Maritime transport has long played a very important and decisive role in the trade and transportation of goods from one part to another. Nowadays, about 80% (this is according to UNCTAD source; https://unctad.org/topic/transport-and-trade-logistics/review-of-maritime-transport) of the goods are transported by sea, especially when the volume of goods is large and the distance is long. The importance of shipping is most evident when there is no direct land connection between the point of origin and the destination.
Accordingly, the cost of shipping can be one of the most important factors affecting the supply of goods in the world and its cost to the final consumer. Studying this issue can help manufacturers, distributors, and end-users to have an idea of the cost of production, distribution, and consumption.
For example, if the manufacturer has an initial estimate of the shipping cost of the purchased goods, he can estimate the cost of the raw materials needed to be imported from abroad (direct impact) as well as the impact of these costs on the price of materials that will provide from within the country (indirect impact). This initial estimate helps him estimate the cost of producing the product and consider it for marketing.
The cost of shipping itself is influenced by factors, and the purpose of this article is to introduce the factors that affect the cost of shipping around the world, the future, and its prospects to see where shipping costs will go in the future.
In recent months, the cost of shipping has fluctuated so much that it has become one of the most important concerns of merchants around the world. Suppose you have a product and it is difficult to market it to enter a new market. Nevertheless, you have overcome all difficulties and you have reached a final agreement with the customer on the request for the product for the destination country. The customer has asked you to deliver the goods to him in the destination country, so you must quote the shipping price plus the FOB price of the goods and announce the final price to the customer. This is where the importance of estimating shipping costs comes into play.
Now suppose you calculate the cost of goods to the destination country based on the prices available for shipping and notify the customer. The customer asks you to deliver a certain amount of goods at a specific time (for example, two months) in the destination country. It takes less than two weeks for the ship to carry the goods from the country of origin to the country of destination. How do you manage your risk if you do not have an estimate of the cost of shipping for the agreed period? Especially in this period when the cost of shipping is increasing.
Changes in shipping costs will also be influenced by several factors familiarity with these factors can be the key to better business management. The following is a description of some of the most important factors affecting the cost of shipping.
One of the most important factors affecting the cost of ships and therefore the cost of freight is the cost of fuel. Fuel costs are directly affected by world oil prices, so all factors that directly affect oil prices, including political, social, and security crises in oil-rich countries and their impact on oil production and supply by them, indirectly Affect the price of freight. According to global estimates, the world oil price has recently started to rise, so the price of Brent oil has risen again to $ 90 per barrel.
Currently, the most important resistance to rising oil prices is $ 100. It is expected that if the price of oil reaches $ 100, it will fall for a while and then it will either start a downward trend or try again to break the resistance of $ 100. If the very important resistance of $ 100 fails, the world will see a sharp rise in oil prices and, consequently, in the price of shipping.
This is the sixth time since the discovery of oil that the price of oil is approaching $ 100, but so far it has either not been able to pass it or, if it has passed, it has not been able to stay above it for long. The price of oil may react similarly this time, reaching the $ 100 range, and gradually decreasing its price. This reduction can have a positive effect on freight costs.
On the other hand, it should be remembered that the world is engaged in an erosive war in Yemen. The escalation of the war into Saudi and UAE territory and the consequent danger to their oil facilities, such as the targeting of fuel tanks and Abu Dhabi airport last week, could reduce the production of oil in these two countries as well as in neighboring oil-rich countries. And subsequently, these developments will lead to an increase in oil prices above $ 100.
The Black Sea is experiencing a similar situation. Given the fact that in recent days, Russian military movements on the Ukrainian border have increased again, a military conflict is likely. The continuation of this unrest in the Black Sea will have unpleasant consequences for the oil market and could change its price.
Occurrences of such events can be a very important catalyst for the rise in oil prices, given the impact of oil prices (directly and indirectly) on changes in freight costs. So, monitoring the political and security situation in the world by traders for the period ahead, especially the current situation in the oil producer countries is highly recommended.
Demand is a function of social events in different parts of the world.
When the coronavirus was first reported in January 2020, no one would have thought that the virus could have such an impact on the global economy and global supply and demand. After the discovery of Covid-19, the world faced a widespread epidemic of the virus, as a result of which most countries imposed strict rules for the movement of people in the community so that some countries entered long-term quarantine, telecommuting made sense, and many companies preferred to be able to continue to operate and provide services in the shadow of quarantine, carry out telecommuting for employees. As a result of quarantine and closure of some factories and economic activities that could not adapt to the new conditions, such as the tourism industry, cinema, etc., the consumption of goods was reduced.
