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Stopford, M. 2009, Maritime Economics, 3rd edn, Routledge, London, Chapter 5, refers to the four shipping markets, namely the new-building market, the freight market, the second-hand ship market and the ship demolition market. Explain how these four markets interact and illustrate your answer with discussion of the effects of the Global Financial Crisis 2008 on the four markets.
Note: Copy and paste of the contents from the above textbook are not enough for your answer. Your answer should include an analysis of the interactions between the four markets and refer to the effects of the GFC 2008 on the four markets.
Explain and analyse the effect of vertical integration in the liner shipping sector on:
a. the economic cost of supply chain operation.
b. the competitive advantage of liner shipping companies.
Note: Use relevant references and industry information to support your answer if necessary.
a. Explain the different forms of cooperative agreements in liner shipping.
b. The attached article written by Brett, D. 2013, 'FMC global summit produces 'open and candid' discussions', Lloyd's List, 18 December, reports on policy issues relating to cooperative agreements in the liner sector. Based on the information given in the article and relevant sources, discuss the issues faced by policy makers in dealing with shipping lines' cooperative agreements.
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Market is a place where the forces of demand and supply operate and where buyers and sellers meet to strike a deal and exchange the product in return for some cash, which is the actual price of the product, also known as the equilibrium price if demand equals supply at the price. Now let us examine how the shipping market works. The shipping market is divided into four markets a) the freight market which deals in sea transport. It provides the main source of cash for the shipping companies. Freight rates earned in this market are the main source of driving the activities of the shipping industry b) the sale and purchase market deals in second hand ships c) the new building market deals with new ships 4) the demolition market deals with ships are ready to be sold at the scrap value which are not sold in the second hand market.
In the new building market the cash flows in the opposite direction that is cash spent in buying new ships flows out of the shipping industry. So, the cash flowing between the different markets drives the shipping market.
At the beginning, the cycle freight rises and shipping industry goes through a period of boom allowing ship owners to pay higher prices for second hand ships. As the prices go up, investors move to the new building market with the confidence created by this boom period. After a couple of years the ships arrive in the market, creating an excess supply so the process reverses. Falling freight rates squeezes the cash inflows, because investors start to pay for their new building.
So, financially weak owners not having enough cash to meet their debt obligations are forced to sell ships in the second hand market. So the ships are sold at a bargain price and the dream of ship owner of 'buying low and selling high' is not fulfilled. Sometimes the supply is also so much in the second hand market compared to demand that some of the ships that are not sold in the second hand market enter the demolition market and are sold at their scrap value. As the number of ships scrapped increases the supply falls, causing freight rates to increase again and the whole process starts again. This is how the shipping industry works and interacts among themselves.
The sector that has benefited mostly from globalization is the shipping industry. So it is was evident that in the case of any global financial the industry that would be worst hit would be shipping industry which actually happened after the 2008 crisis. After the 2008 crisis freight and charter rates fell there was also massive unemployment in the freight market because of less number of orders and trades that were coming into the shipping industry.
After the global financial there was a significant drop in GDP of all countries and Global exports dropped by more than 10 percent for all economies and there was global economic stagnation, thus international trade suffered a decrease. Because of globalization all economies tend to move in tandem with each other because of the free flow of capital and also free flow trade without much restriction, so the economic crisis quickly spread to the other nations. The demand for the shipping industry is a derived demand that is the demand for shipping industry will depend on, the demand for the goods that it ships. So, if the consumption of one good falls the demand for transportation of that good would also fall (Friedlaender & Spady, 1980). Ships were getting parked for months.