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CHAPTER 2

Set your course by the stars, not by the lights of every passing ship - Omar N. Bradley

2.0 The nature of transport demand

Customers of Sea Transport have special requirements and these are met by shipping companies who provide a range of tailor made services and solutions. The following are some of the criteria which play an important role in the customer making a decision when it comes to choosing a mode of transport.

2.1 Price

Shippers of cargo pay greater attention to the freight cost depending on the percentage that it makes up of the CIF cost. For example the cost of transporting a barrel of oil from the Persian Gulf to Europe cost about 49% of the CIF cost in the 1950s. Because of this the oil majors had their own tanker fleet so as to have greater control over the cost of ocean transport. But today the cost of seaborne transport is only about 2.5% of the CIF cost and therefore the oil majors prefer to charter in vessels. Also in the 1950s the cost of transporting a ton of coal from the Atlantic to the Pacific was about USD 10-15 per ton on a 20000 dwat vessels. Today the same coal is transported at similar rates on 150000 dwat vessel. This has been achieved by economies of scale.

2.2 Speed

Transit times are key for shippers of high value goods. Average speeds of deep sea going container vessels have increased from 17 knots in 1985 to 22 knots in 2007. In comparison to the cost of holding inventories in warehouses, it is cheaper to ship smaller quantities as and when required. Although the freight rates will be higher it is still smaller in comparison to the overall costs of stocking. In 2009 average transit speeds when down on account of many carriers slow steaming to beat the global downturn in order to reduce their costs. At this same period bunker prices also escalated so carriers further slowed down.

2.3 Transport reliability

Shippers are ready to pay premium freight for shipping services which provide just in time (JIT)/Kanban deliveries. Container ships are now days being used as floating warehouses. Speeds can be increased or decreased in order to deliver products exactly when needed.

2.4 Security

Shippers are usually also ready to pay higher freight for transportation which can guarantee minimal damage to his cargoes. Safety is especially of prime concern in container shipping where the value of goods being transported can go into millions of dollars. After the events of 11 September, the ISPS Code came into existence. Although this code increased costs and time spent for both ship owners and port facilities, shipping has become a lot safer than before. Currently piracy is a big concern and is adversely affecting international trade as costs are going up and there are also delays in the delivery of goods. 2010 has seen as escalation in Somalian piracy and efforts are currently underway to curb this menace.

2.5 Substitutes to shipping

There are no real substitutes to shipping because of the following reasons.

2.5.1 Cost effectiveness

Shipping is the most cost effective mode of transport per TEU or per ton or per cubic meter of cargo carried. As an example seaborne transport is just about 10-15% of the costs for road transport

2.5.2 Spac