I-Introduction

The Cost of

Nontariff Barriers to Trade in Shipping

Constantino Stylianos Halkias

Substantial Research Paper

Prof. Lee

Spring 2000

Table of Contents

I. Introduction i-iii

II.A Seaborne Trade 1-8

Seaborne Trade- A synopsis

The Shipping Market Demand Function

The Shipping Market Supply Function

III.B The Ship’s Cargo & Market 9-19

Bulk Cargo

The Bulk Shipping Industry

The Ships & Its Characteristics

The Charter Market

Freight Rate Determination

IV.C Grain as a Commodity 20-28

Grain-The Basics

The Seaborne Grain Trade

The Grain Trade Model

Grain-World Trade

Bulk Vessel Trades

V.D Voyage Estimates 29-35

Voyage Estimating In Perspective

Vessel Costs

Voyage Estimates

VI.E Nontariff Barriers to Trade 36-42

Nontariff Barriers & The World Trade Organization

Defining & Identifying NTB’s

Agricultural Trade Barriers

VII.F Restrictive Shipping Policies 43-57

Restrictive Shipping Policies- An Overview

Cargo Sharing Agreement Between Brazil & Argentina

Argentina’s Freight Tax

Port State Control in Rotterdam

The ITF’s Minimum Wage Demand

The River Plate’s Draft Limitation

The Ukraine’s Bias Against FOC

VIII.G Conclusion 58-63

IX. Appendix

B-1: Parcel Size Distribution

B-2: Bulk Carrier Cross Section & Cross Section of a Hold

C-1: World Seaborne Trade of Main Bulk Commodities 1988-1998

C-2: Grain Seaborne Trade 1998

C-3: Oil/Bulk/Ore Vessel Cross Section

C-4: Stowage Factor for the Main Grains

C-5: Maritime Freight Rates For Wheat

F-1: Voyage Estimate #3

F-2: Affidavit

F-3: World Fleet as of December 1996

G-1: Elements in the Bulk Transport System

G-2: List of Daily Running Costs

X. Bibliography

Illustrations

Tables

1. World Seaborne Trade in Million Tons 3

2. World Seaborne Trade in Billion Ton Miles 4

3. World Fleet at Start of Year (Million Deadweight) 6

4. Deliveries of Newbuildings (Million Deadweight) 6

5. Tonnage Broken Up and Lost (Million Deadweight) 7

6. Major Grain Exporters/Importers for 1998 in Seaborne Trade 25

7. NTB’s and their Effect on Voyage Cashflows 61

Graphs

1. Short Run Supply Function 18

2. Short Run Adjustment 19

I-Introduction

Nontariff barriers to trade act as hidden costs that a shipowner may incur when offering his vessel for hire. Understanding seaborne trade will allow for a clear identification of nontariff barriers to trade (NTB’s). Embedded in the economy as a means of protection, NTB’s disrupt flow and increase costs.

Understanding the intricacies of maritime economics is extremely complex. As exposed in his book, Maritime Economics, Martin Stopford's description of supply and demand of the shipping market will serve as the guide. Stopford outlines ten key influences that affect the supply and demand of the shipping market. The five key influences for the 'demand function' of sea transport are: the world economy, seaborne commodity trade, the average haul, transport costs and political events. On the 'supply function' Stopford identified the following five key influences: shipbuilding output, scrapping, fleet performance, and operating environment. The dominant feature of the shipping market supply/demand model is that demand is highly volatile and unpredictable, while supply is lethargic to respond to changes. All these factors will be exposed in the second section of this paper.

The third section of the paper expands on bulk shipping, bulk carrier vessels and the freight market. There are currently four commodities -oil, iron ore, coal and grain-, which account for two-thirds of all seaborne trade. These commodities are generally shipped in bulk, thus they are commonly referred to as 'bulk commodities' and carried in bulk carriers. Bulk shipping has been instrumental in achieving economies of scale. It has reduced transport costs to the extent that it is often cheaper for industries to import raw materials by sea from suppliers thousands of miles away than to get the supplies from land only a couple of miles away. The way the market works is that the shipowner comes to the market with a ship available, free of cargo. The shipowner will contact his broker or agent, middlemen who specialize in ‘fixing’, which is setting up work for the vessel. The middleman then contacts the shipper or charterer who has a particular volume of cargo to transport from one location to another. The deal is completed when the charter party is drawn up. The procedure of ‘fixing’ is relatively standard, and varies according to the shipment and the type of ship being utilized.

