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The control of shipping in Canadian seaborne bulk trades Aandahl, C. Loren 1980

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THE CONTROL OF SHIPPING IN CANADIAN SEABORNE BULK TRADES by C. LOREN AANDAHL B.A.,  .  Greenville College, 1974  A THESIS SUBMITTED IN" PARTIAL FULFILLMENT OF :  THE REQUIREMENTS FOR THE\DEGREE OF MASTER OF SCIENCE /  in THE FACULTY OF GRADUATE STUDIES (Faculty of Commerce and Business Administration)  We accept this thesis as conforming to the required standard  THE UNIVERSITY.OF BRITISH COLUMBIA March, 1980 (c) C. Loren Aandahl, 1980  >E-6  In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of B r i t i s h Columbia, I agree that the Library shall make i t freely available for reference and study. I further agree that permission for extensive copying of this  thesis  for scholarly purposes may be granted by the Head of my Department or by his representatives.  It is understood that copying or publication  of this thesis for financial gain shall not be allowed without my written permission.  Department nf  QfQ^W^^  The University of B r i t i s h Columbia 2075 Wesbrook Place Vancouver, Canada V6T 1W5  BP  75-51  I  E  ii. Abstract As part of the negotiation of a trade contract, commercial buyers and s e l l e r s of goods in domestic and international trade must agree on shipment terms.  Shipment terms f i x the r e s p o n s i b i l i t y for the costs and  risks of carriage between the two p a r t i e s . The basic objective of this thesis is to describe the factors which influence the decision of Canadian trading firms to exercise responsib i l i t y over the ocean shipping arrangements in their trades. two secondary objectives.  There are  The f i r s t is to describe some of the advan-  tages and disadvantages associated with the control of shipping by Canadian trading firms.  The second is to provide some indication regard-  ing the extent of Canadian p a r t i c i p a t i o n in the control of shipping in Canadian ocean borne trade. The scope of the thesis is r e s t r i c t e d to dry bulk commodity trades u t i l i z i n g deep-sea shipping.  These commodities account for nearly 90  per cent of Canadian exports and together with crude petroleum account for nearly the same percentage of imports. Many factors influence the control of shipping in Canadian deep sea trades.  The very f i r s t factor which must be analyzed is whether the  Canadian trading firm has the option to do so.  In a free market s i t u a -  t i o n , trade negotiations between two parties are conducted on a commercial basis with a minimum of interference from government authorities.  This applies to the control of shipping as well as to other  aspects of trade.  However, Canadians trade with many countries where  governments do exercise a considerable deal of influence in trading and shipping matters.  Trade may be conducted with foreign government  i i i. trading agencies who i n s i s t on c o n t r o l l i n g shipment.  In a d d i t i o n ,  foreign governments may have imposed direct l e g i s l a t i o n , commonly referred to as f l a g discrimination, which reserves a certain proportion of trade or type of cargo for national c a r r i e r s .  These can favour control by  the foreign trading counterpart. Canadian trading firms may also not have the option to participate in the control of shipping in trade with firms which is conducted on a commercial basis.  The r e l a t i v e size and bargaining power of the other  party may be such that the Canadian trader has no chance of pursuing the issue. If the control of shipping i s a viable option for a Canadian trader, the intensity with which the opportunity is pursued is b a s i c a l l y the tradeoff between benefits and r i s k s . several ways through  A trading firm can benefit in  the control of shipment.  If cost savings can be  achieved through Canadian c o n t r o l , the net back to the trader can be improved or the commodity may be more competitively priced.  Cost savings  may be achieved through chartering p o l i c i e s , through economies of scale in shipment s i z e , by reducing port time and costs and by better coordinating the shore-ship  interface.  The trading firm may also r e a l i z e marketing advantages by c o n t r o l l ing shipment.  These relate p r i n c i p a l l y to the service aspect.  The  Canadian trader may make l i f e easier for the foreign party by assuming r e s p o n s i b i l i t y for the shipping arrangements. Risk i s a v i t a l consideration which strongly influences the policy of a firm with respect to the control of shipping.  Involvement in ocean  shipping entails some risks a firm must deal with.  Common risks associ-  ated with shipping include rate f l u c t u a t i o n s , a v a i l a b i l i t y of shipping  and demurrage. The negotiation of the terms of shipment is a v i t a l part of every trade contract.  