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Freight Rate Mechanism

In: Shipping and Logistics Management

Author

Listed:
  • Y. H. Venus Lun

    (Logistics and Supply Chain MultiTech R&D Centre)

  • Kee-hung Lai

    (The Hong Kong Polytechnic University)

  • T. C. Edwin Cheng

    (The Hong Kong Polytechnic University)

  • Dong Yang

    (The Hong Kong Polytechnic University)

Abstract

This chapter analyses the freight rate mechanism in the shipping market. Sea transport is a derived demand where shipping demand occurs as a result of seaborne trade. The demand determinants affecting sea transport include the world economy, seaborne commodity trade, average haul, random shocks, and transport costs. On the other hand, determinants for shipping supply are fleet capacity and operational efficiency. The shipping supply function shows the quantity of shipping services by sea transport carriers that would be offered at each level of the freight rate, whereas the shipping demand function shows how shippers adjust their demand requirements to changes in freight rates. In the shipping market, the supply and demand curves intersect at the equilibrium price, where both carriers and shippers have reached a mutually acceptable freight rate. Furthermore, the concept of the “shipping cycle” is introduced in this chapter. A shipping cycle starts with a shortage of ships followed by increases in freight rates, which in turn stimulates excessive ordering of new ships. The delivery of new ships leads to more supply in shipping capacity. The shipping cycle is a competitive process in which supply and demand interact to determine freight rates.

Suggested Citation

  • Y. H. Venus Lun & Kee-hung Lai & T. C. Edwin Cheng & Dong Yang, 2023. "Freight Rate Mechanism," Springer Books, in: Shipping and Logistics Management, edition 2, chapter 0, pages 21-37, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-26090-2_2
    DOI: 10.1007/978-3-031-26090-2_2
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