Section four will focus on grain as a commodity and cargo. The world economy is the main driving force behind seaborne trade; however, particular commodity trades may follow a different growth trend than that of the world economy. This is the case with agricultural commodities, which are subject to seasonal variations that coincide with harvests. The trade of grain is a clear example of such a volatile commodity. Since the trade is seasonal and fluctuates with harvest in both the exporting and importing regions, it is virtually impossible to predict changes. This makes planning of grain export facilities difficult, and scheduling efficient large bulk export operations very complex.

In order to quantify the cost of NTB’s in the carriage of grain, voyage estimates will be calculated for a bulk carrier carrying grain from Argentina to the Netherlands and another from the United States to the Ukraine. The voyages will be real calculations and thoroughly analyzed in order identify any possible cost which could be identified as an NTB. Sections six and seven will set out to identify the different nontariff barriers to trade which might be encountered upon while preparing the voyage estimates. An example of a non-tariff barrier to trade for a ship carrying grain is the large costs of dredging that need to be assumed when loading/discharging grain in the River Plate (Argentina). These costs add up for the shipowners account, which in turn is tied to the fact that Argentina is a leading grain exporter. Another such example of a nontariff barrier to trade is when ports issue 'flag restrictions'. By 'flag' it is meant under which country's maritime laws is the ship registered. Countries such as Liberia, Panama and Malta offer lax restrictions and lucrative tax cuts. Consequently shipowners choose these flags over their own national flag. In order to compensate for lost revenue countries impose increased port expenses for vessels that have 'free flags', further adding to the cost of operating a vessel and subsequently reducing income earned in a particular voyage.

The concluding section of the paper will seek to place the cost of NTB’s in perspective with regard to the shipowners cash flow for the above-mentioned voyages. The reason why the shipowners perspective has been chosen is because governments and the cost of NTB’s have been covered. The cost to the individual business man/woman however, has yet to be truly explored, and most importantly exposed. For one of the voyage estimates the total cost of NTB’s is $155,199. This number certainly quantifies nontariff barriers to trade, especially to the shipowner who saw his profit dwindle. This will give the reader a true glimpse into seaborne world trade, and how the terms free trade does not really mean ‘free’.

II-Seaborne Trade

Seaborne Trade- a synopsis:

"Fast and cheap transportation has been one of the main products of the Industrial Revolution. Distances have been shortened at an astonishing pace. Day by day the world seems smaller and smaller and societies that for millennia practically ignored each other are suddenly put in contact or conflict" (Stopford, 2).

Worldwide, the experience has been one of rapid industrial and population growth that has resulted in large, concentrated centers of production and consumption. This has led to an increase in demand for transportation in general, and with world trade rapidly increasing, for seaborne trade in particular. There exist four modes of transportation, railroad, highway, air and water, yet one of them stands out above them all, water. It is only natural that the element, which covers three fourths of the planet, be the number one form of transportation, after all it unites all the corners of the world.

When discussing shipping one inevitably dwells into the core of the world economy. As the interdependence amongst states deepens, the leverage of shipping in the world economy increases. In order to fully understand the economic and political forces that shape seaborne trade, one must be aware of the two-way interaction between the developments in shipping and the developments in the world economy.

In 1999, world seaborne trade increased marginally compared to 1998. In terms of volume, there was a 0.7 percent increase from 5062 mmt (million metric tons[1]) to 5100 mmt. In terms of total miles transported, 1999 showed a marginal decrease from 21492 btm (billion ton miles[2]) in 1998 to 21480 btm in 1999. This is the second consecutive year of negative growth after a fourteen-year period of continuous growth. Seaborne trade relies on the world economy, but does not necessarily depend on it, consequently if the world economy receives a severe shock such as the Asian meltdown in 1997, world seaborne trade is bound to suffer in the long run. (Fearnleys)

The maritime economy is an extremely complex one. In order to get a full picture one must be able to identify its major variables. Martin Stopford, in his book Maritime Economics, identifies ten of the most important variables affecting seaborne trade's supply and demand. In doing so, Stopford set out to understand what makes the variables change, and what effect that change has on the shipping market.

The Shipping Market Demand Function:

The world economy generates the basic demand for seaborne trade. Developments in particular commodities and changes in the distance over which cargo is transported, are key players in modifying the economics of world trade for the shipping market. These, in turn, generate the final demand for shipping services that are measured in ton-miles.

The demand for sea transport originates from the world economy's need to import raw material for the manufacturing industries and the trade of manufactured products. The relationship between sea trade and world industry is not linear however. There are several factors that affect world trade which in turn reflect in the shipping market. The first such factor is the depletion of raw materials, which leads to imports having to increase faster than industrial production. This occurred in Europe, for example, when in the 1960's iron ore had to be imported in order to support its steel industry.