The individual  trading firm must weigh in the balance  the benefits and risks of c o n t r o l l i n g shipment.  Evidence gathered in  the course of this thesis indicates that the position of most Canadian trading companies is well thought out in regard to the control of shippi When the option to control shipping is a v a i l a b l e , Canadian firms act in t h e i r own best i n t e r e s t s .  V.  TABLE OF CONTENTS •Page. Abstract  i i  L i s t of Tables  vi  L i s t of I l l u s t r a t i o n s  vii  Acknowledgements Chapter 1:  vi i i  The Influence of Cost Reduction Upon the Control of Shipping  ? . .  11  Chapter 2:  Marketing Influences on the Control of Shipping  ...  35  Chapter 4:  The Effect of P o l i t i c a l Constraints on the Control of Shipping The Control of Shipping and Institutional Policy: Two Case Studies  65  Summary and Conclusions  82  Chapter 5: Chapter 6: Bibliography  :  48  89  vi. TABLES Page Table 1.1:  Principal Dry Bulk Commodities Exported Through Vancouver in 1978  4  Table 1.2:  Major Terms of Shipment in Seaborne Trade  5  Table 2.1:  1978 Dry Bulk Carrier Costs  Table 2.2:  Delivered C . I . F .  Price Comparison for Two Shipping  Options. Table 2.3:  16  19  Multiple Seeds and Pellets Shipment to Japan Loaded on Vessel  'Ogden Tiber'  in Vancouver, Feburary 1979. .  Table 5.1:  Exports of Canadian Grain Products in 1977-78  Table 5.2:  Major Customers of Canadian Wheat and Barley in  Table 5.3:  1977-78 Canadian Bulk Commodity Exports to Japan in 1977 . . .  22 66  67. 75  Illustrations  I l l u s t r a t i o n 1: .  Trip and Time Charter Rate Variation 1947-78  viii. Acknowledgements My thanks and appreciation go to several people whose assistance made my thesis a r e a l i t y .  Dr. Trevor Heaver, my advisor, has helped  me with his knowledge of the shipping industry and ideas on the subject of Canadian control of shipping.  In addition, my thanks for his a s s i s t -  ance in arranging the financial funding which made my study possible. Dr. Herbert Drechsler's expertise in the international  minerals  trade was valuable in helping me gain an understanding of the commodity trader's point of view.  My appreciation goes to Dr. John Tap!in for  his interaction with me on the subject matter.  Special recognition i s  made of the f i f t y plus people in the shipping and trading f i e l d who were so generous with t h e i r ideas and time during the interview stage.  Many  thanks to Colleen Colclough for her typing. F i n a l l y , my thanks to Shesh for seeing this thesis through with me.  1. Chapter 1 INTRODUCTION As part of the negotiation of a trade contract, commercial buyers and s e l l e r s of goods in domestic and international trade must agree on shipment terms.  Shipment terms f i x the r e s p o n s i b i l i t y for the costs and  risks of carriage between the two p a r t i e s .  In international  seaborne  trade, the negotiation over shipment terms is usually the means by which the parties w i l l allocate r e s p o n s i b i l i t y for the arrangement and cost of ocean shipping.  The buyer and s e l l e r are normally responsible for the  arrangement of carriage in their respective countries.  However, ocean  shipping is the middle step of the international physical  distribution  process and both parties to the trade have the p o s s i b i l i t y of assuming r e s p o n s i b i l i t y over i t . Many firms are engaged in trading. a variety of commercial environments.  These companies are involved in Yet a l l must deal with the question  of f i x i n g r e s p o n s i b i l i t y for the carriage of their traded goods.  In  trades which u t i l i z e ocean shipping, this requires determining whether or not they w i l l arrange and control the ocean shipping. OBJECTIVE OF THE THESIS The basic objective of this thesis is to describe the factors which influence the decision of Canadian trading firms to exercise over the ocean shipping arrangements in t h e i r trades.  responsibility  From this analysis,  general p r i n c i p l e s w i l l be developed which are applicable over the wide range of commercial environments which apply to Canadian trading firms. There are two secondary objectives.  The f i r s t is to describe some  of the advantages and disadvantages associated with the control of shipping  2.  by Canadian trading firms.  The second is to provide some indication re-  garding the extent of Canadian participation in the control of shipping in Canadian ocean borne trade. SCOPE OF THE THESIS The research base for the thesis has been limited to a part of Canadian ocean borne trade.  This thesis w i l l analyze those commodities,  other than petroleum, which trade in s u f f i c i e n t volume to u t i l i z e  full  vessels or a large part of cargo capacity on vessels other than regularly scheduled,conference l i n e r s e r v i c e .  The shipping which i s u t i l i z e d for  these commodities is usually chartered.  