Problem

Instability of ocean freight rates

Nature:
Very frequent and sharp fluctuations in liner freight rates cause grave concern among shippers, particularly in developing countries, who in the last analysis bear the brunt. With liner freight rates changing at frequent intervals, shippers have increasingly found that one of the supposed advantages of the conference system, namely stability of freight rates, has hardly existed. Bunker costs, combined with general inflationary trends, have contributed to a rise in liner freight rates, and another important element is the demand conditions which have generally characterized cargo markets. Because of the peculiar structure of the liner shipping industry, competition is severely limited both in extent and effect, and it is not possible for those concerned with the use of its services to remain inactive and to trust that competition will reduce the prices charged for those services to a reasonable margin above cost levels. Nor is it possible to rely upon pressure from competitors and consumers to force the managements of shipowning enterprises to increase efficiency so that cost levels are reduced to the minimum. Furthermore, the inefficiencies to which excessive costs are attributable are often beyond the control of individual shipping managements. In the liner sector of shipping there is no price competition between shipowners who are members of a shipping conference, and competition between shipping conferences and non-conference lines is likely to be diminished, if not eliminated entirely, by the prevailing systems of loyalty arrangements which bind shippers to utilize conference vessels.

The shippers who utilize liner services are usually numerous, often widely dispersed, and on shipping matters they usually lack any form of commercial relation with each other - since, unlike the shipowners, they are not in business primarily to deal with shipping. Accordingly, their bargaining power is weak compared with that of the shipowners. Additional problems arise within the liner sector because many shippers do not themselves produce, or own, the goods which they ship, and so long as the level of freight rates is not actually restricting the flow of trade, they have no interest in resisting freight rate increases. Higher freight rates in fact increase the profits of middlemen merchants whose remuneration is based on a percentage of the CIF value of the goods they handle. In a developing country they can simply pass on the freight increases by increasing the market prices of imported consumer goods, and by decreasing the FOB prices which they pay to the producers of export goods. Similarly, international merchant houses which have affiliations with shipping companies may be more concerned with the vessels in which their goods are shipped than with the costs of transport. For these reasons, shippers cannot be expected to exert the type of user pressure that would be needed for the purpose of resisting freight increases and inducing shipowners to maximize their efficiency.

Related Problems:
Substandard shipping vessels
Problem Type:
E: Emanations of other problems
Date of last update
01.01.2000 – 00:00 CET