A second factor, which affects seaborne trade, is industrial development. As a country's economy matures, its economic activity tends to become less resource intensive, which in turn leads to a decrease in imports of raw material. However, when the mix of countries experiencing development changes, the decline of one importer may be offset by the boon in industrial output from another country. The third and most unpredictable impact of the world economy on seaborne trade is the occurrence of 'economic shocks'. Unlike 'business cycles', which seem to have somewhat regular ups and downs, 'economic shocks' are precipitated by particular events and are generally unforeseen. Their impact on seaborne trade is dramatic. The last 'shock' was the demise of south east Asian countries economies in the mid 1990's.

Seaborne commodity trade is another major variable in the demand function for the shipping market. Commodity trading may follow a different growth trend from the world economy as a whole because of changes in demand for a particular commodity, a change in the production technology, a change in the source of the commodity, or the relocation of a processing plant. Individual commodity trades fall into short-term and long-term components. The principal short-term components are seasonal effects and stock building, both of which may have a significant impact on the demand for shipping services during a short period. One such example is the trade of grain. In the US Gulf (of Mexico), the principal exporter of grain, port activity reaches a low during the summer only to see it grow by as much as 50 percent between September and the end of the year when grains are harvested. The volume of seaborne trade for the major bulk cargoes can be seen in table 1, which shows their volume for the past three years.

Table 1

World Seaborne Trade in Million Tons

	Crude Oil	Oil Products	Iron Ore	Coal	Grain	Other	*Total*
1997	1519	410	430	460	203	2070	5092
1998	1524	402	417	473	196	2050	5062
1999	1480	410	410	480	210	2110	5100

Source: Fearnleys, World Bulk Trades 1999

The average haul is another key variable in the demand for sea transport, because the demand for sea transport depends upon the distance over which the cargo is shipped. The basic principle is that the farther away the load port is from the discharge port, the more beneficial it is for the shipping market. If the US were unable to import oil from the North Sea or Mexico, for example, it would have to do so from the Middle East which is 11,000 miles away, having to pay more for the oil and receiving it in smaller quantities and at a lower pace. In most trades we find that the average haul has remained constant over the last few years. Table 2 shows the average haul of crude oil, oil products, iron ore, coal, grain and other commodities during the period 1997-99.

Table 2

World Seaborne Trade in Billion Ton Miles

	Crude Oil	Oil Products	Iron Ore	Coal	Grain	Other	*Total*
1997	7930	2050	2444	2332	1169	6000	21825
1998	7793	1970	2306	2419	1064	5940	21492
1999	7500	2010	2220	2430	1170	6150	21480

Source: Fearnleys, World Bulk Trades 1999

International trade has been able to expand rapidly thanks to the development of a transportation network. One must keep in mind that when transporting goods the importer incurs on costs, which are reflected in the sale price of the product. Improved efficiency, bigger ships and a more effective and comprehensive organization of the shipping operation have led to a steady reduction in transport costs and a higher quality of service. That is why transport costs are considered to be an important variable in the demand for sea transport.

Political events have the peculiarity of producing sudden and unexpected change in the demand for sea transport. Political uncertainties themselves do not affect the demand for sea transport, but their repercussions do. A political crisis may have an immediate effect on the average haul. This was the case in 1956 when the Suez Canal was nationalized by the Egyptian government. Thus, forced oil tankers to divert around the Cape, consequently increasing the average haul, which led to an increase in ship demand.

The Shipping Market Supply Function:

The most important variable in the supply function of the shipping market is the merchant fleet. The merchant fleet is the stock of ships readily available in the market to transport goods. Scrapping of old vessels and new deliveries determine the growth rate of the merchant fleet. One of the main characteristics of the merchant fleet is the extended period of time a vessel is capable of operating. The average working life of a vessel is twenty years, so the adjustment of the merchant fleet is inevitably measured in decades, which makes it difficult to predict future trends.

The experience of the oil tanker fleet is a clear example of how difficult it is to speculate in the shipping market. Between 1962 and 1973 oil trade quadrupled and came to a screeching halt with the first oil crisis. The first oil crisis struck deep into the industry as new vessels were being delivered to a fleet which saw its cargo dwindle by as much as sixty percent during the next decade. On the other hand, the bulk carrier fleet grew from 17 million deadweight[3] (mdwt) in 1963 to 268.4 mdwt in 2000. This progression in ship size was largely due to the fact that economies of scale were being reached in industries that were previously small in size and production. Such was the case in the coal and iron ore commodity trades. The larger and more efficient ships, which predominated the market in the postwar era, pushed their way into the market as economies of scale and specialization of vessels became the predominant aspect of the merchant fleet. Table 3 shows the total deadweight for the world's merchant fleet for the past three years.