These commodities largely  into the c l a s s i f i c a t i o n of dry bulk commodities.  fall  These .include iron  ore, c o a l , grain, forest products, sulphur, potash, bauxite, phosphate rock, copper concentrates and other assorted non ferrous ore concentrates.  Due to Canada's trade structure, most of these dry bulk commodi-  ties are exported.  Only bauxite and phosphate rock are imported into  Canada via ocean shipping. These bulk exports are usually transported in vessels that are not engaged in a regularly scheduled common c a r r i e r service between two points.  Rather, vessels which have been chartered off the world market  under a variety of contract terms are the principal carriers of these commodities. The main focus of this thesis i s the deep sea trade.  However, the  topics covered in this thesis are applicable to coastal and lake shipping': with the United States.  3. MAGNITUDE OF CANADIAN DRY BULK COMMODITY TRADE Canada ranks as the third largest exporter in the world of dry bulk commodities. trade.*  O v e r a l l , the country i s tenth in terms of world seaborne  In 1976, Canadian international waterborne t r a f f i c exceeded 180 2  m i l l i o n tons.  In that same year, deep sea exports t o t a l l e d nearly 80  m i l l i o n tons.  Ninety per cent of these deep sea exports were accounted 3  for by dry bulk commodities.  Crude o i l  is by far the largest single  oceanborne import commodity for Canada. Iron ore is the major Canadian dry bulk commodity exported.  In 1978,  4 35 m i l l i o n tons were exported.  A large percentage of t h i s ,  approaching  50 per cent, is shipped to the United States, mainly on the Great Lakes. The remaining amount i s exported primarily to Western European countries. Iron ore is mined in Quebec and Labrador regions of eastern Canada.  It  is shipped from the ports of Sept-Iles and Port Cartier on the northern shore of the St. Lawrence River. The second largest group of dry bulk commodities exported from Canada is grain and grain products. 5 21,702,000 metric tonnes. behind grain. were exported.  In the 1977-78 crop year, exports were Seaborne trade in forest products is close  In the peak year of 1973, over 18 m i l l i o n metric tonnes This peak level in 1973 was matched again in 1979.  Whereas  grain is exported from both coasts of Canada r e l a t i v e l y evenly, the forest products trade is dominated by exports from the province of B r i t i s h Columbia. Coal is another commodity exported in large volumes. the coal export trade in Canada was dormant.  The 1970 s saw rapid growth 1  in coal exports from the West Coast primarily to Japan. 15 m i l l i o n metric tonnes were exported.^  Prior to 1970,  In 1978, nearly  Growing offshore demand will con-  4. tinue to ensure that coal w i l l be one of Canada's major commodity exports. Sulphur and potash are two other dry bulk commodities exported in large volumes from Canada. port of Vancouver.  These are also shipped primarily through the  In 1978, they amounted to nearly 7 m i l l i o n metric tonnes.  The port of Vancouver is the largest tonnage port in Canada and is g second only to New York City in North America.  With the exception of  iron ore, Vancouver handles a sizeable proportion of Canada's seaborne dry bulk commodity trade.  In 1978, the port handled 45,210,000 metric  tonnes of cargo.  The seven principal commodities account for 33,197,000  metric t o n n e s . ^  Table 1.1 l i s t s these commodities and their tonnages in  1978. TABLE 1.1 PRINCIPAL DRY BULK COMMODITIES EXPORTED THROUGH VANCOUVER IN 1978 Coal Grain Sulphur Potash Lumber Pulp Copper Ores Source:  14,426 7,784 3,967 2,744 2,280 1,226 770  '000 metric tonnes  National Harbours Board, Port of Vancouver S t a t i s t i c s 1978. Vancouver: National Harbours Board, 1979.  Definition of Terms of Shipment The terms of shipment f i x the r e s p o n s i b i l i t y for the costs and risks of carriage between the two parties to a trade transaction.  Table 1.2.pre-  sents a summary of the four major terms of shipment in seaborne trades. The terms of shipment which are used in a trade transaction place the r e s p o n s i b i l i t y for arranging, c o n t r o l l i n g and paying for the various stages of carriage on both buyer and s e l l e r .  5. TABLE 1.2 MAJOR TERMS OF SHIPMENT IN SEABORNE TRADE Cost of Carriage Paid by FAS  Insurance arranged by  Property and Risk Passes From S e l l e r  Where Delivery Takes Place  Buyer  Buyer  Under ships hooks  When vessel is able and ready to load  Buyer  Buyer  When safely loaded  Over ships r a i l at port  Seller  Buyer  On tendering the B i l l of  -of.loading  Seller  Seller  j-  Free along side FOB Free on board C&F Cost & freight  adin  9  t  o  t  h  e  '  CIF buyer Cost, insurance & freight Source: A l a s t a i r Watson, The Finance of International Trade. London: The Institute of Banking, 1976  The terms of shipment which are used in a trade transaction place the r e s p o n s i b i l i t y for arranging, c o n t r o l l i n g and paying for the various stages of carriage on both buyer and s e l l e r . The two most common terms of shipment are f . o . b . and c . i . f .  