Market Equilibrium Analysis and Applications

This assignment delves into the concept of market equilibrium and its practical applications across different industries. It examines case studies related to the coal market, Korea's manufacturing sector and imports from Australia, contracts of affreightment in shipping, public sector economics, participatory sensing, and global trade statistics. The focus is on understanding how market forces influence pricing, supply, demand, and overall market dynamics in these diverse sectors.

Running head: MARITIME SHIPPING INDUSTRY
Maritime Shipping Industry
Name of the Student:
Name of the University:
Author Note:

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Table of Contents
Introduction:...............................................................................................................................3
Factors affecting supply and demand in shipping freight market:.............................................3
Types of shipping freights:.....................................................................................................4
Container Cargo:................................................................................................................4
Liquid bulk:........................................................................................................................4
Dry bulk:............................................................................................................................4
Break bulk:.............................................................................................................................4
Ro-ro:.....................................................................................................................................4
Cargo related issues:..............................................................................................................5
Vessel related issues:..............................................................................................................8
Sailing related issues:.............................................................................................................9
Port related issues:..................................................................................................................9
International agreements between countries:.......................................................................10
Formation of freight rate in tramp market:..............................................................................11
Difference between freight and hire:....................................................................................11
Differences between tramp markets and pre-arranged chartered ocean liners:.......................11
Difference between Bareboat charter and Time or Voyage charter:....................................12
Contracts of affreightment:..................................................................................................12
Established trade routes:......................................................................................................13
Interaction between demand and supply curve in determining equilibrium prices:................14

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a) Momentary Equilibrium:..................................................................................................14
b) Short run equilibrium:......................................................................................................14
c) Long-run equilibrium:......................................................................................................15
Conclusion:..............................................................................................................................16
References:...............................................................................................................................17

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Introduction:
The paper seeks to delve into demand and supply in the shipping freight market in the
world. The paper has three sections, the first deals with the factors effecting demand and
supply in the shipping market, the second section studies the freight rate in tamp shipping
market while the third section applies three types of equilibrium to the shipping to study this
demand and supply. The factors impacting the demand and supply are issues related to cargo,
vessels, sailing, ports and international relations. The tramp freight section delves into diverse
terms like contracts of affreightment and time charter. The final section delves into three
types of equilibrium namely, momentary equilibrium, short-run equilibrium and long-run
equilibrium. The section discusses each of these three equilibrium conditions and interprets
from the view of the shipping industry. The assignment has been provided with graphs and
charts to make the research more substantial and strong. Graphs, figures and charts from
several reliable sources like the European Union, the Baltic Dry Exchange, S & P Global
Platts and the World Shipping Council, which has, strengthen the quality of the data
manifold. The author before embarking on explaining the three sections has given a brief idea
on the types of cargos. A brief idea about the main logistics hubs, the hub and spoke concept
and the main international shipping has also been given. This would help the reader to
comprehend the various aspects of the shipping freight market.
Factors affecting supply and demand in shipping freight market:
There are several factors affecting supply and demand in shipping freight market
internationally like cargo related issues and vessel related issues. The goods transported using
freight carriers can be of five types namely, container cargo, liquid bulk, dry bulk, break-bulk
and Ro-Ro.

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Types of shipping freights:
The section below would contain brief idea about each of these cargo categories, which are as
follows:
Container Cargo:
The container cargo consists of materials, which are transported in containers and are
easily breakable. They consist of FMCG products, electronic goods and food products, which
are packaged before transporting.
Liquid bulk:
The liquid bulk consists of liquid raw materials like crude oil and finished products
like wine, which are transported in bulk. This type of cargo mostly consists of oils of various
types like petrol, kerosene and even vegetable oil.
Dry bulk:
The dry bulk cargos are transported from one port to another in huge bulks. The dry
bulk freight consists of dry commodities like metals , coals, grain, sand , sugar, salt and even
yeasts used for making alcoholic drinks.
Break bulk:
Break bulk cargo consists of commodities, which are broken into parts and racks to
enable easy transport across ports. The category consists of freight goods like paper, wood,
bags of cocoa, rolls of steel and components of heavy machinery like turbines.
Ro-ro:
The roll on/roll off (Ro-Ro) consists of cargo which are loaded and off-loaded easily.
They consist of automobile products like cars, buses, agricultural vehicles like tractors and
threshers and construction vehicles like cranes.