Table 3

World Fleet at Start of Year (Million Deadweight)

	Oil Tankers	Combined Carriers	Bulk Carriers	Others	*Total*
1998	267.1	17.9	266.6	170.6	722.2
1999	272.7	16.3	266.1	177.3	732.4
2000	276.7	14.9	268.4	181.6	741.6

Source: Fearnleys, World Bulk Trades 1999

Shipbuilding output, the second variable identified by Stopford to affect the supply function, is important because peaks and troughs in the deliveries of vessels have an impact on the development of the market into which they are being delivered. Shipowners order new buildings when the market is riding high. Unfortunately, in most cases, by the time delivery takes place the market has decreased so overproduction and chronic surplus are the norm further depressing the market. In recent years there have been major changes in the product range of ships built by the merchant shipbuilding industry. These are illustrated graphically in table 4.

Table 4

Deliveries of Newbuildings (Million Deadweight)

	Oil Tankers	Combined Carriers	Bulk Carriers	Others	*Total*
1997	7.49	0.33	18.85	10.17	36.84
1998	12.63	0	11.58	11.08	35.29
1999	19.08	0.44	12.61	8.4	40.53

Source: Fearnleys, World Bulk Trades 1999

Scrapping and losses are the manner in which the merchant fleet's rate of growth is determined. From the existing merchant fleet one must add the new deliveries and subtract ships scrapped or lost at sea. Whilst new orders are readily traced to an increase in the market, scrapping has a more complex and unpredictable way of occurring, causing considerable difficulties in judging the development of the shipping capacity. The scrapping of vessels depends on a number of factors, which interact in many different ways. The most influential factors are the ships age, technical obsolescence, scrap prices, current earnings and market expectations. The tendency to scrap ships is only visible when the industry has encountered a severe and long standing depression that depletes both cash and the owner’s optimism. Table 5 is the total amount of vessels scrapped or lost at sea for the past three years.

Table 5

Tonnage Broken Up and Lost (Million Deadweight)

	Oil Tankers	Combined Carriers	Bulk Carriers	Others	*Total*
1997	3.6	0.4	7.6	3.8	15.4
1998	5.7	1.4	12.3	4.4	23.8
1999	14.6	1.1	10.5	4.1	30.3

Source: Fearnleys, World Bulk Trades 1999

When contrasting table 5 to table 4, the chronic oversupply of ships, which has led to depressed freight rates for the past couple of years, is evidenced by the fact that newbuildings have outpaced scrapping for the past three years by an average 14.38 mdwt per year.

Changes in the physical capacity of the fleet, and changes in its actual operating performance in response to market conditions, affect fleet performance and productivity, the fourth variable affecting the supply of sea transport. As vessels age their performance is hampered, especially their operating speed, which according to the author is the merchants fleet most important physical characteristic. This affects the fleet’s productivity as more time is needed to transport the goods. Owners may also intentionally reduce speed when freight rates are unfavorable in order to reduce costs. Fleet productivity is just as important in determining the balance of supply and demand, as is the tonnage of cargo to be transported, according to Stopford.

The last variable affecting supply in seaborne trade is the operating environment. In this variable several factors come into play, each affecting the transport capability of the fleet. For example port congestion reduces the supply of ships available for trading because vessels are forced to wait extended periods of time to load or discharge. Safety and environmental standards could also affect the supply of vessels as new standards could leave a large number of vessels incapacitated to trade. The introduction of new laws may eliminate tonnage available to haul the cargo by imposing age and port of registry restrictions. This particular form of action would be categorized as a non-tariff barrier to trade, which this paper is interested in identifying.

The exposition of the ten most important variables affecting supply and demand of the merchant fleet exposes the fact that they do not enjoy a harmonious balance. Demand tends to be volatile and unpredictable whilst supply is ponderous and lethargic to change. Such a market has created some of the most spectacular reversals of fortunes, leaving only a select few daredevils to operate in it. The prospect for growth is hand in hand with the development of world trade for most shipping markets, unfortunately the vagaries are wide and many creating more threats than promises for the market that delivers the most goods.

III- The Ship’s Cargo & Market

Bulk Cargo:

Bulk cargo is generally defined as "any cargo that is transported by sea in large consignments in order to reduce the unit cost" (Stopford, 214). The introduction and advent of bulk cargo shipments has been instrumental in the achievement of economies of scale. The shipment of cargoes in bulk has reduced transport costs to the extent that it is often cheaper for industries to import their raw material by sea from thousands of miles away than by land from suppliers only a few hundred miles away.

