MARITIME

ECONOMICS

Module 7
General cargo shipping

Review: bulk shipping

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Characteristics of bulk cargo and bulk shipping

Market structure and its effect on competition

Impact factors impacting freight rate

Key issues affecting the efficiency

Module 7: focus questions

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What are the main characteristics of general cargo and how

do they affect the operation of the shipping of general cargo?

What is the market structure of liner shipping and what are the
effects of the market structure on competition?

How are freight rates set in the liner market?

What are the key issues in liner shipping?

General Cargo
General cargo can be classified into the three
categories:

Break bulk

Final consumer and producer goods

Intermediate goods
Primary products and raw materials

Neo bulk

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Dry
Goods of various sizes and weights shipped as packaged cargoes
Goods of uniform sizes and weights shipped as loose cargoes
Dry or liquid or liquefied gas
Neither packaged nor of uniform sizes and weights

General Cargo
Characteristics of general cargo:
heterogeneous
high value
smaller quantities

Liner shipping is more suitable for the transport of

general cargo.

Unitisation is important to cargo handling and transport

productivity, and multi-modal transport.
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General Cargo
Characteristics of general cargo handling:
Break bulk cargo handling is generally labour intensive.
The cost of cargo handling used to be high, about one to
two thirds of the total freight.

Containerisation contributes largely to solving the above

problems.

Palletized Cargo

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Liner shipping
Facts about containers:
If all containers in the world were lined up, it would have a length of
108,000 km.
1/3 of the way to the moon
18 times the length of the Great Wall of China
2.7 times around the earth at the Equator.
A serial number for each container, i.e. XXX-U-123456-1
Watch a video on the
afterlife of a shipping
container here

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Liner shipping
Facts about liner shipping
The largest container carrier is MSC Oscar (19,224 TEU)

The largest liner operator is Maersk 13.45% market share % TEU, 1 May
2015
Maersk > MSC > CMA CGM
The busiest container port in the world is Shanghai, China
>30m of Shanghai v.s. <5m of all Australian ports

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Liner shipping
Facts about liner shipping
Trade volumes in the main trade routes

Source: Elaboration from Drewry (2014)

The main trade lanes can be categorised in: East-West (71.7 million TEUs), North-South
(30.3 million TEUs) and intraregional (74.5 million TEUs).

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Note: Inside intraregional trade, intra-Asia routes play a dominant role as they generated
in 2013 almost 60 million TEUs of cargo volumes.

Liner shipping
Brief history about liner shipping
Cargo liner era (1870-1950s)
Improvement in steamship technology facilitated offer of scheduled services
Multi-deck, versatile and with own cargo-handling gear
Can carry a mixture of manufactures, semi-manufactures, minor bulks and
passengers
Similar in size, design and speed to tweendecker used by tramp operator
More sophisticated cargo liners were built to match trade growth in 20th
century
Though flexible, it was labour and capital intensive
Retractable Tweendeck

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Passenger-Cargo Liner

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Liner shipping
Brief history about liner shipping
Containerisation era (1950s present)
1st container made its maiden journey in 1956 (invented by Malcolm McLean)
Carried 58 containers from Port Newark, New Jersey to Port of Houston, Texas
Standardization of container size by ISO, e.g. 20, 40 in 1961

High handling productivity and cost efficient

Evolve to

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Liner shipping
Characteristics of liner shipping
Liner shipping accounts for only a minor proportion of total
ton miles but a large contribution to total freight revenue.
Liner shipping is vulnerable to imbalance between inward
and outward cargo flow, trade volatility, and seasonality.
Liner operators need to be able to provide a regular
service to the ports on the itinerary.

There are high barriers to entry.

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Liner shipping
The recent structural changes
The direct deep-sea connections replaced by the hub-and-spoke system

Ports logistic hubs

Larger ships
Massive investment in container ports and terminals
Vertical integration (value-added services)
Horizontal integration (merger and acquisition; alliance)

What are the impacts of these?

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Module 7: focus questions

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What are the main characteristics of general cargo and how

do they affect the operation of the shipping of general cargo?

What is the market structure of liner shipping and what are the
effects of the market structure on competition?

How are freight rates set in the liner market?

What are the key issues in liner shipping?

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Market structure
Market structure: Oligopoly
Major characteristics
Limited sellers
Little difference in service, i.e. homogeneous services

High ability to set price, normally set by price leader,

which leads to more stable price
High entry barrier

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Market structure
Market concentration Top 20 liner companies
Market share of 20
largest liner is over 80%
Market share of (Maersk
+MSC + CMA CGM) is
about 35%, and it is
increasing
Merger and acquisition
are accelerating this
process.

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Source: Drewry, 2014

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Market structure
Liner conferences origin
The arrival of steam ships by the end of 19 century and more and more
advanced technologies introduced increase the supply rapidly
intense competition
Vulnerability to trade imbalance, seasonality and volatility, and very
high fixed operational costs liner shipping is a risky business
Severe excess capacity of shipping services a drastic and long-lived
decline in fright rate is inevitable the incentive for liner shipowners to
get organised was particularly strong Creation of the first
conferences can be attributed to this severe slump.
Example: time charter rates for different sizes of ships

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Market structure
Liner conferences what is it?
An agreement between two or more shipping companies to cater regular cargo and/or passenger service
on a particular trade route

under uniform rates and

common terms.

