention

that there is a very high level of difficulty to stow. The systems of transportation after a thoroughly examination decided to be just two; the pallets and the containers. Regarding the containers, we have to say that they dominate the shipping industry globally, since their introduction in 1966.

2.2.2 The Bulk Cargo.

The base of transportation for this category is “one cargo-one ship” while in the general cargo we found exactly the opposite (one ship-many types of commodities). Most of the commodities are drawn from the material trades such as oil, iron ore, coal and grain. The four main categories of bulk cargo are:

• The Liquid bulk. This cargo requires tanker transportation, and the most known commodities are the crude oil, the oil products and the liquid chemicals.

• The five major bulks. These are the iron ore, the grain, the coal, the phosphate and bauxite.

• The minor bulks. In this category we find cargoes such as the steel products,

cement, gypsum, non-ferrous metal ores, sugar, salt, sulphur, forest products, wood chips and chemicals.

• The specialist bulk cargoes. In this category they belong cargoes with specific handling or storage requirements.

2.3 The Dangerous Goods.

The definition “dangerous” is given by the IMO (International Maritime Organization) and they are including specific classes of commodities. The IMO, has evolved recommendations as to stowage, the carriage, the packaging and the labeling of most dangerous commodities. It well mentioned that the Code (the IMO Code for the Dangerous Goods), classifies the goods in units called classes, and each one includes many cargoes/commodities of the same level of danger. So, the Code classifies as follows the dangerous goods: Class 1: Explosives Class 2: Gases: compressed, liquefied or dissolved under pressure Class 3: Inflammable Liquids Class 4 4a: Inflammable Solids

4b: Inflammable Solids, or substances, liable to spontaneous combustion 4c: Inflammable Solids, or substances, which in contact with water emit

inflammable gases Class 5 5a: Oxidizing substances 5b: Organic peroxides Class 6 6a: Poisonous (toxic) substances 6b: Infectious substances Class 7: Radioactive substances Class 8: Corrosives Class 9: Miscellaneous dangerous substances In view of the above classification, we can understand that the carriage of such cargoes is not dangerous only for the hull (the vessel), but it is pregnant with dangers for the crew also, and for the people who are involved, mostly, with the loading and discharging these commodities. It is estimated that more than 50% of the cargoes transported by sea today can be regarded as dangerous, hazardous and/or harmful (marine pollutants) under the IMO classification, designation or identification criteria. A point of view is that the industrialization of the world is an element, in which the demand and so the transportation of these commodities is in rise and the sure is that, the lists of the products will grow. This is a reason why the carriage of these classified commodities has the highest freight of transportation in the market.

Chapter No.3 : The world economy in connection to the demand for sea

transport. 3.1 The world economy.

The world economy is a very important factor on the demand of sea transport. It generates the import of raw materials for manufacturing industry, or the trade in manufactured products. In this case we have a new definition; the business cycle. The business cycle lays the foundation for freight cycles. It is accepted that these economic cycle arise from a combination of external and internal factors. The externals include wars or sudden changes in commodity prices such as crude oil, which cause a sudden change in demand. The internal factors refer to the dynamic structure of the world economy itself, which it is argued, leads naturally to a cyclical rather than a linear growth path. Briefly, the five most commonly quoted causes of business cycles are: • The multiplier and accelerator. The income can be spent even in investment goods (indirect, for future purpose) or in consumption goods (direct). The investment is mentioned as the "multiplier" and the income takes the part of the "accelerator". • Time - lags. Time - lag is called the delay between the economic decisions and their implementation. The result is to make the booms more extreme and cyclical. • Stockbuilding. An increase in the stockbuilding indicates that the demand for sea transport is very high and so the market is ready to pay more for the product/good to be delivered onto it. • Mass psychology. This term can be examined only if people act independently, and it has the meaning that if they do so then they cancel out their errors. • Random shocks. The impact of such shocks in the shipping industry is very severe and processes a chain of reactions of errors and problems. This category includes from weather changes and pollution acts to wars, new resources and changes in the price of the commodity.

3.2 The Freight rate market.

The freight rate as a term can be identified as the fixed price the shipper demands for the transportation of a specific commodity and for a certain period of time. It is not the same and it depends on many factors, not only from the side of the shipper, which is the connecting link between seller and buyer, but also from the side of the consumers which are represented in the face of the buyer. So, it is highly recommended to distinguish the rate into the following categories, in order to have a total and more objective view of the definition of freight rate. The freight market has two different types of transaction. These are the freight contract in which the shipper buys transport from the shipowner at a fixed price per ton of cargo and the time charter under which the ship is hired per day. Although the two categories of freight, there are also the various types of freight rate, if we want to have a complete study. 3.2.1 Types of Freight.