Using the grain trade as an example, one notices the increasing trend of using larger vessels in transporting the commodity. In the 1960's most of the grain shipped was done so in vessels under 25,000 dwt, twenty years later vessels ranging from 60,000 to 80,000 are the norm for carrying grain. The table in appendix B-1[4], shows the parcel size distribution of the major dry bulk commodities and their percentage as a total of the amount shipped.

Not all cargoes are suitable for bulk shipment. There are certain characteristics and requirements that must be met for the cargo to be considered suitable for bulk shipment. First "there must be sufficient volume of cargo to justify a tailored shipping operation" (214). Since bulk cargo relies on the principle of economies of scale, as the volume of the cargo increases the probability of it being shipped as bulk increases accordingly. If the shipment is not large enough to justify a separate bulk shipping operation, it is shipped as general cargo[5] in the liner sector[6].

The second consideration for a cargo to be considered as bulk is that the "cargo must be physically suitable for bulk handling" (215). As such the cargo must be able to withstand the loading and unloading characteristics of bulk cargoes which, in the case of grain, can occur at the rate of 5,000 tons an hour and 2,000 tons an hour respectively. The stowage characteristic of the cargo is also important in this case. The ease with which it can be stowed within the hull, its susceptibility to damage and special requirements, such as temperature limits, determine whether or not a cargo can be shipped in bulk or not.

The third characteristic a cargo must have in order to be classified as bulk is that the "bulk shipping operation must be adapted to the overall transport system" (216). This means that the cargo be handled as little as possible from port of origin to port of destination and that the shipping of the cargo be done in a form that allows the use of economical transportation in each leg in order to reduce costs.

The last consideration for a cargo to be classified as bulk is that "the size of the cargo parcel be compatible with the stocks held by the producer and the consumer" (216). The parcel size in which a commodity is shipped depends on the size of stocks held at either end of the transport chain. For high-value cargoes, which incur high inventory costs, the parcels may be limited to smaller amounts to avoid inventory pile up, in doing so the smaller parcel consignments may not justify it being shipped as bulk. In minor bulk trades there exists a similar problem, as the physical characteristics of the product may be adequate for bulk shipment but its inventory costs override the benefits brought forth by bulk shipment.

The physical and economic factors of a commodity must be paired in order for a commodity to be shipped in parcels large enough to be considered bulk. The transport of grain is one such commodity in which its physical and economic characteristics allow it to be shipped in parcels large enough to be considered 'bulk'.

The Bulk Shipping Industry:

Ocean transportation, because of its low cost, and its ability to change with trading patterns, is essential to the bulk commodity export business. Seaborne carriage offers the least costly means of transportation between two points seperated by water, and is particularly well suited for long distance movements of bulk commodities.

The principle for the bulk shipping industry is 'one ship, one cargo', though it does not hold true in all cases it is definitely the ruling modus operandi. As the name of the industry indicates, it provides transport for cargoes that appear on the market in shiploads. If there exists bulk cargo which needs to be transported, the shipper can approach the task in several different ways. The manner in which the shipper dispatches his cargo depends on the cargo itself and on the type of commercial operation he is willing to use to ship his cargo. The shipper’s choices range anywhere from owning his own vessels, to handing over the whole operation to a specialist bulk shipper. (Kendall)

If the shipper is a large multinational company which ships a substantial amount of cargo, they often own their own shipping fleets to handle a proportion of their transport requirements. The major oil companies are this type of company. It is estimated that 40 percent of oil tankers operating in the market are owned by major oil companies. Losses which caused large ecological disasters, such as the Exxon Valdez and the Erika more recently, have prompted oil companies to charter the vessels in order to reduce liability. (Kendall; Stopford)

On the other hand, if the shipper has a long term requirement for bulk transport, but does not want to become a shipowner due to the high capital investment, he may charter tonnage on a long-term basis from a shipowner. The charters agreed upon in such cases range anywhere from ten to fifteen years in order to provide a base load of shipping capacity to cover long-term material supply contracts. Charters of such high duration are generally agreed upon before the vessel is actually built. Short-term time charters, any where from twelve to five years, would be obtained on the charter market. (Kendall)

Many shippers, have only a single consignment of cargo to transport. Agricultural trades such as grain and sugar, which are subject to vagaries such as the weather and a volatile market, are cargoes which fall under this category. Their characteristics make it difficult to plan shipping requirements in advance. In such cases, bulk cargo is chartered for a single voyage via a market such as the Baltic Exchange, in which the shipper can hire a vessel for a negotiated freight rate. (Kendall)

The final alternative available to a shipper is that he enter into a long-term arrangement with a shipowner who specializes in a particular kind of bulk shipping supported by his shipping fleet. The service offered in such cases requires close cooperation between the shipper and the shipowner since it involves adherence to precise timetables, using ships with high cargo capacity and fast cargo handling. (Kendall)

The above scenarios are based on the assumption that they are a C.I.F offer or a F.O.B basis. In a 'cost, insurance and freight' (C.I.F) offer the succesful seller/exporter arranges the freight. In contrast, with a 'free on board' (F.O.B) basis, the buyer/importer arranges the freight. Whenever a grain house, such as Cargill, comes in with an 'order', it usually means they have made a C.I.F sale, and require a vessel to lift the cargo (ASBA, 108).

