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ht rates will have no influence on the demand for transportation.

Although most of the times the sea transportation cost and associated expenses are a negligible percentage on the final cost of a product, there are times where these costs may reach 8 and even 15%. As a result its demand is greatly affecting transportation demand.

5.3 Substitution in transportation.

Transportation of goods may be performed by using different means of transport. However, shipping transportation provides services with law cost and in high volume. Nevertheless, when freight rates become more expensive, the convenience in which sea transportation services can be substituted by other means of transport, makes the demand more or less elastic.

Higher freight rates, will lead importers in a search for substitution. In the short run, as we can see in Figure 1, the rise of freight rates won’t have a big effect on the demand on shipping services. As a result, gross revenue will be increased for transportation companies, as the transported volume remains the same but the freights have increased. However, that situation will not last for long.

On the long run, the importers will be able to react in a raise on freight prices by substituting sea transportation by other means of transport. As a result elasticity of demand for the final goods, becomes more elastic (Figure 2) and so does the demand for sea transportation services.

Graph showing the elasticities of the demand for shipping (Source: Metaxas, 1981)

CHAPTER 6

He who loves practice without theory is like the sailor who boards ship without a rudder and compass and never knows where he may cast - Leonardo da Vinci

6.0 Introduction

In this chapter we will discuss about the determinants of the demand for shipping in the three basic shipping categories which are container shipping, dry cargo markets and the wet trade. In all these three sectors the role of China as a force driving the demand for these commodities cannot be replaced.

6.1 Determinants of the demand for liner shipping

“Liner services operate between fixed ports on a strict timetable. Liner services can be operated by one company, or by a group of companies in what is known as an alliance or consortium. Costs and revenues are shared in accordance with each company’s contribution. Liner shipping companies primarily operate container ships, which carry containerized cargo” (UNCTAD, 2010). From an economic perspective, international division of labor and decentralization of production processes have provided an important impetus for the demand of liner shipping. The USA and some traditional industrial countries of Europe have increasingly turned to low-wage countries of Asia instead of some nearby regions with cheap labour force, such as Eastern Europe and Mexico. More and more products suitable for container transport are being produced, like refrigerators, air-conditioners and other consumer electric products with relative high value, which are required to be transport over longer distances. Outsourcing and global maritime transport has to some extent stemmed from the liberalization of global trade during recent years. Lower custom’s duties and the abolition of non-tariff trade barriers have also acted as a catalyst for international trade, which has further affected the demand