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The above-mentioned categories of shipping freight are transported from one port to
another and constitute a large percentage of international trade. Demand and supply plays a
very important role in the shipping freight industry. the following are the factors which effect
the demand and supply in the shipping freight industry:
Cargo related issues:
Cargo related issues are one of the most important factors affecting demand and
supply in the shipping freight industry. According to the World Shipping Council, the
shipping freights across oceans constitute sixty percent of the international trade. The
quantity of goods commercial container ships carry amount to about $ 12 trillion in 2017
(Worldshipping.org. 2017). The cargo ships are now capable of carrying 246 million
deadweight of goods, as per the graph below. The council reports show that the countries
exporting majority of the freights are from the Asia, Europe, North America, South America
and Australia. These markets also account for producing majority of the commodities, which
traded in the freight market. Many commodities like agricultural products are seasonal in
nature. For example, the second figure shows variable wheat export by Ukraine in three years
namely, 2015-16, 2016-17 and 2017-18. Considering the fact that Ukraine is one of the
leading exporters of wheat, the seasonal nature of wheat export means the vessels carrying
wheat freight would be in demand only during certain time of the year.

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Figure 1. Graph showing capacity of container ships from 1980-2017(million dead weight)
(Source: statista.com 2017)
Figure 2. Wheat export of Ukraine
(Source: gain.fas.usda.gov 2017)

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Some countries may require importing certain commodities during a specific time of
the year, which creates high demand on the shipping freight. For example, there are heavy
demands for luxury goods in countries during the festival times since the upper class of the
society around the world demand these goods. This creates high demands for the vessels
carrying luxury goods. The figure below shows the Baltic Dry Index, which indicates the
amount of raw materials moving across the ocean. The rising and falling movements of the
graph shows that there are higher flows of goods across the seas during some time of the
year. One can construe that the changing graph actually projects changes in demand and
supply of certain raw materials. For example, export of meat or food items creates demands
for vessels with refrigeration facilities while metal exporters demand bulky vessels. Again,
food oils require cleaner vessels compared to transport of petrol. This also shows that there is
more demand for particular kinds of vehicles during certain parts of the year. This discussion
shows that shifting demands for vessels create cargo related issues in the shipping freight
market.
Figure 3. Statistics showing the Baltic Dry statistics
(Source: Bloomberg.com. (2017)

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Vessel related issues:
Vessel related issues comprise of several factors relating to the demand and supply of
vessels. The number of vessels at the service of the exporters and importers differs from one
part of the year to the other. These demands for vessels differ with the demand and supply of
the commodities they carry. For example, the import of crude oil in the European Union
according to the figure increased between 2010 and 2015 compared to 2005 and 2010. This
shows that the demand for the vessels carrying bulk cargo like petroleum also increased with
response to the increase in petroleum demand in the EU.
Figure 4. Graph showing EU's import of petroleum products in 1990-2015
(Source: Ec.europa.eu. 2017)
The increase in demand of a particular type of vessel like vessel with refrigeration
facilities results in demand for new vessels. The graph below shows the major ship building
nations, which supplies ships to the shipping freight market in response to this demand.
Advancement of shipbuilding technology and use of prefabrication method to
manufacture ships has led to replacement old vessels by the new ones. The new containers
vessels flooded ship markets in the world. The recent ship market is dominated by China
followed by South Korea and Japan. This increase in number of ships leads to more supply of
ships compared to demand. This results in falling of freight rates as more ships enter the fleet
serving the international marine trade. Thus vessel related issue in the shipping freight

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industry in relation to demand and supply have two problems. First, demand of a particular
category of ship encourages increase in supply of that category of vessels. Second, increase in
supply of modern ships has led to fall in the freight rates.
Sailing related issues:
The sailing related issues refer to the varying conditions of sailing, which favours
demand for particular types of vessels and consequently leads to increase in their freights.
For example, icebreakers enable the cargo ships to accede the ports of Europe and North
America in the winter season to load and unload freights. One must also note that the ports of
North America like Vancouver, New York and New Jersey and the European ports of
Antwerp and hamburger are among the busiest ports in the world handling a huge bulk of
international trade but remain blocked with ice for months. The icebreakers help the cargo
ships to reach these ports and are in great demand. This increase in demand leads to increase
in the freights rates of the icebreakers and ships carrying goods to and from those ports.
Again some portions of oceans and rivers are relatively less deep which allow smaller ships
to accede to them. As a result, these ships increase their freight rates taking advantage of their
high demand. This discussion shows that special sailing conditions like icy ports lead to
increase of demand for a specific type of vessel like icebreakers, which make ways through
ice. These sailing condition related issues lead to increase in demand of these special ships,
which lead to increase in their rates.
Port related issues:
Port related issues refer to attributes of some ports, which influence demand and rates
of freights of ships operating between those ports. For example, the ports like Shanghai,
Singapore and Rotterdam are the highly congested due to the immense volume of cargo
traded through them. As a result, ships commuting between these ports often charge higher
rates than the ones travelling to less important ports like Karachi and Chittagong