Many different ship types are used for bulk transport. Since this paper focuses on dry bulk cargo and grain carriage it will focus on the vessels that carry such a cargo: Tween Deckers[7], Bulk Carriers, Ore/Bulk/Oil[8] (OBO), Tankers[9], and Barges[10] (ASBA, 80).

The Ship & its Characteristics:

For the purpose of this paper I will focus on the bulk carrier, the most common ship used for the major bulk cargoes and the great majority of minor bulk cargoes. The bulk carrier fleet falls into four main categories generally refered to as Handy bulk carriers (10-29,999 dwt), Handymax bulk carriers (30-49,999 dwt), Panamax (50-79,999 dwt) and Capesize (over 80,000 dwt). These are all single deck vessels with a double bottom, which are essentially free of obstructions within their holds. The cargo accesses the holds vertically through its hatches in the weatherdeck. Their speed ranges between 12 to 16 knots, and their stowing capacity[11] ranges from 45 to 55 cubic feet per ton. Grain has a stowage factor of 45-50 (Cu. ft/ton) (ASBA, 93).

Bulk carriers are generally designed for cheapness and simplicity. Key design features are cubic capacity, access to holds, and cargo handling gear. Hold design is important because cargoes such as grain shift easily and if unchecked can capsize a ship. To prevent this, bulk carriers generally have self-trimming holds "in which the topside wing tanks are slopped in such a way that granular types of cargo can be loaded by gravity without having to trim the cargo into the wings of the hold" (ASBA, 93). The bulk carrier's cargo handling gear may be cranes or derricks, which will enable it to be self sustaining in ports with inadequate cargo handling facilities. In general, only the smaller bulk carriers are 'geared'. Larger bulk carriers are usually used in trades in which purpose-built cargo handling facilities exist (ASBA, 94).

In appendix B-2[12] there is a cross section of a 66,000 dwt Panamax bulk carrier, the same type which will be considered when preparing the voyage estimates in section V. Included is a cross section of a bulk carrier hull, which depicts a self-trimming hold, similar to that of the vessel which will be used in the voyage estimates prepared for this paper.

The Charter Market:

The charter market is central to the functioning of the shipping industry, it is here that ships and cargoes get 'paired'. The effort to combine cargo with a particular ship seems like an easy task to accomplish, but the cargoes vary as much as the ships do. In order to simplify the shipowners and shippers experience, the broker plays as the intermediary 'match maker'.

The shipowner places his vessel in the market, free of cargo. The vessel offered for cargo has a particular speed, cargo capacity, dimensions and cargo handling gear. The vessel being offered for hire will probably be completing an existing 'fixture', this in turn will determine the date and location at which it will become available. A typical announcement for a vessel for hire would then read something like this:

M/V 'MAGIC SKY' Liberian Flag, built 1983

single deck bulk carrier

37,554 MT DWT on 35' 3.75'' SSW

LOA 615' 11'' EXT BREADTH 93' 3.5"

1,618,800 cuft grain/1,560,900 cuft bale

5 holds/hatches 4 @ 24 MT cranes

14 Kts on 30 MT (1500') plus 2.5 MT blended F.O.

AVAILABLE 2/2 BALTIMORE

The shipper or charterer, who has a particular volume of cargo to transport from one location to another, will enter his cargo in the market in order to have it shipped. The quantity, timing and physical characteristic of the cargo will determine the type of shipping contract he requires. The charterer's cargo description would be phrased somewhat along these lines:

REQUIRE VESSEL OF ABT. FORTY THOUSAND TONS DWT.

FOR SINGLE VOYAGE FROM NY. TO NAPLES CARRYING

FULL CARGO HEAVY GRAIN. DELIVERY IN NY. FOR LOADING

FIRST HALF FEBRUARY.