The freight is divided into six parts depending on the situation of transaction each time. These are the following:

1. Advance freight.

As its name indicates, the advance freight is paid in advance, which means before the delivery of the goods. This is the most important type of freight, and we find it mostly in liner cargo trades and tramping (bulk carriers).

2. Lump sum freight.

This is called the amount, which is paid for the use of the whole or portion of a ship. It is calculated on the actual cubic capacity of the ship offered, and it is irrelevant to the cargo carried or to the quantity of cargo delivered.

3. Dead freight. It is a definition, which is given in the event of the breach of contract between the shipowner and the charterer, who undertakes the responsibility to furnish the vessel with the named capacity of the named cargo. If he doesn't so, then the shipowner is able to claim damages for unoccupied space.

4. Back freight. It arises when the commodities, which have been dispatched to a certain/named port, they are refused on arrival. The freight charged for the return of the goods constitutes back freight.

5. Pro-rata freight. It is the freight calculated when the cargo has been carried part of the way and due to special circumstances, it is quite impossible to be delivered in to the port of destination.

6. Ad valorem freight. This arises when a cargo is estimated for rate purposes on a percentage of its value. 3.3 The Parcel Size Distribution Function (PSDF).

The PSDF is a function that describes the range of parcel sizes, in which the cargo is actually shipped by sea. When we are talking about "parcel", we must bear in mind that this is an individual consignment of cargo for shipment. In order to have a better view of the PSDF it has to be defined that the cargoes are all classified in parcels. After all, it is a function, which gives us elements and information about the range of the parcel sizes, in which the cargo is actually shipped by sea. Another concept of the PSDF is that any commodity appears in the shipping market in a wide range of parcels. Regarding the precise shape of the PSD for each commodity, it is accepted that this is a factor that is determined by the characteristics of demand. 3.3.1 The purpose of PSDF.

There are many questions and matters of discussion and examination created by the meaning of the PSDF. The first one is to define which cargoes go in which ships. This is a central question and in order to gets an explanatory answer we have to make a separation between "bulk cargoes" and "general cargoes". The bulk cargo consists of parcels large enough to fill a whole ship. On the other side, the general cargo consists of parcels small enough to fill a ship, and thus it has to be packed with other cargo for transport. These are all elements for examination and we must consider them with absolute care for the correct calculation of the parcel size distribution function. 3.3.2 The factors that affect the shape of the PSDF.

Talking about PSDF, we should not forget the factors that influence the shape of this function. These are sum up into the following three sections. • The economics of the businesses producing and consuming the cargo. In this case,

we are examining the Supply and Demand of the commodity, from the market. If the businesses which consume the cargo, have financial / economical problems, then the demand for this commodity will be lower. The opposite will happen, if there are limited or not at all financial impediments. So, the problem of the

economics of a business creates many other problems in many other sectors of the industry. The firm which create the product has a whole background of actions and scheduled procedures, in order to be distributed "just in time", without delays and with safety to the port(s) of destination.

• Another important factor is the availability of the ships and their carrying

capacity. Some bulk cargoes travel in small bulk carriers, while others use the biggest ships available. If the availability is reduced and the ships that exist in the market are few, then the supply of the commodities will be reduced too, and the PSD function will be present a downslopping curve.

• The last of the factors that affect the shape of the PSDF is the transport

infrastructure. This is a combined form and it has to do not only with the transportation of the commodities from the port of discharge to the market, but a part of it belongs to the timing and the bureaucracy that exists in each place individual. The transport infrastructure of a port maybe will be fine, with railways, highways, warehouses, etc, but if the timing of distribution does not operates well, then the problem still exists. On the other hand, with bad infrastructure the commodities will have to be delivered later than the time they have scheduled and this is a cost which is added in the final price of the commodity.

Chapter No.4 : The Maritime and overland transport costs.

The costs of the transportation can be attributed as the sum of fixed and variable costs. This is the definition from the viewpoint of the microeconomics. The meaning of cost has many dimensions. Different types and categories of costs are calling to pay the shipowner or shipper and different the charterer, the cargo owner until the commodity go to the hands of the consumers. Of course, all these types are relevant each other and the existence and use of one are the meaning of existence for another type of expense. Below I will present the two different types of costs; the maritime cost and the overland cost of a commodity transported. The first type of cost, the one of maritime cost, has to do with the transportation expenses and all the relevant expenses which are created because of the commodity's transportation. The commodity is being transported from the place (port) of supplier to the final / original destination(s) which is the port of demander/consumer. 4.1 The Maritime costs.