In short,  the buyer arranges and pays the cost of ocean shipping under f . o . b . terms while the s e l l e r assumes this r e s p o n s i b i l i t y under c . i . f .  terms.  In  the following paragraphs, a partial description of the r e s p o n s i b i l i t i e s of buyer and s e l l e r under these terms in respect to the ocean shipping aspect is presented.  This detailed description is taken from Incoterms  1953, a book published by the International Chamber of Commerce in Paris which is the standard universal text on trade terms. Under f . o . b . terms, the s e l l e r assumes r e s p o n s i b i l i t y to: Deliver the goods on board the vessel named by the buyer, at the named port of shipment, in the manner customary at the port, at the date or within the period s t i p u l a t e d , and notify the buyer, without delay, that the goods have been delivered on board the v e s s e l . 1 1  6. Under f . o . b . terms, the buyer must: At his own expense, charter a vessel or reserve the necessary space on board a vessel and give the s e l l e r due notice of the name, loading birth of and delivery dates to the vessel. Bear a l l costs and risks of the goods from the time when they shall have e f f e c t i v e l y passed the ship's r a i l at the named port of shipment, and pay the price as provided in the c o n t r a c t J 2 When a s e l l e r trades on c . i . f .  terms, his r e s p o n s i b i l i t i e s with  respect to the shipping aspect is to: Contract on usual terms at his own expense for the carriage of the goods to the agreed port of destination by the usual route in a seagoing vessel (not being a s a i l i n g vessel) of the type normally used for the transport of goods and any charges unloading at the port of discharge which may be levied by regular shipping lines at the time and port of shipment. Load the goods at his own expense on board the vessel at the port of shipment and at the date or within the period of time fixed or, i f neither date nor time have been s t i p u l a t e d , within a reasonable time, and notify the buyer, without delay, that the goods have been loaded on board the v e s s e l J 3  Under c . i . f .  terms, the buyer must:  Receive the goods at the agreed port of destination and bear, with the exception of the freight and marine insurance, a l l costs and charges incurred in respect of the goods in the course of t h e i r t r a n s i t by sea until their a r r i v a l at the port of destination, as well as unloading costs, including lighterage and wharfage charges, unless such costs and charges shall have been included in the freight or collected by the steamship company at the time freight was paid. Bear a l l risks of the goods from the time when they shall have e f f e c t i v e l y passed the ship's r a i l at the port of shipment.  METHODOLOGY OF THE THESIS One objective of this thesis is to identify the factors which influence Canadian traders of dry bulk commodities to control the shipping arrangements of their trades.  In spite of the potential  importance for Canadians  of control over shipping arrangements, l i t t l e general information is a v a i l -  7. able on the subject. There is l i t t l e s p e c i f i c information relating to the p o l i c i e s of Canadian dry bulk commodity trading firms with respect to terms of shipment in published material.  In order to acquire s u f f i c i e n t  information  on the subject, an extensive interview program was undertaken with over sixty companies involved in dry bulk commodity seaborne trades.  The i n -  formation gathered centered on the nature of trades and on the terms of shipment used by the individual companies and the underlying reasons for using those terms.  The interview program canvassed the major firms  involved in the major Canadian dry bulk commodity trades as well as shipping companies and agents. Additional  information on shipping and the Canadian and worldwide  trading pattern of the major commodities was gathered from a wide range of sources.  This information was used to supplement and further develop  the ideas gathered during the interview process. As the subject matter was developed, separate categories of factors which influenced the control of shipping became evident. category, an attempt was then made to identify the general  Within each principles  that apply to the control of shipping for a wide range of trading firms and commodity trades. OUTLINE OF THE THESIS What factors influence Canadian traders to participate in the shipping of t h e i r trades?  If given the opportunity to do so, the  actions of a l l firms w i l l be guided by commercial p r i n c i p l e s . principal aim of firms is to maximize t h e i r return.  The  The principles  used to achieve this goal in international trading are cost reduction, marketing strategies and risk a n a l y s i s .  