The cargo seems to be ideal for the described vessel, and most importantly time and location seem to coincide. This is when the broker and agent come into play as 'match makers', since they specialize in setting up the deals. If the shipowner and shipper agree on the terms and conditions a charter party[13] is drawn up and the ship is 'fixed'. (Kendall; Stopford)

Several different types of charters exist. The main differences between them is the degree of owner involvement in the operation, the division of the costs and the extent to which the cargo to be transported is specified in the contract. For the purpose of this paper, which is to establish the cost of non-tariff barriers to trade in the shipment of grain, a voyage charter will be used in order to calculate the voyage estimates. When agreeing upon a voyage charter the shipowner incurs all of the costs involved in the operation such as port charges and canal dues. These costs subtract from the owners earnings in a more visible manner, thus any cost construed as a non-tariff barrier to trade will be readily identified. The owner capitalizes in such a charter by earning freight per ton of cargo transported. (Abrahamsson)

In contrast, with a time charter, the charterer assumes all the voyage expenses, and the shipowner pays for the operating costs of the vessel such as crew, maintenance and repair. In this particular type of charter the shipowner capitalizes on his vessel by hiring it out for a specified period of time for a daily, monthly or annual fee. (Abrahamsson)

Once the ship has been fixed, a fixture report is issued in which the details of the charterer are summarized. For the voyage charter described above, the fixture report would read:

US East Coast to Italy- Magic Sky, 36,000 t, heavy grains/sorghum/soya beans,

$12.50, 4 days/1,000 t, Feb. 6-10. (Andreas)

In layman’s terms, the vessel Magic Sky has been chartered to load grain in the US East Coast and transport it to Italy. The cargo consists of 36,000 tons of heavy grains, sorghum and soybeans at a freight rate of $12.50 per ton. Four days are allowed for loading and 1,000 tons per day rate allowed for discharging. The vessel must present itself ready to load between February 6 and February 10. The charterers are Messrs. Andreas. (Kendall)

Freight Rate Determination:

All markets are governed by the relationship between supply and demand, and the freight market is no different in that sense. What sets the freight market apart from other markets however, is the contrasting speed in which supply and demand adjust. While demand is mercurial due to its relationship to the world economy, supply is lethargic mainly due to the fact that ships take anywhere from one to two years to be built and delivered to their owners. Therefore, time is a major factor in reaching equilibrium in the freight market. Short run equilibrium occurs when there is time to adjust supply by short-term measures such as layup, reactivation, or operating ships at a faster speed; while long run equilibrium occurs when shipowners have time to take delivery of new ships and shippers have time to rearrange their supply sources.

For the purpose of this paper we are interested in the short run equilibrium, as the freight rates which will be considered for the voyage estimates will come from the charter market, which in turn is governed by the peaks and troughs the short run has to offer.

On the supply side function of sea transport, whenever there is a shortage of transport capacity, freight rates rise. This has a two fold effect. First, the older and less efficient ships become profitable to operate and are brought out of layup until the whole existing stock of tonnage is either actively trading or seeking employment. The second effect this has on the world fleet is that in order to earn the maximum possible revenue, shipowners operate at increased speeds, fuller space utilization, and perform fewer and shorter trips in ballast. A greater utilization of operational capacity occurs. (Stopford)

The following graph illustrates the short run supply function:

Graph #1

Source: Martin Stopford, Martime Economics 2^nd Ed.

The opposite occurs when there is an oversupply of ships. Freight rates fall and the least efficient ships in the fleet are unable to cover their operating costs and move into lay-up. Gradually the operational fleet falls towards the level of demand and laid up tonnage grows. The operational capacity of the fleet decreases as shipowners reduce their operating speeds to conserve fuel, and are willing to perform extensive ballast trips to ensure cargo. (Stopford)

By bringing the short run demand curve into the picture we can explain how freight rates are determined. Demand for sea transport comes from world trade, so in the short run, one should not expect it to be significantly influenced by the level of freight rates. A major increase in demand only pushes freight rates up slightly because vessels in lay-up immediately enter the market to meet the increasing demand. An additional increase in demand is what triggers the highest hike in freight rates, as the market rate is being set by older vessels which require higher freight rates in order to be profitable. The market's sensitivity to the balance between supply and demand explains why freight rates tend to follow a long trough periods which are sporadically reverted by short periods of very high rates. (Stopford)

Graph number 2 is the short run supply curve coupled with the short run demand curve, which together create short run adjustment:

Graph #2:

Source: Martin Stopford, Martime Economics 2^nd Ed.

The volatility of the charter market has been known to turn shipowners hair white overnight. Operating costs are relatively fixed in the shipping industry, consequently layup may save some money but not enough to withstand an extended trough in freight rate levels. That is why only the adept owner survives the long droughts and flourishes in the short grace periods the market has to offer.

