Political Events and Shipping Demand Essay

Introduction Modern shipping is the life-blood of the world; without it, much of the demand for imports and exports would not be met. In 2006, world seaborne trade was estimated to have reached 30,686 billion ton-miles, having grown by 5. 5% over the previous year. Despite the prevalence of air transport, up to 90% of world trade is carried over the oceans in humble ships. The demand for seaborne trade is driven primarily by the world economy; various industries produce the goods that need to reach different parts of the world. In its most recent World Economic Outlook , the International Monetary Fund (IMF) forecasted global growth of 3. per cent for the rest of 2008, lower by 0. 2 per cent from the previous month’s estimate. In spite of the dip, the world economy is still growing annually, led by the emerging markets that are hungry for resources to fuel their growth. Beyond the economy, there are several other factors that determine demand for shipping. This paper seeks to evaluate the role of political events and its impact. In addition, it seeks to look into which commodity is most affected by such incidents. In his book, Maritime Economics, Martin Stopford writes that ‘no discussion of sea transport demand would be complete without reference to the impact of politics’. In the following paragraphs, this paper will address the main types of events that affect shipping demand both positively and adversely. 2. 0Political events that have affected shipping demand the most 2. 1Opening-up of the Chinese economy The accession of China into the ranks of the World Trade Organization (WTO) and Beijing winning the bid to host the Olympics in 2001 were events that had large political motivations and caused a tremendous rise in demand for shipping. Since then, China’s economy has seen astronomical growth. In order to fuel this development, the country has increased both its imports and exports in almost every industry. This has taken the world by storm as countries the world over compete to feed and fuel the world’s most populous country. Hence, seaborne trade and demand for shipping worldwide has been skyrocketing as a result of China’s booming economy. 2. 2War and the economic embargoes Conversely, war and economic embargoes and sanctions are the leading cause of a drop in maritime activity. In broad terms, the hostilities in the Middle-East region have led to disruptions in movements of oil shipments to the developed world. In the 1950s, the Suez Crisis between Britain, France and Israel against Egypt, led to the diversion of ships around the Cape of Good Hope to avoid the tensions. Two decades later on 17 October 1973, the ongoing Yam Kippur War caused the Organization of Arab Petroleum Exporting Countries to stop shipping oil to nations that supported Israel’s war efforts. The impact of this embargo on shipping was the collapse of the oil tanker market and led to a series of recessions and periods of high inflation that persisted until the 1980s. Other examples would include the Korean War in 1950 and the Gulf War in the early 1990s. . 0Commodities affected Crude oil accounted for 26. 9 per cent of total goods loaded in 2006. Due to the sheer quantity of oil being shipped worldwide, any political event jeopardizing seaborne trade would usually entail oil shipments being affected. This is because the resource is abundant in only certain parts of the world; the Middle-East is one such region that is plagued with rogue political regimes and instability. In the above-mentioned events in the region, the hostilities resulted in disruptions to the oil trade and consequently, oil price. This would be discussed in the section on Iran. Another sector that would be affected would be the metal industry trades and in particular, that of iron ore. Western Australia and Brazil are major exporters of iron ore to growing markets like China which need it for its continued development. 4. 0Opening of China’s economy Since the 1970s, China has been gradually introducing economic reforms and providing enterprises with autonomy. However, it was only in the last 2 decades that the world’s 2nd largest economy has opened itself up to greater foreign investment and world trade. This was carried out through the relaxation of import and export controls and trade reforms in the form of reduced tariffs. All this led to a significant milestone for China and the world – its ascension into the ranks of the WTO on 11 December 2001. In addition, Beijing won the bid to host the 2008 Olympics that same year. These 2 events have set the stage for China’s rapid development. In the following paragraphs, this paper will explain its effects on the world and global trade and shipping. Based on a working paper by the IMF written in 2004, the international impact of China’s ascension into the WTO is far reaching. Firstly, sustaining the growth of China would provide benefits to its trading partners; beyond the processing of trade, there has been significant growth in imports for domestic use and outbound tourism. Secondly, China’s insatiable thirst for energy and metal imports have since fuelled the rapid rise in imports of such commodities. Lastly, multinational companies are tapping into the large domestic market especially with the freeing up of the country’s banking sector. This paper believes that China’s meteoric rise over the last two decades and more significantly, since the dawn of the new millennia, have created a surge in demand for world seaborne trade and shipping. 4. 1China’s role in transforming Western Australia and beyond As a result of China’s booming steel industry, Australian exports of iron ore to China reached more than A$4 billion last year. BHP Billiton and Rio Tinto, two of the world’s largest resource companies, share the metal-rich Pilbara of Western Australia to feed China’s demand. The latter is hoping to double its 2007 iron-ore production in four years. This mining boom in the traditionally ‘sleepy’ side of Australia spells good news for its economy and residents. In an interview with the Economist , Eric Ripper, finance minister of Western Australia, said that his state has been fighting to bring in a A$9 million surplus seven years ago. Last year, the country’s largest state (by land area) grew by 6. 