Guide to the Shipping Industry -- Introduction

Scope of the guide

Since this guide was first written, over 50 years ago, the pattern and importance of shipping have changed drastically - probably more so in the past decade than in any era during the past hundred years. This is demonstrated by the fact that throughout this period of 40 years, 1964-2014, world seaborne trade has increased by over 500% from 6,000 to 32,000 billion ton miles. The change has been fast moving and driven by many factors. Today we live in a global environment in which shipping and trade are inextricably linked as never before. The shipper is driving the shipping industry and the response is to focus continuously on ship productivity with a strong interface integrated with other transport modes: overland/inland waterways/air. Hence it’s a high profile international business and high-tech in its management and operations. Moreover in recent years the trade growth has shifted to the Asian countries and this has been followed by the ownership of world tonnage.

Today, Asian countries are significant players in many sectors of maritime transport. They account for about half of the crews, two-thirds of global port operators, 83% of container ship building, and 99% of demolition/recycling.

Twenty-eight of the world's 50 largest liner companies are based in Asia.

Over 70% of the top twenty container seaports are based in the Asian region. Today shipping has become more competitive than ever and more complex. Over 99% of world trade in volume terms is conveyed by sea and the need to have an understanding of all the elements in the conduct/ mechanism of the maritime industry is paramount.

This guide is written primarily for the student/ undergraduate/international shipping business executive who has limited knowledge of the shipping industry but wishes to gain a basic and fundamental knowledge of the way it works today and likely future trends. It deals with the economic, political, commercial, logistics, operating, information technology, finance and legal aspects, together with focus on seaports. Furthermore it embraces a full integration of e-commerce throughout the text and identifies key areas of management and strategy in the industry.

The latest edition, containing 75% new material, is completely updated throughout. It features the growing development of multi-modalism, logistics and containerization, role of e-commerce, including Bolero, development of logistics, growth of globalization, update on IMO regulations, changing ship design/survey methods/cargo vessels structure embracing new technology, new chartering documents and changing role of ship broker, and Baltic Exchange, increasing role of BIMCO, Intertanko and other international agencies, structure of shipping companies, third party ship management and changing role of politics. It also focuses on current challenges facing the industry and possible solutions and areas of structure it changes. Basically, it’s more analytical in content and focuses on the broader picture of factors driving its development. This embraces trading blocs, the WTO and EU.

Overall, it features a strategic role.

Overall the guide is written in a simple but lucid style and reflects the author's experience in the industry spanning 50 years, which includes not only work and consultancy on a worldwide scale in the industry itself, but also that of lecturer/chief examiner at home and overseas. This has involved overseas governments and multinational industries together with many conferences/ seminars at which he has delivered papers on the subject. This guide treats the subject in a pragmatic and professional way. It places particular emphasis on the fact that shipping today is a complex operation and all the ingredients of the subject must be fully understood to ensure the business is conducted both efficiently and profitably. The 'value added benefit' concept is particularly significant whereby the shipper will choose the maritime service which yields the highest benefit both to the exporter and importer.

Function of shipping

The function of shipping is the conveyance of goods from where their utility is low to a place where it’s higher. Goods may consist of raw materials conveyed in bulk cargo shipments or purpose-built containers, equipment components/parts for assembly at an industrial plant or on-site capital project like a power station, or the whole range of consumer products many of which are durable and may be shipped in containers, on swap bodies or by an international trucking operation. A growth area in recent years is out sourcing. This involves manufacturers relocating their industrial plant from a high labor cost economy such as Germany or the UK to a low labor cost environment as found in many Far East countries. Components are sourced locally or from neighboring countries to the industrial/assembly plant. Subsequently the products are marketed locally to the major trading centers such as Europe and North America. It’s logistically driven and relies primarily on containerized shipment. It exemplifies how shipping is contributing to the growing volume of international trade, the relocation of industry from the developed to the developing economies, and finally to the changing pattern of international trade.

The factors influencing the shipper's choice of transport mode has changed dramatically during the past decade. Today it’s based on the total product concept embracing all the constituents of distribution logistically driven.

These include reliability, frequency, cost, transit time, capital tied up in transport, quality of service, packaging, import duty, insurance and so on.

It favors more strongly multimodalism with sea transport undertaking the major leg of the overall transit. Logistics, just-in-time delivery, supply chain management and distribution centers / 'distriparks' play a major role in the decision-making process. All these aspects will be re-examined later as the basis of how the ship-owner can best meet the needs of the shipper in the foreseeable future. The paramount consideration is for the ship-owner to empathize with the shipper and strive to become flexible and responsive to the shipper's needs on an innovative value-added basis in a competitive logistic global environment. The freight rate is not the only paramount factor, it’s the value-added benefit the shipper gains from the service, which is usually a combined transport operation road/sea/rail

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Tbl. 1 World seaborne trade, selected years (billion ton miles)