IV-Grain as a Commodity

Grain- The Basics:

The importance of grains in the human diet is primordial. From the earliest times its functions have been two-fold: human food and for feeding livestock. Many different forms of grain exist which are differentiated by their climactic and soil requirements, as well as their nutritional value. From the time when grains were first utilized to their modern day counterparts which are genetically enhanced, there has been no clear cut definition as to which grains are consumed by humans and which are fed to animals. Johnson's Dictionary defined oats in the eighteenth century as a ‘grain which in England is generally given to horses, but in Scotland it supports people' (Atkins M., 123).

Wheat and rice are generally identified as the most important food grains, whilst maize[14], sorghum, and barley are categorized as the most important feed grains. The three latter grains are occasionally grouped with rye and millet, and known as coarse grains. The rule of thumb is that grains fed to animals are those which have the lowest protein content; however, wheat of a lower quality is fed to animals in Europe and the ex-soviet socialist republics, and corn and millet are staple food in many regions of the world. (Atkins M.)

It does not matter which grain is used, as they are all crucial in the human diet, consequently governments intervene heavily in the grain markets. The purpose behind such heavy government intervention is to stabilize or raise the incomes of grain farmers, and to ensure that consumer food prices are reasonably low and stable. To accomplish this governments must maintain a difficult balance, thus their response varies according to the relative strength of the political forces backing the producer or consumer groups. In most cases it’s the producers who pay the price when their product is valued at lower rates than expected. Such agricultural policies are most commonly practiced in the United States and Western Europe. In Europe agricultural subsidies under the Common Agricultural Policy, have been the cause of severe debates and an obstacle in the development of the European Union (EU). (Atkins W.)

The governments intervention in the grains market distorts prices hence a large proportion of the world's grain is produced and consumed at prices set by governments bearing a tenuous relationship to the price of freely traded grains. However, the sheer magnitude of the freely traded grains in the world market allows it to continue to play an extremely important role to many of the world's farmers and consumers of grains.

Seaborne Grain Trade:

Grain is considered one of the major dry bulk cargoes together with coal, iron ore, bauxite & alumina, and phosphate. Of these major bulk trades, grain is different in both economic and shipping terms. Whereas, iron ore and coal are part of a carefully structured industrial operation, grain is an agricultural commodity[15], seasonal and subject to vagaries which make its trade in both volume and route irregular. In appendix C-1[16] one can find a table which indicates the amount of trade the five major bulk trades have followed for the past ten years. What is clearly noticeable is the inconsistency of the grain trade. In 1992 there was an all time high of 208 mt, falling to 184 million tons in 1994, and raising again above two hundred million tons in 1997 to 203 mt (Fearnleys, 5). The inconsistency of the grain trade makes for the optimization of the trade extremely difficult, as planning is almost impossible. Consequently the grain trade depends heavily on general-purpose tonnage drawn from the charter market.

In 1998, grain trade was 196 mt and in 1999 it rose to 210 mt. As pointed out earlier, grain is used for both human food and as animal feedstuff in the production of meat. Wheat, arguably the most important food grain, accounted for about half of the grain trade during the last decade, mostly destined for human consumption; the other half consisted of maize, barley, and oilseeds, mainly for use as animal feedstuff. By commodity, in 1998 the seaborne grain trade was wheat 81 mt, and coarse grains accounted for 115 mt. Thus the grain trade is more closely linked to meat production than to direct human food. (Fearnleys; Stopford 2nd ed.)

Though inconsistent in its quantity, seaborne grain trade has been on an upward trend for the last couple of decades. The rising trend is largely due to greater meat consumption fueled by higher income levels. A considerable amount of the grain trade is destined to meet harvest shortfalls and relieve famines, but the real volume is intended for feeding animals in industrial and industrializing countries, "where each unit of meat produced requires anything from five to fifteen units of animal feed" (Stopford, 323-2nd ed.).

The advent of economic success in developing countries, particularly the Asian Tigers and Eastern Europe, has generated a new pattern in the demand for grain imports. This is evidenced by the fall in the share of total imports from Europe and Japan. While both accounted for two-thirds of total grain imports in the 1960's, by 1995 their trade share had fallen to only 4 percent and 13 percent respectively. On the other hand, Asia (29 percent), South America (17 percent) and Africa (16 percent), have all become much more important (Stopford, 324-2nd ed.). (Atkin, M.)

The Grain Trade Model:

The grain trade depends on the typical supply/demand model. Food demand depends on income, population, prices, daily calorie intake and consumer tastes, while supply depends on land, yields, policies, prices and feed conversion efficiency (Stopford, 324-2nd ed.). Traditionally the focus of the grain markets is on supply disruptions, as these cause the largest movements in price, quantity shipped, and final destination. Demand side developments, however, should not be ignored.