Market conditions in shipping freight markets

The economics of general cargo and tramp markets are different. Competition is less in liner markets in comparison to bulk markets, as there are fewer suppliers of the freight service, organised through conferences and alliances. Shippers (charterers), on the other hand, are many with relatively small cargo consignments to transport that occupy only part of the vessel. As a consequence, each individual shipper of a cargo does not have the power to negotiate freight rates. However, freight rates on a US$/TEU or USS/FEU⁴ basis do change on week to week basis according to the balance of demand with supply. Thus, both carriers and shippers are exposed to the freight rate volatility' and the risks that this entails for the income of the former and the freight cost of the latter.

Conditions of perfect or near perfect competition prevail in tramp dry-bulk and tanker markets. That is, there are many buyers and sellers of freight services, with no barriers to entry or exit, negotiating a relatively homogeneous product (the freight service) in well organised freight markets. The charterers, which include large trading companies, private and governmental exporters/importers, etc., compete between themselves to secure vessels which will carry their cargos. It can be safely assumed that in a particular route-trade there are no significant differences in the quality of the freight service offered; that is, the freight service is close to being homogeneous if not perfectly' homogeneous, despite some minor differences in vessel characteristics and customer relations that may exist between shipping companies, aiming to differentiate their service. Similarly, there are many ship carriers, which include private and public shipowners, ship managers and state-owned ship-owning companies. They compete to secure employment for their vessels to transport cargos. These two counterparties come together through specialised brokers, who are based either in house or are operating as independent brokerage houses. They' are the middle-persons that help to arrange agreement on the details and the freight rate, which will be then put down in a charter-party agreement. This is individually negotiated for each vessel and cargo carried. As mentioned before, such a fixture can take various forms, ranging from voyage charter, COA, time-charter of different durations, etc.⁵

The many buy'ers and sellers participating in the freight market can freely enter or exit the market, and their large number is by itself evidence of the ease of entering and exiting the market. It is true that the initial cost of buying a newbuilding or a second-hand vessel is high, but specialised departments in banks and specialised ship-lending banks exist that are willing to finance these projects. True, significant collateral is needed to secure such financing, but then even smaller investors can participate in shipowning through investing in shipping stocks of publicly listed shipping companies in stock exchanges (see Kavus- sanos and Visvikis, 2007a). Exiting the industry is even simpler, as vessels may be sold in organised markets for second-hand vessels or sent to scrap if this solution is economically favorable.

Furthermore, entry and exit (switching) of vessels into different trades/routes is not prohibited in any way, as long as the vessel complies with the required technical specifications to serve that trade/route. The same is also true for contracts of different duration, which are effectively distinct markets. In fact, what the owners do is consider the risk—return trade-offs of operating vessels in particular routes of the industry and move their vessels accordingly'. The same considerations are also taken into account when they decide on the type of fixture to secure for their vessel (for example, voy'age, six-month time-charter, 12-month time-charter, etc.). As is well-known, when such opportunities in a market are realised by' market participants, the excess profits are eliminated through the joint movement of vessels towards the excess profit generating trade/route and/or type of fixture, to reap the profits. This geographical mobility of vessels is an important characteristic that contributes to competition prevailing in freight markets, and is a feature other industries lack, such as, for example, the real estate sector. At the same time though, there are costs involved in moving vessels between different lanes/trades, as vessel hulls may need to be cleaned or the vessel may have to travel in ballast to enter a different route than the one it trades at the moment. Moreover, switching between contracts of different duration involves certain costs, when agreements are broken, including penalties and loss of reputation in the market. These costs are insignificant in “paper markets”, such as those involving derivatives, stocks, bonds and money instruments in general.

Finally, a few words are in order about the availability and the processing of information in freight markets. The Baltic Exchange was formed in 1883 to bring together market participants wishing to buy and sell the freight service. This physical pooling of participants in an organised market is equivalent, amongst other things, to pooling of information, which helps discover prices and contributes towards the efficient working of markets. Since then a great number of developments have occurred, including technological innovations in communications and electronics. This has allowed shipbrokers possessing information generated in the market to exchange this information in the form of published reports, informed advises over the telephone, email, fax, or the web. Nowadays, specialised organisations and businesses have come to existence, which collect and disseminate relevant information on fixtures, prices, cargos and vessels available to the market in various forms (paper or electronic), typically for a price. They include: the Baltic Exchange, Clarksons Research Studies (CRS), Clarksons Shipping Intelligence Network (SIN), Simpson Spence and Young (SSY), Drewry Publishing, International Maritime Statistics Forum (IMSF), Lloyds List Archives, Fearnleys, Bloomberg, Reuters, etc. These information sources are all available to shipowners and charterers, who can utilise the available information to make informed decisions in freight markets, leading to sharper conditions of perfect competition for the global shipping industry.