Oil | Five

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Tbl. 2 Development of international seaborne trade: goods loaded, selected years [a] (goods loaded) Dry cargo Tanker cargo Total of which main Total (all goods) bulk commodities [b]

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Tbl. 3 World output growth, 2001-2004 [a] (%) Region/Country [b] 2001 2002 2003 2004 [c] World 1.3 1.8 2.5 3.8 Developed countries 1.0 1.3 1.7 3.0 of which:

Japan 1.0 1.3 1.7 3.0 United States 0.3 2.4 3.0 4.4 European Union 1.7 1.1 0.9 2.1 of which:

Germany 0.9 0.2 -0.1 1.0 France 2.1 1.2 0.5 2.1 Italy 1.8 0.4 0.3 1.0 United Kingdom 2.1 1.7 2.2 3.1 South East Europe and CIS 5.6 4.9 6.9 7.5 Developing countries 2.4 3.5 4.7 6.4 Developing countries excluding China 1.5 2.7 3.9 5.7

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World seaborne trade and world fleet

(a) World seaborne trade ( Tbl. 1) reached 27,635 billion ton miles in 2004, reflecting an increase of 6.9%. The average transport distance also increased, thereby improving ship productivity. Demand for haulage of crude oil and oil products rose by 6.2%. This indicates crude oils are moving longer distances - For example from sources in the Barents, Baltic and Black seas to destinations in Europe and North America. For all dry cargoes the ton mileage rose by 7.4% whilst tonnage carried rose by 4.4%. All five main dry bulks cargoes' ton miles increased by 8.2%, reflecting rising Chinese industrial demand. The remaining dry cargoes embracing minor bulks, and liner cargo supply lines were also extended and reflected an increase of 6.7%. This reflects longer distances between cargo origins and destinations and the lasting effect of relocated industries in the Far East.

(b) Development of international seaborne trade ( Tbl. 2) rose by 4.3% to 6.76 billion tons of loaded goods in 2004, but the growth rate is likely to slacken in subsequent years owing to the slow-down in the Far East economies, especially China. Africa's share of world exports was 8.6%, America's 21.4%, Asia's 38.4%, Europe's 22.7% and Oceania's by 8.9%.

Tanker shipments rose by 4.2% to 2.32 billion tons, 76.4% of which was in crude oil. Natural gas production reached 2,618.5 billion cubic meters (bcm) - an increase of 3.4% in 2004. Producers are the Russian Federation 578.6 bcm, United States 549.5 bcm, Canada 180.5 bcm, UK 102.7 bcm, Algeria 82.8 bcm, Iran 70 bcm and Indonesia 72.6 bcm.

Other producers are located in the Middle East, Latin America and Asia - often obtaining natural gas as a result of oil production. About 20% of natural gas is exported, mainly by pipelines, which carry 75% of all exports. Many LNG tankers are now in the range of 150,000 m^3 instead of traditional 125,000 m^3. Designs for a new type of vessel, the compressed natural gas carrier (CNG) were under inspection in North America and Norway. This carrier would provide a cost-effective solution for supplying gas from remote locations too small to warrant full scale LNG projects. Oil pipeline construction continues in many oil-producing countries. A recent example is the commissioning of the 1,770 km pipeline from Baku ( Azerbaijan) to Ceyhan ( Turkey) on the Mediterranean Sea, which will reduce the transit of tankers through the Dardanelles Straits.

Dry cargo shipments recorded an increase of 4.4% to reach 4.44 billion tons in 2004. The five dry bulk trades iron ore, coal, grains, bauxite/alumina and rock phosphate attained an increase of 7.6% to reach 1.59 billion tons. The remaining dry cargo trades, minor bulks and liner cargoes, increased at a slower rate to 2.65% to 2.86 billion tons. The share of dry cargo shipments in world seaborne trade was 65.7% of total goods loaded during the year.

An analysis of dry cargo shipment in 2004 established the following.

World crude steel production rose by 8.8% to 1,054.6 million tons, world pig iron production rose by 10.8% to 753.9 million, steel consumption rose by 6.1% to 918 million tons, iron ore shipments reflecting steel production rose by 12.6% to 590 million tons with Australia and Brazil accounting for 70% of world exports; coal shipments rose by 5% to a record of 650 million tons with thermal coal representing 70% of shipments; grain shipments rose by 4.2% to 250 million tons and were split equally between wheat and coarse grain such as maize, barley, soya beans, sorghum, oats and rye; and shipments of bauxite and alumina - primary inputs for the aluminum industry - rose by 6.3% to 67 million tons. Containerized shipments totaled 1.94 million tons, embracing the east-west (trans-Pacific, Europe-Far East and transatlantic), north-south and regional routes.

(c) Referring to Tbl. 3, world output growth from 2001 to 2004 rose by 3.8% in 2004. Overall, it reflected the fact that virtually all regions of the world recorded positive economic growth at differing paces. Tables 1.1 and 1.2 give an analysis of the impact of this growth in the maritime industry, particularly the developing countries. Future growth depends on many factors, especially inflationary oil prices and the trade deficits in major developed economies which long-term are unlikely to be sustainable.