The definition for the maritime costs is the sum of all the relevant expenses, fixed and variable, arising from the transportation of the commodities to the final destination(s). The range of this definition is wide and in order to be explained and not misunderstood, we have to bear in mind that different types of costs are calling to pay the different parts of the contract involved. The shipper and the carrier compose the contract of carriage (coc). The shipper is also, many times the charterer, the person who arranges to find the appropriate person(s) who is interested in the transported commodity. The costs that compose the maritime costs of transportation the commodities from one place to another are the following: • The operating costs In this category we can find the ongoing expenses connected with the day-to-day running of the vessel, the maintenance and the insurance expenses. Also there is the existence of costs like the routine repair and maintenance and many others. As a function it can be shown as follows:

OC = M+ST+MN+I+AD Where : M = manning costs ST = stores MN = routine repair and maintenance

I = insurance AD = administration • The crew costs Crew costs include all the charges incurred by the crewing of the vessel, direct and indirect. These charges can be the salaries and the wages of the crew, the pension, social insurance, the victuals and repatriation expenses. They are two factors that determine the level of the manning costs for a particular ship. These are the number of the crew demanded for the safe manning of the vessel and the other is the employment policies adopted by the owner and the ship's flag state. According to the type of vessel, if it is a Capesize or a Handymax, or an Aframax, the demanded crew for the safe manning is different in each case. This is always in accordance to the technical systems the vessels has. The same is in force for the flag state of the ship. There are different requirements and employment policies for each flag. Any differentiation has to be commonly agreed between the shipowner's organization and the relevant seamen's union. • The stores and consumables costs These costs are calling also as "constants". They divided into three main parts; the general stores, the cabin stores and the lubricants. • The repairs and maintenance costs This type of cost include expenses arising from the maintenance of the ship, the use of spares in order to be fit in each stage of the voyage, and the navigation and comms service's costs. • The insurance costs The estimation of the cost of the insurance is on/about 35-40% of the operating costs. Of course it varies from ship to ship, but the average is somewhere over there. The insurance of a ship is a very important factor that determines many sections of the operation of the ship. It has to do with the insurance of the Hull & Machinery (H&M), which protects the s/o against third party liabilities, such as oil pollution, etc. the level of the H&M insurance is determined by two important factors. The owner's claim record and the claimed value of the vessel. In the first case, if the s/o has no damages claimed / insured against the P&I club, then his contribution will not be increased, and the opposite. In the second case, the claimed value of the ship, determines not only the contribution of the ship owner to the P&I club, but it has affection to the selling price the vessel has in the market.

• The general costs In this type of cost, belong expenses arising from the communication of the ship and other miscellaneous expenses from the day-to-day operation of the ship. • The voyage costs The voyage costs belong to the category of the variable costs, which can be defined as the sum of all the relevant expenses incurred in undertaking a particular voyage, expressed by the following formula:

VC = FC+PD+TP+CD Where : VC = voyage costs FC = fuel costs for main engines and auxiliaries

PD = port and light dues, etc TP = tugs and pilotage CD = canal dues.

• The fuel (bunkers) costs They are including all the costs arising from the consumption of fuel oil and diesel oil, for the commencement of a voyage and for the safety and readiness of the ship in each stage. • The port charges These costs can not be calculated with accuracy, due to the fact that each port has different charges for different use of services. The ship can not be sure for the charges, even if she knows the loading/unloading port(s), but there is estimation, which is very close to the total result of charge, with a minimum declination. Most of the shipowners know exactly and try to by at schedule for the commencement and loading/discharging operations, due to the fact that for every day the vessel stays in the port the costs of expenses is getting more and more higher. • The canal dues (if any). In order to reach a vessel the port of loading / discharge, it has to sail through the canal. Of course this is happening for trips which are connected with the passage of the canal. For example, if there is a voyage from the Mediterranean Sea (Med Sea) to the Persian Gulf, then the vessel will have to pass from the Suez Canal, so as to consume less quantity of fuels and make less time to reach the port of call, and load / discharge the commodity. The charges of the canals are not very high if we compare them to the charges that we should have, if we tried to approach the port of call(s) without passing from them, but around Africa, for example.