These principles are a l l  applicable to the subject matter of this  thesis.  8.  Chapter 2 develops the p r i n c i p l e of cost reduction opportunities  in  shipping and inland d i s t r i b u t i o n as a factor influencing Canadian control of shipping arrangements.  The transportation costs of bulk commodities  usually comprise a large percentage of the f i n a l delivery cost.  Since  transportation.costs account for such a large percentage of delivery costs, there i s potential for sizeable cost reduction in this area. Shipping may not only be a s i g n i f i c a n t percentage of the total transportation cost but i t may also impact s i g n i f i c a n t l y on other transportation and d i s t r i b u t i o n costs.  Because ocean shipping can be arranged by either  party to a trade, one party may be able to secure shipping at a lower cost than the other party. means for doing so.  Chapter 2 analyses the opportunities and  The primary focus i s on shipping costs although the  opportunities for cost reduction in inland d i s t r i b u t i o n as a result of the control of shipping is discussed. Chapter 3 concerns the marketing factors which influence the control of shipping.  There may be opportunities for trading firms to gain advan-  tages into particular markets by s e l l i n g on a delivered basis. There are many trades in which Canadian firms are unable to assume any r e s p o n s i b i l i t y for shipping.  This is usually the result of govern-  ment p o l i c i e s in foreign countries which protect t h e i r national interests.  These are referred to as f l a g discrimination  shipping  policies.  This topic is covered in Chapter 4. Two case  studies of major firms involved in Canadian dry bulk commo-  dity trade are analyzed in Chapter 5. institutional  These case studies concern the  p o l i c i e s regarding the control of shipping by the Canadian  Wheat Board and the Japanese steel industry.  These case studies describe  the factors which influence these i n s t i t u t i o n s with regard to t h e i r policy  9. on the control of shipping. Chapter 6 is the summary and conclusion of the t h e s i s . of individual factors.  The decision  firms to participate in shipping is influenced by many  The objective of this chapter is to summarize these factors  and give some indication as to t h e i r r e l a t i v e importance. LIMITATIONS OF THIS THESIS The research into the extent of control over shipping by Canadian traders is merely a by-product of the research done in order to analyse the primary objective of the t h e s i s .  The same reasoning applies to the  discussion of the advantages and disadvantages of the control of shipping. The analysis of these topics is perhaps b r i e f but serves to evaluate the factors which influence the control of shipping. Since dry bulk commodities are Canada's major oceanborne cargoes, only they have been analyzed in the context of this t h e s i s .  This does  not preclude the application of several of the principles developed to the general merchandise trade which is usually shipped on regularly scheduled conference vessels.  However, l i n e r trades have not been studied.  Cost data has been used only to i l l u s t r a t e principles which apply to the subject matter. to be an analytical  This treatment of the subject matter is not meant  exercise.  F i n a l l y , the author assumes r e s p o n s i b i l i t y for a l l the interpretation of the subject matter and principles which are developed. of several p a r t i e s , not a l l  At the request  s p e c i f i c d e t a i l s gathered in the interview  process are footnoted in order to protect the c o n f i d e n t i a l i t y of the parties  involves.  10. Chapter 1 Footnotes: 1.  "Canada Report," Seatrade, August 1979, p. 105.  2. .  Transport Canada, A Shipping Policy for Canada. Canada, 1979, p. 4.  3.  Ibid, p. 5.  4.  Mining Association of Canada, Mining in Canada, Facts and Figures 1979, Montreal: Mining Association of Canada, 1979, p. 44.  5.  Canadian Wheat Board, Annual Report 1977/78, Wheat Board, 1978, p. 8.  6.  H.P. Drewry (Shipping Consultants), Ocean Trade in Forest Products. An Economic Study #36, London: HPD Shipping Publications, August 1975, p. 8. " ~>  7.  National Harbours Board, Port of Vancouver S t a t i s t i c s 1978. Vancouver: National Harbours Board, 1979.  8.  Ibid.  9.  "Canada Report", Seatrade, August 1979, p. 119.  Ottawa:  Winnipeg:  Transport  Canadian  10.  National Harbours Board, Port of Vancouver S t a t i s t i c s 1978. Vancouver: National Harbours Board, 1979.  11.  International Chamber of Commerce, Incoterms 1953•> national Chamber of Commerce, 1965, p. 24.  12.  Ibid, p. 25.  13.  Ibid, p. 34.  14.  Ibid, p. 38, 40.  Paris:  Inter-  11. Chapter 2 THE INFLUENCE OF COST REDUCTION UPON THE CONTROL OF SHIPPING Bulk commodities traded internationally are transported in three stages.  