(d) An analysis of the structure of the world fleet ( Tbl. 4) indicates in 2005 it reached 895.8 million deadweight tons (dwt) on 1 January 2005, realizing an increase of 4.5% over 2004. New building deliveries represented 49.4 million dwt while 10.6 million dwt were broken up and lost, resulting in a net gain of 38.8 million dwt over 2004. Oil tanker tonnage in 2004 rose by 6.1% and that of bulk carriers by 4.2%. These two types of ships represented 73.3% of total world tonnage. The world fleet of fully cellular container ships continued to expand substantially in 2004 both in ships and their TEU capacity. In January 2005 there were 3,206 ships with a total capacity of 7,165,352 TEU - an increase of 5% in ships and 11.3% in TEU capacity. Average carrying capacity per ship rose from 2,108 TEU in 2004 to 2,235 TEU in 2005. Vessels of over 4,000 TEU capacity account for 74% of the current order book; 165 vessels on order were larger than 7,500 TEU capacity, more than three times the current number of vessels above that size.

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Tbl. 4 Structure of the merchant fleets of the main country groups as of 1 January 2005a (dwt million and percentage shares)

World fleet Developed Open-registry Developing Central and Socialist countries market-economy countries; countries Eastern Europe of Asia countries

Type of vessel Million % Million % Million % Million % Million % Million % dwt dwt dwt dwt dwt dwt Total fleet 895.8 100.0 241.7 100.0 404.0 100.0 202.3 100.0 14.5 100.0 33.4 100.0 Oil tankers 336.2 37.5 108.4 44.9 145.1 35.9 73.1 36.2 2.9 20.3 6.6 19.6 Bulk carriers 320.6 35.8 60.6 25.1 169.7 42.0 73.4 36.3 3.0 21.0 13.9 41.6 General cargo ships 92.0 10.3 20.4 8.5 29.8 7.4 27.2 13.5 5.7 39.8 8.8 26.3 Container ships 98.1 10.9 34.0 14.0 43.0 10.7 17.6 8.7 0.4 2.9 3.0 9.0 Other ships 49.0 5.5 18.3 7.6 16.4 4.1 10.8 5.3 2.3 16.1 1.2 3.5 Source Compiled by the UNCTAD secretariat on the basis of data supplied by Lloyd's Register - Fairplay.

Note Ships of 100 grt and over, excluding the US Reserve Fleet and US and Canadian Great Lakes fleets.

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Challenges facing the shipping industry in the twenty-first century

As we progress through the contents of this guide it’s important to focus now on the major challenges facing the shipping industry in the twenty-first century and in so doing provide the learner with the opportunity to reconcile these challenges with current practice in an objective analysis and identify possible future trends.

(a) The growing development of a global logistic environment, thereby moving away from the port-to-port operation to the combined transport supply chain embracing road/sea/road, rail/sea/rail, rail/sea/canal.

(b) The continuing liberalization of trade through the GATT/WTO global agreements, thereby providing more trading opportunities.

(c) The changing political scene through the emerging markets and their influence in global trade negotiations.

(d) The growth of the Chinese, Indian and Brazilian economies, especially the former, and the extensive program in China of infrastructure development, especially container ports. India is likewise developing its container ports.

(e) The changing trade flow emerging from the Far East as consumer/ industrial plant is relocated, with Europe and North America the prime consumers. This is the result of outsourcing manufacturing and consumer industries from the developed economies of Europe and North America to developing countries of the Far East, many involving joint ventures.

(f) The growing importance of energy as the vehicle for industrial/consumer demand expansion, especially oil and gas. Gas will grow at double the rate of oil.

(g) The need to improve ship productivity. This is being realized through third party ship management; development of the hub and spoke system, especially through containerization; port modernization/privatization; the tendency to build larger vessels such as in container vessels, cruise tonnage; auto carriers and LNG carriers to exploit economies of scale, continuous improvement in ship management, development of longer voyages; continuing improvement in marine engineering especially in propulsion, shipboard management, and longer voyages. Fleet planning and computer technology play a major role to improve ship productivity.

(h) The continuing expansion and increasing influence of economic blocs/customs unions in opening up markets and trading opportunities.

(i) A key factor is for the ship-owner to develop strategies to continuously 'add value' to the shipping service provided. This embraces the total product, including all the ingredients featuring ancillary activities. It’s driven by the shipper, and a synergy must be developed between the shipper and ship-owner in a market research-driven environment.

(j) The changing pattern of the world's mercantile fleet, embracing type of tonnage, the diminishing age of many sectors, and ownership. The trade expansion in the Far East has caused ship ownership to move from Europe to the Far East, a trend which continues, especially in China.

(k) Another key factor is for the ship-owner and port operators to adopt strategies which are innovative and flexible in responding to the changing market environment and the challenges it offers.

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