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(brighthubengineering.com 2017). According to the World Shipping Council, the busiest
ports of the world are concentrated in the developed markets of North America, Europe and
Australia and the emerging markets of Asia and South America. Thus, major ports in these
countries remain congested and handle huge volume of merchandise on daily basis. The
vessels carrying cargo to and from these ports charge higher freight rates taking advantage of
their higher demand. This shows that the conditions of the ports like position and amount of
cargo handled have impact on the demand for vessels, which in turn affect the rates, they
charge.
Figure 5. Graph showing global shipbuilding
(Source: Reserve Bank of Australia. 2017)
International agreements between countries:
International trade agreements between nations act as one of the main factors in the
freight rates. Institutionalisation and technological advancements have emerged as one of the
major factors operating the shipping freight market (Dillinger 2017). The liberalisation of the

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major market economies, institutions like the World Trade Organization and the European
Union have fuelled global trade. This increase in the global trade led to huge exchange of
goods between the countries. The advent of economical air travel rates led to majority of the
international passengers opting for air travel over ships. Today, the ships handle a bulk of the
international trade. The countries usually enter into agreements among themselves to arrange
free trade between them. This has led to free trade between countries who are parties to
certain bilateral agreements (Worldoceanreview.com. 2017). These bilateral free trade
agreements between countries have deep impact on shipping freight markets.
Formation of freight rate in tramp market:
Difference between freight and hire:
Freight refers carrying of goods using ships across the ocean and rivers. Hiring refers
to leasing the vessels for exporting cargos across oceans and rivers. Freight rates only refer to
voyage charters, which the exporters pay to transport their goods using ships. The exporters
often hire services from the shipping companies to transport their freights to other countries.
The hirers can only avail the paid services of the shipping companies on pre-specified routes
and time schedule. The two parties enter into contracts, which determine the terms and
conditions of the usage of the shipping services.
Differences between tramp markets and pre-arranged chartered ocean liners:
Tramp freight shipping services refer to ships, which have no fixed schedule, or
ports between which they carry goods. The tramps have no itinerary, which the clients can
use to plan their transports. The ocean liners are ships, mostly big and very expensive ones,
have foxed routes and time schedule according to which they transport. These oecna liners r

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chartered freights have schedules, which are advertised to the clients who book these ships to
transport their goods.
The ocean liners are usually very expensive and provide better facilities like
warehousing and cold storage facilities. The exporters have to book and enter into contract
with the shipping companies in advance to avail the category of cargos appropriate for their
goods. The tramp freights, tramp freighters or trampers usually are available more easily and
require no advance booking.
Difference between Bareboat charter and Time or Voyage charter:
The bareboat charter or demise charter is an agreement between the charterer and
the owner of the ships where the charterer gains possession of the ships and can decide their
schedule. The charterer or the customer uses his own human resources like captain and crew
to operate onboard. Time or voyage is a contract between charterer and owner of ships retain
ownership of the ships (Light 2016). The charterer however, can decide the course of the
journey of the ship while the owner employs his human resources to operate the ships.
Voyage charter contains the number of trips or voyages a particular ship would cover. The
time charter or spot charter contains the loading and unloading costs (Tsvetkova et al. 2016).
The time charter is discounted over a longer time-period and consider factors like port delay
and bunking in the contract.
Contracts of affreightment:
The contract of affreightment is the contract the owner of ships and the charterer
enters. The ship-owner according to the contract agrees to allow the charterer hire the ships
stated in the contract to carry goods specified in the contract between them. The charterer
according to the contract agrees to pay a charge for the service of the ships’ owner called

