The Spot Market

When goods are in demand in one area and there is an abundant supply in another area, the goods may be shipped from the area of abundance to where there is demand.  That transport is often referred to as “trade”.  When the distance is great and there is a waterway available, the least cost option is often to load the cargo aboard a ship and sail to the destination for unloading.

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The limiting factors to trade are the number of ships at the shipping port or in the fleet as a whole, the amount of cargo space in each ship, the distance to be traveled to deliver the cargo, and the cost (not the price just yet) to travel between ports.  Let’s examine each factor:

Available capacity at port of departure, along with ships expected to arrive in a short time frame, often determines spot market pricing.  If there are an abundance of ships to choose from, then charterers have negotiating power and prices drop.  If the number of transport vessels is low relative to shipping volumes, spot market prices tend to be bid higher in order to secure a vessel.  Note that this is generally localized, as it takes awhile to steam to ports that have insufficient supply of transport vessels.  This is why fixings are reported for specific routes

Voyage Costs

Let’s consider that costs of a voyage vary based on several factors.  Crew costs are relatively steady and change over time, but don’t quickly change so will not be in the forefront of a discussion on costs.  The major costs of a ship operator are fuel and vessel lease costs.  The vessel lease costs will be defined by contract with the owner of the vessel.  Each lease is structured differently and has a significant effect on the business model and profitability attained.

Fuel costs can be derived from two factors.  The first factor is the price paid for bunker fuel.  Bunker fuel prices vary with the price of crude and refined and recycled petroleum products.  As prices go up and down, the costs to operate the vessels also rise and fall.

The second factor in fuel costs is the rate at which a vessels travels.  All vessels have an efficient rate of travel, in terms of their rate of fuel consumption.  Running the vessel at a high rate of speed tends to burn fuel at an alarming rate and isn’t cost effective when measuring fuel burned / distance traveled.  When fuel prices climb excessively, operators tend to reduce the speed of their vessels to save on operating expense.  While it takes longer to reach their final destination and therefore they have higher crew expenses for that trip, the savings on fuel will outweigh the higher crew costs.  It should be noted that each vessel carries an average of 3 – 6 months of bunker fuel, and doesn’t have to refuel when costs appear to be high locally.

Another factor to consider is the amount being paid to deliver the cargo.  If the amount is extremely high, and demand is expected to stay high, then it may be better to pay the additional fuel expenses in order to secure another contract as quickly as possible to maximize profits while spot rates are particularly high.  Each ship captain has to weigh the advantage of a quick trip and securing another contract versus the operating costs of the voyage.