2nd
IMO Symposium on low- and zero-carbon fuels for shipping: “Ensuring a just and inclusive transition towards low-carbon shipping”.
THERE IS MORE TO FREIGHT THAN MEETS THE EYE While it may be obvious for those familiar with dry bulk shipping economics, there is more to freight than the cost of fuel and the future carbon tax. The key element that drives the volatility of freight, somehow forgotten in this debate, is the cost of the time of shipping assets, expressed in time charter rates (see Fig.1) . These rates are not established on a ‘cost-plus’ basis. Instead, they are driven by the dynamics of ‘hockey stick’ economics. The key to ‘hockey stick’ economics is the interaction between the supply of ships that transition from perfect elasticity to perfect inelasticity and inelastic demand for dry bulk freight.
Demand for dry bulk freight is derived from the demand for commodities. And, as freight represents a small fraction of the delivered value of commodities, demand for bulk freight is highly inelastic. Even in the case of iron ore exports on long hauls where its share in the cost of delivered value is higher than in other commodities, history shows that volatile swings of freight barely move the needle on the shipped volumes (ditto the data for the past 8 years on iron ore exports ex Brazil).
Enter ‘hockey stick’ ship supply. During times of underutilized fleet, the drop in time-charter rates has no effect on the increase of seaborne freight. The supply is perfectly elastic. However, as the world runs out of available ships and their utilization reaches more than 90%, freight rates go into wild swings, producing volatility unmatched by any other commodity. The reason is simple enough. You don’t build ships overnight. So long as the shortage persists and demand remains strong, high rates will persist. In the past 20 years, hockey stick economics delivered swings that made headlines for affecting the cost of ocean transport of commodities. Firstly, during the period referred to as the ‘super-cycle’ between 2004 and 2008, and secondly during the post- Covid recovery in 2021.
Fig. 1: Estimated average annual share of the cost of time and fuel in the voyage freight for the exports Capesize iron ore from China to Brazil. Source: Clarksons Research & Baltic Exchange
13 | ADMISI - The Ghost In The Machine | Q3 Edition 2022
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