ECONOMICS
OF SEA TRANSPORT & INTERNATIONAL TRADE (EST) 2006
OVERALL COMMENTS
This year’s Economics of Sea Transport & International Trade was fairly well done. It was pleasing to observe an increase in candidates attempting the paper with an above average performance across the board. Handwriting, which poised a massive problem last year, saw some improvement. Also noteworthy was the reduction in half- hearted attempts. The majority of the candidates attempted five questions. However, a number exhibited a lack of knowledge of current shipping industry news and international trading issues resulting in poor grades and in some cases, failure. Candidates are advised to keep abreast with current shipping news and international trade developments, as they are a sure way of securing marks.
Overall a fairly average year.
QUESTION 1 - WORLD’S WET TRADES
This was a one of the most popular questions but sadly misunderstood by many candidates who went to great lengths to describe the structure of the tanker market! Most candidates also exhibited a lack of knowledge of the other sectors of the seaborne commodity trades and naturally failed to comment on the growth of the sector thereby losing marks.
The question was about the structure of the tanker trades: the common types of cargo in these trades are crude oil and refined oil products, chemicals, wine, orange juice, vegetable and other food oils.
The chemical sea-borne trades consists of: Petroleum Products derived from organic chemicals, sulphuric acid and phosphoric acids derived from inorganic chemicals and vegetable oils, animal oils and bio Fuels
The increasing use of bio fuels in Europe and America is the main driving force behind the growth of this sector
QUESTION 2 - THE DEMAND FOR SHIPPING.
This was probably the most popular question , but again not adequately tackled. Candidates failed to make mention of the Marshal Rules that govern the elasticity of derived demand and therefore failed to secure maximum points.
Demand for shipping services is determined by a large number of factors the most important of which are: the Level of World Economic Activity particularly that of the OECD countries, the volume of sea-borne trade generated and its major components, distance over which cargo is moved, freight rates and other external factors.
Derived Demand. The concept of derived demand explains the relationship between the level of economic activity and the level of international sea-borne trade. Derived demand has a set of rules that relate to its elasticity. These rules known as the Marshal Rules after Marshall a 19th century English economist.
QUESTION 3 - FACTORS WHICH HAVE INFLUENCED THE FREIGHT MARKET.
This is a question that gave candidates the opportunity to show their understanding of current affairs and an application of theory to shipping practice. Well answered by candidates with sound theory and knowledge of market conditions.
Vital points include: Tonnage Supply, Choke Points, Bunker Prices, world commodity demand, levels of industrial production Seasonal pressures and market speculation
Choice of a relevant factor and explanation would have summed it all.
QUESTION 4 - ARGUMENTS IN DEFENCE OF LINER CONFERENCES
A topical and relatively straight- forward question. Lack of examination preparation and current affairs was responsible for low grades.
The question basically called for arguments in defence of conference lines, candidates personal opinion and supporting views.
QUESTION 5 – FLUCTUATION OF CRUDE OIL PRICES.
Candidates who attempted this question and had a good knowledge and understanding of theory and current affairs made a good account of themselves.
Fundamental Reasons: Increased economic growth, massive growth of several Asian economies such as China, India and increase in the demand for oil in the US.
Temporary Reasons: War in Iraq, hurricanes, market speculation and cold winter in northern hemisphere, limited refinery capacity and US foreign policy
QUESTION 6 – EFFECT OF HIGH DRY BULK FREIGHT RATES.
A popular question with relatively good answers and graph (see overleaf), provided well prepared candidates with lots to write about.
Effect of high freight rates on commodities suppliers.
Transport costs have the effect of raising the price of imported goods in the same way that a tariff does. In the case of international trade this would have the effect of making one source more attractive than another. One could therefore see the same commodity sourced from a region with a more competitive overall transport cost regime The lowering of the transport element in fact has the positive effect of simulating world trade as has been seen since the end of the second world war
QUESTION 7 INTRA – INDUSTRY AND INTER-INDUSTRY TRADE FLOWS
(Inter-industry = between different industries. Intra industry = between same industries)
A straight forward answer that required candidates to define the two concepts and an explanation of the economic theories that support them and the mention and explanation of the rise of multinationals, transfer pricing and tax differentials as it is no longer possible to explain all trade flows with just one economic model!
Two Traditional explanations of Trade Flows: both argue that trade flows are driven by relative costs only. Comparative Advantage: Inter Industry, specialisation. Absolute Advantage: flawed theory
QUESTION 8 PROPOSED EXPANSION OF PANAMA CANAL.
A topical question, right from shipping and international news, attempted by a large number of candidates. For those with a good knowledge of international trade and shipping news this was an opportunity to impress.
Panama canal is a vital link between US East coast and Asia and indeed International Shipping community. The canal contributes about 10 % of service income to the Panamanian economy, so it is a vital sector to Panama.
At the time of its completion the canal locks were able to accommodate any ship in the world, that is no longer the case, many ships are too large to fit through the canal, the number of post panamax vessels is increasing
Estimates suggest that 30 % of the global fleet is projected to be post panamax size by 2020. The canal needs to take this into account in order to remain in business
Without expansion the canal would lose its economic importance to shipping.
Global shipping trends suggest increasing demand for canal services
Private sector investment at both ends of the canal are strong indications that the canal is poised to continue to be a vital all weather route for Asia and the US in particular and global shipping and trade generally
With the canal’s partners such as the port of New York and New Jersey pushing ahead with expansion to cater for larger vessels, it is in the economic interests of the canal to follow suit
CONCLUSION
Given the increasing number of candidates taking the Economics for Sea Transport and International Trade examinations there is the need to emphasise that application of theory to practice and a keen appreciation of current shipping news and events are critical success factors in this examination as well as thorough and adequate preparation.
Candidates are also advised to present their answers in a professional manner and to read questions thoroughly before putting their ideas to paper. Start with an introduction, support the answer with solid theory, practice and relevant graph where relevant and finish the work with a sound conclusion.
As current and future shipping and international trade practitioners, the need to keep abreast with news and events in the shipping and international trade arena cannot be over emphasised. So read and research!