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Market structure
Liner conferences some notes
The main argument has been that without conferences,
freight rates would frequently bid down.
A serious problem facing both shipowners and shippers is
the un-profitability of the former would lead to the
discontinuity of liner services.
Every government considers it to be a national interest that
vital trade connection are not jeopardised.
Another purpose of conferences is to prevent competition
from outsiders, which is considered as harmful to liner
shipping.
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Market structure
Liner conferences main features of strengthening
the market power of the members:
Agreement to reduce harmful competition including that
from outsiders.
Conditional on the loyalty to the conference, shippers
are entitled to extensive concessions, e.g. rebates,
discount rates, to shippers.
Agreement to fix the tariffs.
Avoid overlapped routes and reduce the number of sailings.
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Market structure
Liner conferences impacts and operations:
Generally conferences work toward two main effects:

More efficiency through better organisation of operations,

Accumulation of market power that allow them to operate as
cartels (oligopoly).
Conferences can contribute toward more efficient operation if
they are well organised as single entities.
Efficiency could be achieved through cooperation between liner
companies to better allocate ports, routes and tonnage, which
help avoid over tonnage and simultaneously extend the route
coverage.
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Market structure
Liner conferences good or bad?
Advocates say that they prevent the liner shipping market from
being crashed as a result of highly volatile demand which would
create prolonged damage to the market and interruption of liner
services because of the sluggishness of the liner service supply.
On the opposite side, critics say liner conferences deprive
consumer surplus and create economic inefficiency as a result of
dead weight loss.

Questions: what are the advantages and disadvantages of

liner conferences? List at least three points with illustrations.
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Module 7: focus questions

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What are the main characteristics of general cargo and how

do they affect the operation of the shipping of general cargo?

What is the market structure of liner shipping and what are the
effects of the market structure on competition?

How are freight rates set in the liner market?

What are the key issues in liner shipping?

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Freight rate set (pricing)

Cargo differentiation and pricing
High value and urgent cargoes are likely to have different
transportation demand profiles from low value minor bulk cargoes,
especially over long routes
Price (freight rate) that shippers are prepared to pay depends on the
cargoes to be delivered, i.e. price elasticity

Basic Clothing
about 16,000USD per ton

Designer Clothing
about 60,000USD per ton
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Motorcycle
about 22,000USD per ton

Electronic Goods
about 30,000USD per ton

Scrap Materials
about 300USD per ton

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Freight rate set (pricing)

Freight rate is determined by:
Distance via different trade routes
Cargo related factors, e.g. cargo weight, dimensions, value, less than
container load (LCL), full container load (FCL), etc.
Additional charges, e.g. loading and unloading expenses at ports, i.e.
terminal handling charge (THC), carriage of goods by other
transportation modes along the supply chain, storage of goods, customs
clearance, etc.
Currency adjustment factor (CAF)
Bunker adjustment factor (BAF)

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A good reference is the Shanghai Containerized Freight Index (SCFI)

measured in USD per TEU/ FEU

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Module 7: focus questions

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What are the main characteristics of general cargo and how

do they affect the operation of the shipping of general cargo?

What is the market structure of liner shipping and what are the
effects of the market structure on competition?

How are freight rates set in the liner market?

What are the key issues in liner shipping?

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Issues
Issues in liner shipping:
Strategic alliances and cooperation among liner companies
Market regulation
Vulnerability to demand fluctuations

Trade/cargo imbalance

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Issues
Issues in liner shipping:
Strategic alliances and cooperation among liner companies
Consortia: sharing administrative and operating costs and
revenue.

Alliances: sharing vessel operating costs.

Sharing agreements in liner shipping can take the form of
space/slot chartering between participating carriers, settled
by cash cross-payments at pre-determined prices.

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Issues
Issues in liner shipping:
Strategic alliances and cooperation among liner companies
alliances
To achieve economies of scale larger ships
To fill these ships and frequent
global services alliances
Vetoed

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Issues
Issues in liner shipping:
Strategic alliances and cooperation among liner companies
Alliance port and
terminal choices involve
many trade-offs for
each carrier

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Issues
Issues in liner shipping:
Vulnerability to demand fluctuations
Large-size container ships mean the sector is more
vulnerable to demand fluctuations.
Seasonal variation

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Issues
Issues in liner shipping:
Trade imbalance
It is inevitable as a result of production relocation to
countries where resources are abundant and cheap.
It raises challenges in container transport, especially in
relation to:
Management of empty containers
Unequal freight rates for inbound and outbound routes.

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Module 7: focus questions

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What are the main characteristics of general cargo and

how do they affect the operation of the shipping of general
cargo?

What is the market structure of liner shipping and what

are the effects of the market structure on competition?

How are freight rates set in the liner market?

What are the key issues in liner shipping?

So, what are the key strategic decisions for liner companies
to make?
what is the difference between liner shipping and tramp
shipping?

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MARITIME
ECONOMICS

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Market structure
Lower freight rates/time charter rates due to
increased ship sizes

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Freight rate set (pricing)

Current freight rate: SCFI/ CCFI Shanghai (China)
Containerized Freight Index measured in USD per TEU/ FEU

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Source: BIMCO

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Liner shipping
East-West trade routes (examples)
Asia North America (Transpacific Trade)

Asia Europe (AE Trade)

Europe North America (Transatlantic Trade):

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Source: http://www.maerskline.com/

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Liner shipping
Intra regional trade routes (example: Intra Asia)
Intra Asia

Source: http://www.maerskline.com/

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