3%, twice that of the entire country. In addition, it now boasts a healthy surplus of A$2 billion. Besides iron ore, China has a tremendous hunger for other natural resources. All across the world, Chinese firms are finding new sources for crude oil, natural gas, metal and coal. Ships have been queuing off Newcastle in Australia to load cargo bound for China; at one point in June 2007, the queue was 79 ships long . In short, the rise in import demand by the Mainland has helped countries in Latin America and Africa grow their own economy. Another country that has seen business grow is the shipping giant of Greece. 60 per cent of China’s imports of raw materials and energy are carried on the backs of Greek ships. Greek ship owners want to capitalize and many have made orders to build ships in China which has caused the order books of the large manufacturers to bulge and many smaller players to join in the fray. . 2China’s effect on shipping demand In terms of shipping, China is a force to be reckoned with. Just 2 years after joining the WTO, China handled 48 million twenty-foot equivalent units (TEU) in 2003, an increase of 11 million TEUs the year before. This made the country the largest container shipping market for the first time with both Sh anghai and Shenzhen joining the mega-port league of over 10 million TEUs throughputs . On two of the most important container trades from Asia to North America and Europe, mainland China and Hong Kong corner 60 per cent of the market share. More recently, with an increasing portion of China’s imports of oil products coming from Latin America and West Africa, ton-miles demanded associated with this trade has increased. Referring back to the example of Australian iron ore, China’s high volumes mean that Chinese companies are sourcing for metals from further abroad such as Brazil. In addition, China has always been a net exporter of coal. However, in the last few years, China has become a net importer; this forces its neighbors to source for coal from further afield. All these factors serve to increase ton-miles demanded. It is important to note that though ton-miles demanded may increase, actual volume may remain unchanged. 5. 0Iran and the Strait of Hormuz The on-going tension between Israel, the United States of America (USA) and Iran over its suspected nuclear-weapons programme has brought about fluctuations in oil prices in recent times. Several factors have made this all the more pressing in the last few months. These include a weakening Bush administration, Iran’s continued uranium-enrichment programme, a lackluster Western diplomatic approach to handling the situation and Israel’s jitters have raised the idea of a possible war in the Middle-East. In retaliation to suggestions of a military strike, Iran has threatened to cut oil exports and close the Strait of Hormuz . This strait’s importance lies in that it is the only viable path for much of the oil from the gulf to reach the rest of the world. By comparison, the Suez and Panama Canals are passages that have alternative albeit costlier, routes. A horseshoe-shaped body of water that stretches between Iran and the northern tip of Oman, the Strait is the only passage in and out of the Gulf. Every day, around 50 tankers carry between 4 million and 17 million barrels of oil and oil products through the 180km-long strait – roughly 40 per cent of the world’s internationally traded supplies . If Iran were able to close this waterway by use of anti-ship missiles, only 3 million barrels would be able to be diverted via the Red Sea. Thus, oil and oil product shipment would be greatly hit worldwide. In addition to oil, Jebel Ali, a port-town in the United Arab Emir ates, handles about half of all maritime trade between Europe and Asia. Currently, it is the largest port between Rotterdam and Singapore. Large portions of what enters some of these free zones in the gulf are transshipped to other parts of the world. Experts who have monitored the Suez Crisis in the 1950s and how it led to the Six-Day War understand that such an action from Iran would result in the Middle-East suffering economically. On a larger scale, the world would be faced with supply cuts in almost all goods. 6. 0Maritime terrorism Another threat to the maritime industry is terrorism at sea. Terrorism is broadly defined as attacks to create fear and often have an underlying belief that the terrorists want to spread. Since the world-changing September 11th attacks on the United States of America in 2001, many other acts of violence have been carried out with ships as targets. An example would be the infamous Al-Qaeda attack on the French oil tanker, the Limburg, in Yemen in 2002. Such attacks create not only a sense of uncertainty in the shipping industry, but have raised the costs of shipping as well. In the case of the Limburg, the insurance payout reached US$70 million . This example highlights the trend of insurance companies charging higher insurance premiums to shipping companies whose ships sail through more ‘dangerous’ waters. As a result, shipping cost has risen over the years and this has led to a dip in demand. Amongst the main trunk routes that ships often ply, the greatest number of such incidents happens in the South China Sea and the Straits of Malacca. These acts of terror also do not differentiate between the types of ships they target; almost everything from boats to tankers has been looted for their cargo and entire ships stolen. This paper would like to caution that the distinction between maritime terrorism and piracy is blurring. 7. 0Conclusion This paper has looked at examples of how political events have caused a stir in the maritime world. This is largely a result of the correlation between world trade, shipping and movement of commodities. Such incidents can spark both a decrease as well as an increase in demand for shipping. In the case of China’s reforms towards a more open economy, trade between this country and the rest of the world has increased dramatically. This has spurred the shipping industry not just in terms of seaborne trade but in other forms such as ports and shipbuilding. Beyond its shores, it has helped to lift the economies of countries that enjoy a high level of trade with China. On the other hand, the tensions in the Middle-East have brought about uncertainty throughout the world over oil prices and world trade. The strategic position of the most hostile nations in the region has given them leverage over the Western world in terms of threats to block the major waterway, the Strait of Hormuz. Lastly, the concerns over maritime safety and rising insurance costs to cover ships and their owners have caused a dip in demand for shipping. This is because of the higher costs now associated with shipping; it is intuitive yet unfortunate that the world’s major shipping routes are also the most dangerous.