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freight. The contract specifies the whether the ship owner would allow the charterer to use
the whole ships or a portions of them (Dawood 2016).
The law pertaining to the contract of affreightment follows the general law of
contract, which gives, empowers the parties to the contract to do acts, which are allowed
under law. The laws also contain provisions, which allow the courts o intervene between the
parties in cases of disputes between them. The parties namely, the ship owner and the
charterer prepare the contract of affreightment according to the specific needs of particular
shipping assignments. This to some extent allows them to minimise the chances of conflict of
interests between them (steamshipmutual.com 2017).
Established trade routes:
According to the World Economic Forum, the Strait of Malacca is one of the most
important trade routes in the world whose importance is high. It is because it runs between
Indonesia, Malaysia and Singapore, thus connecting Europe and Africa to Asia and America.
The other two important trade routes are Suez Canal and the Panama Canal. The Atlantic
Ocean is the world’s busiest oceans, which connects the developed markets of Europe and
North America (Adăscăliţei 2013). The Indian Ocean serves as one of the busiest marine
trade routes because it connects the developed markets of the west to the emerging markets to
Asia. These established trade routes run along and connect countries which export and import
large amount of goods. These markets experience high demand for raw materials, finished
products and intermediate products. The ships prefer travelling following these routes
because there are less chance of return of goods and cancellation of orders in these markets
(weforum.org. 2017). These trading routes connect trading hubs, which facilitate the
international marine trades across the world. These marine logistics hubs follow spoke-hub
distribution paradigm. There are feeder vessels, which transfer the materials to the main
freight carriers, which transport the cargos to the destination ports.

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Interaction between demand and supply curve in determining equilibrium prices:
The demand and supply in the international freight market interact with each other
while determining the equilibrium prices. The following are the two types of interaction
between demand and supply:
a) Momentary Equilibrium:
Momentary refers to situation when demand and supply equal each other. Considering
the shipping industry, it can be said that in reality demand and supply can never balance each
other. For example, the United States of America exported 5.2 million barrels per day
petroleum to 101 countries and imported 10.1 million barrels per day from about 70
countries. This shows that the US on continuous basis creates demand and supply. The
country exports petroleum to other countries in response to the demand in the international
market and in turn imports more petroleum to respond to its own demand. Thus, in reality,
demand and supply never meet each other and the shipping industry never gains momentary
equilibrium (Eia.gov. 2017).
b) Short run equilibrium:
A short run equilibrium model refers to the situation when business organisations in
the market try to supply equal to the demand generated by the consumers. The short run
equilibrium is often considered as the only way of balancing demand and supply. The
economists consider that there are no better ways to produce goods. The concept situation can
be applied to explain the interaction of demand and supply in the maritime shipping freight
industry as per the description given below. The companies try to produce goods at price p
and output y. Let the firms be represented by i. If every firm i try to supply to the demand
then ∑yi represents the supply of the firms. The total amount of demand fuelling the supply

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can be represented by Qd(p). Under ideal condition, demand is equal to supply. Hence, ∑yi =
Qd(p).
The shipping industry has several charterer or exporters and importers who create the
force of demand. The shipping companies create the force of supply in response of the
demand. The shipping companies all around the world try to meet all the demands and
achieve short run equilibrium. They provide shipping services so as to meet the demands of
the international trade.
c) Long-run equilibrium:
Long run market equilibrium takes place when the market is perfectly competitive and
the demand is completely elastic. Perfectly competitive market by definition consists of
firms where every firm sells an identical product and no firm can control the market price
alone. Price elasticity refers to a large change in demand of products in response to small
changes in price. In reality, perfectly competitive market is not fully feasible. As far as the
freight shipping is concerned, the international organisations like the EU, the national
governments of the countries and the large shipping companies have control over prices in
the market. Moreover, long-run equilibrium considers only a small change in prices of goods
as the determinant factors in determining the goods. However, in reality, several factors
decide the demand for goods in the international freight industry like availability of goods in
one market and economic conditions of the trade involved in trade. Hence, it can be
summarised that, long run equilibrium is not applicable in the international freight industry.

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Conclusion:
The discussion brings into light several facts about the shipping freight industry. First,
there are multiple factors like vessel related issues and port related issues, which affect the
demand and supply in the shipping industry. The economic position of the trading countries,
their market conditions and their power to impact international trade have great influence on
the international maritime trade. The trading hubs play great role in movement of freight
traffic towards the places of demand. The international freight routes connect the important
ports of America, Australia, Asia and Europe making them major demanders and suppliers in
the international trade. There are both ocean liners for planned freights and tramps for short
notice freights. The countries participating in the international marine trade keep on creating
demands which the suppliers try to satisfy, in reality equilibrium market condition is not
feasible.

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