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Port congestions in bulk cargo loading ports like that of Australia and Brazil and discharging ports like that in China also help in increasing the demand for shipping in the short run. This is because on account of severe congestions vessels have to wait on roads for 2 to 3 weeks before they can berth. This decreases the supply in the market of free tonnage and therefore increases demand of ships in the short run.

3.14 Predictions, projections, forecasts and expectations of shipping gurus and pundits and the effect of speculation

Future predictions in the shipping industry can sometimes increase and decrease demand of seaborne transport (the case of irrational exuberance). As an example in 1970 there was a prediction that Japanese steel production would double in 5 years. This motivated Japanese steel mill charterers to charter in bulker in large quantities. This frenzy led to about 40% of the world’s bulk fleet (19000 ships or 40 million dwt) being chartered in simultaneously. This led to a sharp increase in the demand for bulkers and freight rates also went up. Then in the winter of 1970-71 the same charterers withdrew from the voyage market and suddenly there was surplus of unemployed tonnage in the market. This sent demand spiraling and with it the freight rates.

3.15 Effect of new regulations and legislations

New Regulations and legislations often tend to increase the demand for shipping services. For example after the grounding and spilling of oil by the Exxon Valdez in Alaska, the US legislators implemented the Oil Pollution Act of 1990 (OPA ‘90). This law did not allow single hull tankers to trade to US ports so this led to scrapping of single hull tankers and a rise in demand for double hull tankers.

CHAPTER 4

Without goals, and plans to reach them, you are like a ship that has set sail with no destination - Fitzhugh Dodson

4.0 Relationship between demand, supply and freight rates in shipping

Supply and demand are the forces that make market economies work. The interplay of supply and demand in shipping determines finally the freight rate. “Shipowners and shippers negotiate to establish a freight rate which reflects the balance of ships and cargoes available in the market” (Stopford, 2003). As supply of tonnage in the market goes up demand falls and so does the freight rates. On the other hand as supply of tonnage in the market fall demand increases and so do the freight rates. This induces shipowners to provide more transport. “Demand, however, rarely exceeds supply for long; rather, there tend to be relatively short peaks of prosperity in the freight markets, followed by longer slumps” (Lorange, 2010). The supply of shipping services changes very slowly to a response to changes in demand. On the other hand demand for shipping services changes very rapidly. Ships take several years to build and moreover have a lifespan of between 15 to 30 years. So when demand falls the fall in supply will take a very long time to catch up. As an example in the mid 1970s tanker demand fell drastically by 60%. It took more than 10 years for supply to adjust to this fall in demand. Although there was no demand for tankers in this period supply continued to increase as new buildings ordered during the good times were delivered. So demand fell further and freight rates hit the bottom. This forced owners to start scr