During that period, the cost of freight also decreased. Regardless of the impact of oil prices, declining demand for goods means declining demand for shipping, which has had a direct impact on prices.
After the corona vaccine was developed and widely injected by people around the world, economic activities gradually increased. The return of economic activities and the lifting of quarantine led to an increase in the consumption of goods, which prepared the conditions for an increase in demand for shipping, which increased the cost of freight.
The world is currently struggling with new strains of Covid-19, but fortunately, the situation is not as difficult as it was in early 2020, and unless a very dangerous and uncontrollable strain appears (the latest NeoCov strain discovered), it is predicted that vaccination will be extended globally, and the level of economic activities will also grow and affected the growth of demand for shipping.
In other words, a decrease in global demand can reduce the cost of shipping and increase it will increase the demand for shipping and consequently its price. But the question is which factor has the greatest impact on shipping? Fuel or demand? We will answer this and similar questions at the end of this article.
The most important factors affecting the demand for shipping are:
III. Seasonal demand: Seasonal demand for a crop such as fertilizer can severely affect maritime transport in an area. Due to the not evenly distribution of ships in different parts of the world, in a short period, the seasonal increase in demand for shipping can temporarily affect prices.
The number of ships in different regions is not evenly distributed. Some countries are attracting maritime fleets due to their economic-export diversity, which makes it difficult for many countries to supply ships to transport goods.
Increasing demand for shipping in these areas greatly increases the cost of shipping. If your business is in a country with shipping restrictions, a small increase in demand can increase your shipping costs.
Another determining factor that can affect the existing capacity in the region is the limitation of ports of origin or destination, which limits the number of ships that can be used and moored. For example, in the port of Tartus, there is a draught limit of 8.5 meters. This restriction prevents ships larger than 20,000 tons from berthing at the port, thus reducing the number of ships that can be used for loading.
Geopolitical events that go back to the geography of the regions and the political relations between the countries of the world or the countries of a region will also have a great impact on the cost of shipping and its changes. The onset of a crisis in an area can severely restrict the entry of ships into that area. As a result of this restriction on entry and the resulting risk, the cost and risk to shipowners will increase, and as a result, they will demand higher prices for the services they want to provide.
For example, as the risk for ships increases as a result of military conflict or as the risks of pirate attacks on merchant ships increase, insurance companies will charge more to cover the ship. This can have a direct impact on both the shipowner and the trader.
It should be noted first we are not talking about the price of shipping, but its changes. Why this is important? Assume that the shipping cost remains unchanged for some time. This lack of change is good for everyone because in a stable situation, everyone knows how much it costs and it is easy to estimate. But changing prices, whether for a reduction or an increase, can be annoying for everyone. Because it is very difficult to trade in an unstable market.
Therefore, in this article, we decided to describe the factors affecting the shipping price as much as possible, so that by recognizing them, a preliminary estimate of changes in freight prices in different periods is possible.
Given the circumstances ahead, it should be noted that the price of fuel is certainly one of the most influential factors on the cost of shipping, but solving this puzzle is not as easy as solving a single unknown mathematical equation, this equation has several unknowns. The coefficient of fuel in this equation is greater than the coefficients of other factors, but its effect will be greater if the amount of change is also large.
Let me illustrate the point with an example. Imagine the global price of fuel has not changed much. Suddenly, the export of a raw material that is produced and supplied by 10 countries in the world is stopped by one of its largest producers. It is one of the largest producers of supplied raw materials, which supplies a significant amount of the needs of neighboring countries. After the cessation of supply by this country, neighboring countries turn to other producers to meet their essential needs of this raw material – based on production capacity and geographical distance.
We assume that one of these producers is a small country with high production potential that can meet a significant percentage of the demand of these countries, but due to limited exports from its origin, the number of merchant ships that sailed to the ports of the country was very small. Now, with increasing demand and greed to enter new markets, the merchants of this country were thinking of competing to charter ships and send raw materials to consuming countries. Here begins a very tough competition between the merchants of the mentioned country so that they are willing to pay much higher prices than the reasonable price. Prices are rising sharply, shipowners’ expectations are rising and it is becoming difficult for everyone to send goods from the country.
We see that in a situation where fuel prices have not changed, the demand factor alone has created great turmoil in the maritime transport market for that country. The conclusion is that in each stage, the effect of different factors should be examined and analyzed according to the existing conditions.
Based on what has been said, our forecast for the future freight costs for the whole world will be price stability, and some are willing for their reduction due to the stability and reduction of oil prices. Due to other factors, this conclusion may not be true for all regions of the world, but the whole world will see stability and even lower shipping prices. Certainly, prices will not return to their previous levels during the Corona epidemic.