The transportation of a commodity demands the use of the above costs and the parties that involved are very careful in the division and approval for payment of the costs that they ought to pay. This division is always calculated depending on which type of charter party (c/p) we have in each case. In a voyage charter party, the management and the employment belong to the shipowner. So the shipowner is responsible for the processing of these expenses and their payments. In this case the payment is settled under the form of a fixed freight per ton carried. In a time charter party, the management belongs to the shipowner and the employment is in the responsibility of the charterer. In a time charter party the payment of the commodity carried is calculated in the basis of a fixed hire per day. Also the shipowner is the one who undertakes all the expenses arising from the management of the ship, except the payment from the consumption in fuels (bunkers) of his ship. The last of the three types of a charter party is the demise charter party. In the case that a commodity is carried under a demise charter party, we are observing that both the management and the employment of the safe adventure, is doing by the charterer. He is also responsible for the payment of a hire per day, as in the case of the time charter party. In the voyage charter party, the shipowner is liable to the payment of the expenses arising from the administration and the depreciation. They are costs that are not quite definite that are known from the company itself (in a bulk carrier company). On the other hand, in a time charter party, the shipowner is responsible for the expenses arising from the administration and depreciation, the stores and repairs, and let’s not forgets the crew expenses and the insurance. For the rest of the expenses arising in a time c/p, the charterer is liable. On a demise or bareboat charter party the shipowner pays only the administration and depreciation expenses. The management and the employment of the ship are in the hands of the charterer. He is the one who is responsible for the safe transportation and arrival/discharge of the transported commodities. 4.2 The overland transport costs.

In this category we can find all the relevant costs incurred by the safe and proper operation of the overland transportation of the commodity, from the ship to the final receiver, who is the consumer. The total cost of the commodity is not calculated only to the sea transport expenses, but there is a calculation also, because of the overland transport expenses. These

expenses are the operation of the cargo handling equipment by the workers, the wages/salaries of the workers, the hires for the warehouses, the use of the FLTs, the railway system of transported of the goods, the use of trucks from the warehouse the commodities are to the final destination they have to go, etc. All these expenses are added to the final price of the product, and the consumers pay in order to have the goods in their hands. The sea transport is the link between the seller and the buyer, and it is in high importance because if there were not transported the goods by sea, the time of arrival will be increased in many cases, and with the time of arrival the cost will be increased too. These meanings and terms are collateral and each shift of one term has reactions and affections on the other. A very long time of stay of the commodities in the warehouses, will have an increase to the final cost of the commodity, which will be added to the final price of it. The opposite will happen, if the ship, for example, arrives earlier than it was expected and the operation of the ship will cost less and so the final cost will be reduced, reducing also the final price of the commodity.

C O N C L U S I O N

After the examination of the referenced terms and units regarding the demand for sea transport, we can say that it is in great importance the need for transportation of the commodities around the world. The existence of trade globally wouldn't be succeed if they weren't the sea transport to link the countries and the commodities each other. The sea transport is the linking point between countries that demand and those that supply commodities each other, any types of commodities, from and to anywhere. The market systems that exist are affecting every time in different way the structure of the shipping market of the transportation of the goods. This is always examined from the viewpoint of the market model that exists each time. The costs that exist and arising from the operation of the different type of service, have affections in the total cost of the commodities, which is added into the final price of the commodities. All these terms are equal connected each other, and there is a consequence between them. That means, if we want to examine one part of them (e.g. the PSDF) we have to take it as a total in the whole meaning of the demand of the sea transport. After all, as I mentioned above in the introduction of my project, the demand of the sea transport is not an isolated chapter of the shipping industry. It should be always examined as a function of the market systems, the world economy, the political; disturbances, the freight rate and all the relevant factors that affect the final demand of the sea transport.

B I B L I O G R A P H Y

1. BOOKS :

(a) Maritime Economics, by M. Stopford, 2nd Edition, Routledge, 2000.

(b) Elements of Shipping, by A. Branch , 2nd Edition, Chapman and Hall, London, 1991.

(c) Sea Transport, by Patric M. Alderton, Chapman and Hall, London,1995. 2. MAGAZINES – PERIODICALS :

(a) The Freight Market, Daily Shipping & Financial Newspaper, Piraeus 2005

(b) Seatrade, Shipping Magazine, UK Edition, September/October 2004,

Vol.33, No.5. (c) The Ports, Greek magazine for shipping matters and new

developments regarding the shipping industry. Greek Edition, April – May 2002.

3. WEB SITES :

(a) www.wikipedia.org/wiki/Microeconomics (b) www.mhhe.com/economics/mcconnellmicro15e/student_index.mhtml

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