These are:  1)  inland d i s t r i b u t i o n from s e l l e r s ' to port of shipment  2)  ocean shipping to buyers' designated port of discharge  3)  inland d i s t r i b u t i o n to buyers' f i n a l  According to the individual  point of production  destination  trades, the physical requirements of d i s -  t r i b u t i o n and costs of the three stages w i l l vary.  Each party is usually  responsible for the d i s t r i b u t i o n arrangements and charges within i t s respective country because of the f a m i l i a r i t y each w i l l have with local conditions.  Either party may exercise r e s p o n s i b i l i t y over the middle  link,  the ocean shipping stage. Several reasons related to cost may influence either the buyer or s e l l e r to assume r e s p o n s i b i l i t y for the shipping arrangements.  One is  the opportunity to secure shipping services at a lower cost than the other party could. One party may also be in a position to reduce or better control the costs in their domestic d i s t r i b u t i o n stage by exercising  responsibility  over shipping arrangements. The motivation to reduce or control the costs of transport and d i s t r i b u t i o n occurs in a l l three stages of the d i s t r i b u t i o n process. of the interactive nature of the three stages of international  Because  distribu-  t i o n , the costs of a l l three stages may be influenced by the question of control over r e s p o n s i b i l i t y for the shipping stage. This chapter evaluates the desire for cost reduction as the motiva-  12. tion for the control of shipping in Canadian dry bulk commodity trades. The f i r s t section w i l l analyze how cost economies in shipping may influence a buyer or s e l l e r to control the shipping arrangements.  The l a t t e r por-  tion of the chapter is devoted to evaluating the effect that control over shipping arrangements has upon the cost of either party's.' " inland d i s t r i bution r e s p o n s i b i l i t i e s and costs. COST REDUCTION IN SHIPPING The trade of Canadian originated dry bulk commodities involves some very large shipment s i z e s .  Iron ore and coal regularly move in vessels  over 100,000 dwt and sulphur, potash and forest products in vessels up to 50,000 dwt.  Grain shipments are commonly transported in vessels between  15,000 and 35,000 dwt.  It i s obvious that these major Canadian bulk  commodity exports move in sizeable shipment lots - in many cases the entire vessel is transporting one consignment. Shipping costs can be reduced in four ways. 1) 2) 3) 4)  through charter terms by increasing the size of individual shipments by reducing vessel time in port by minimizing vessel b a l l a s t voyages.  Chartering Terms and Their Effect on the Cost of Shipping Different methods of chartering for shipping services are available and influence freight rates for identical vessels.  The f i v e major charter  arrangements are bareboat charters, time charters, consecutive voyage charters, contracts of affreightment, and single voyage charters.  In a  time charter, a shipowner hires out his vessel for a s p e c i f i c length of time.  For a consecutive voyage charter, an owner agrees with a charterer  to provide a s p e c i f i c vessel to move a s p e c i f i c quantity of cargo on a repeat voyage basis.  The contract of affreightment does not specify the  13.  vessel but the owner guarantees to make a fixed amount of tonnage a v a i l able to move a fixed quantity of cargo at a fixed rate. In the single voyage charter, an owners agrees to use a s p e c i f i c vessel to transport a fixed amount of cargo from a s p e c i f i c loading port to a s p e c i f i c port of discharge. owner's r e s p o n s i b i l i t y .  A l l fees in the movement are the ship-  The bareboat charter is nearly the opposite.  Under a bareboat charter, the charterer e f f e c t i v e l y becomes the owner of the vessel, being responsible for crews, maintenance and a l l other costs. This is usually a longer term arrangement. In general, longer term charters tend to r e f l e c t more closely the actual cost of operating a vessel.  Shorter term charters are influenced  by the current world market and the trading patterns the vessels w i l l be engaged i n .  Rates on short term charters often deviate widely from  long-run costs r e f l e c t i n g the current state of demand and supply in world shipping markets. I l l u s t r a t i o n 1 gives an indication of the fluctuation in shipping markets since the end of the Second World War. t r i p and time charters.  The table i l l u s t r a t e s  only  Trip charters are a variation of voyage charters.  It can be seen that the market fluctuates widely, especially in times of international  crisis.  The i l l u s t r a t i o n does not contain a graph represent-  ing voyage charters but one can assume i t corresponds c l e a r l y with the t r i p charter market. The state of the world shipping market w i l l determine i f rates are higher for longer term charters versus short term charters.  Thus, i f one  party to the trade transaction has a vessel under some sort of long term charter, i t may or may not be at a lower rate than what could be obtained on the spot market at that time.  If the rate for short term charters  is  higher, the party with the vessel under long term charter w i l l be able to  14. Illustration 1 Trip and Time Charter Rate Variation  TM I EC-HARTER JULY DECEMBER iW.-Ot  T-1PC -H>CTE=.  :  . i '  ; : • i ' i ; i •  1  :  ;  .. : ' i  i .  ! ! ; ; ! ! ! 1 \ j !  :  —-*«r»*  !  W6l  ;  TRJP-CrfAfTTEfi  ! 19CS  *  i  • •  r\n  .  ! !  : i I ! ! ihh 1 • i 1 1 i i i i i ; ! .'I L,l t 1 ! I ! ! • / \ \ I j1 i * f  1  ' 19< -<  i : ! !  j i h l  !  !  !  i i i ! 1 : ! i ! i _r  j I i9t* _  Source:  1947-78  1 1 1 1967 ;96t  TIME-CHARTER  196?  ]  1  i I'  1  ft  -  <: l\1  \'.  AS  l  l  1  i  !  1 1970  I  1971  .  !  i  (  ' io-j  1  j >• IOT*  i  13:5  ii  ;  i 1976  \  V--.A  i  I  1 !  I 1 I  ! i i  1 IS"' 1  1975  ; 19?  | |  I  |  | j ! i960 1  t981' I96i 1 1953 : W  1 1 1965  JULY 1566-JUNE 1986-100  Norwegian Shipping News:, No. 2A, 1978, p. 104.  transport the commodity at a lower out-of-pocket cost.  If the rate for  short term charters i s lower, the party with the vessel under long term charter w i l l not be able to transport the commodity at a lower cost. A trading firm w i l l charter vessels under long term contracts only i f a base cargo over the period of the charter i s guaranteed.  By charter  ing a vessel for a period of time, the chartering party gains a number of advantages.  The biggest one i s that a f r e i g h t rate is assurred over  some period of time.  -  This eliminates a l o t of the r i s k associated with  15. chartering short term on the world market.  The short term market w i l l  fluctuate with p o l i t i c a l c r i s e s and w i l l also tend to synchronize with the international trade c y c l e J Another advantage gained by long term charters is the use of the same vessel over the period of the charter. ized vessels.  Many trades require s p e c i a l -  The modern vessels in the coal or forest products trade  are only one example.  This w i l l be elaborated on later in this chapter.  The control of shipping in a trade transaction w i l l be influenced one party has a vessel under long term charter.  if  The long term charter-  ing arrangement may give one party the opportunity to provide lower cost ocean transport.  Another strong factor is that the charterer of a vessel  under long term charters w i l l seek to keep his vessel f u l l y u t i l i z e d . This may be desirable even in situations where his costs are higher than those available in the short term market.  The obvious example of this  situation is the unpleasant experience of MacMillan Bloedel during the 1970's. Cost Reduction by Increasing Shipment Size Shipping costs can be reduced by increasing the size of individual shipments to take advantage of economies of scale.  In dry bulk trades,  where commodities are usually transported in shipload l o t s , larger vessels may be used to achieve economies of scale.  As carrying capacity increases,  vessel costs per ton decrease because of economies of scale in construction and operation.  Figure 2.1 i l l u s t r a t e s the c a p i t a l , operating and  voyage costs to the shipowner of three sizes of dry bulk c a r r i e r s in 1978. The rates shipowners charge for shipping services may and w i l l  vary  from the actual costs but the economies of scale are nevertheless r e f l e c t e d , especially in time charters.  For the purposes of this a n a l y s i s , rates w i l l  16. Figure 2.1 1978 Dry Bulk Carrier Costs $/DWT/Month * cost of operating a 1977 b u i l t vessel o costs of operating a 1972 b u i l t vessel  6 +  o  15  Source:  25  60  '000 DWT  H . P . Drewry (Shipping Consultants), The Operation of Dry Bulk Shipping, Economic Study #71, January 1979, p. 34.  tend to closely approximate costs. There are two ways in which to increase the size of the individual shipment and u t i l i z e a larger vessel.  F i r s t , the commodity can be arranged  to be transported in a larger volume.  Secondly, additional cargoes may  be combined with the primary shipment to u t i l i z e a larger vessel. In order to ship a commodity in larger lots requires cooperation and f l e x i b i l i t y by both parties to the transaction. sale of potash w i l l remain as such.  A single 10,000 ton  However, i f the sales contract is  for a larger amount to be delivered over a period of time, the opportunity is available for the economies of scale in shipping to play a role in determining the size and timing of shipment.  A contract to supply one  m i l l i o n tons of coking coal to a Japanese steel mill over a one year period gives ample opportunity for shipment size arid shipping costs to be evaluated.  The shipment size and vessel used w i l l r e f l e c t the cost of  17. shipping as a means to minimize the total d i s t r i b u t i o n cost.  The delivery  requirements of the buyer, production c a p a b i l i t i e s of the s e l l e r , a v a i l a b i l i t y of storage space, the a b i l i t y system and inventory carrying costs a l l  the  and cost of the d i s t r i b u t i o n  influence the optimal shipping  lot size. There is a correlation between shipment size and the value of the commodity.  Expensive mineral concentrates such as copper and zinc simply  do not move in 50,000 ton shipments.  It is more economical to transport  these items on a regular basis than to accumulate large quantitites a single shipment in order to reduce the ocean shipping costs.  for  Dollars  on freight saved are largely lost in inventory carrying costs, cash flow and customer preference considerations.  For many concentrate buyers, a  50,000 ton shipment would represent close to one year's supply. The cooperation between buyer and s e l l e r to increase shipment size to reduce f r e i g h t costs does not in i n s e l f favour the control of shipping arrangements by either party. Cargo consolidation i s an effective means of reducing shipping costs because larger vessels may be u t i l i z e d .  Depending upon the trade and  market, either party or both may r e a l i z e the opportunity to reduce shipping costs through cargo consolidation.  The a b i l i t y to do so and reduce  shipping costs strongly influences which party w i l l exercise control over the shipping arrangements. There are two methods to consolidate cargoes and u t i l i z e a larger vessel.  In the f i r s t case, a s e l l e r or buyer may consolidate similar  cargoes from their separate contracts.  If a Canadian s e l l e r of a particu-  lar commodity has a number of contracts to a geographical area which need to be shipped, these commodities can a l l be shipped on the same vessel;  18. subject to technical considerations such as vessel size and port d r a f t , etc.  This w i l l allow a larger vessel to be u t i l i z e d and reduce the cost  per ton of shipment.  The separate contracts need to be within a geograph  cal area because the cost savings associated with the larger vessel have to be traded o f f against the steaming distance to additional ports.  It  would not be economical to charter a vessel and load i t with consolidated cargoes, half of which w i l l go to the Far East and the other half to Western Europe.  The additional distance which the vessel w i l l  travel  more than outweighs any cost savings associated with u t i l i z i n g a larger vessel. To i l l u s t r a t e the potential cost reduction a r i s i n g from the application of this p r i n c i p l e , an example w i l l be worked out.  A Canadian sulphu  exporter has four separate contracts to deliver 14,000 tons of sulphur to buyers in B r a z i l .  A number of shipping options are a v a i l a b l e .  Each  contract can be shipped on a separate vessel, they can a l l be shipped on a vessel of the 60,000 dwt class or there can be various combinations.  Table 2.1  compares the delivered c i i . f .  sulphur shipped i n d i v i d u a l l y and consolidated together.  intermediate price of the A reduction of  7.3 per cent is achieved through cargo consolidation. A second means of consolidating cargoes to u t i l i z e a larger vessel is to seek out cargoes to ship on behalf of other parties.  If the party  which is c o n t r o l l i n g the shipping arrangements on the primary trade is able to locate additional cargoes, the delivered price of the primary cargo w i l l be reduced in a manner similar to Table 2.1.  There is also  the p o s s i b i l i t y that the party may be able to make p r o f i t s from the additional cargoes. Assume that a Canadian sulphur exporter has two 15,000 ton contracts  Table 2.2 DELIVERED C . I . F . PRICE COMPARISON FOR TWO SHIPPING OPTIONS Timecharter rates for dry cargo vessels - April 1979 10 20 35 50  19,999 34,999 49,999 69,999  dwt dwt dwt dwt  (15,000 (27,500 (42,500 (60,000  dwt) dwt) dwt) dwt)  $ $ $ $  7.50/dwt/month 6.10 4.70 3.75  Vancouver - Brazil loading, steaming and discharge time approximately one month. Therefore, f r e i g h t rates are calculated based on the above timecharter rates. Assume 14,000 tons of sulphur can be shipped on a 15,000 dwt vessel and 56,000 tons on a 60,000 dwt vessel. Each ton therefore bears 1 1/14 (1.0714) of the freight rate. 1 .0714 x $7.50  =  $8.04  1.0714 x $3.75  =  $4.02 14,000 ton shipment  Vancouver f . o . b . price Freight Brazil c . i . f . price Reduction in c . i . f .  Note:  Source:  $47.00 8.04 $55.04  56,000 ton shipment $47.00 4.02 $51.02  price by u t i l i z i n g larger vessel  $55.04 - $51 .02  =  $4.02  $ 4.02 T $55.04  =  7.3%  This example excludes bunker costs which are incurred by the charterer over and above the timecharter cost of the vessel. For the purpose of this example, the cost of bunker fuel used per ton of cargo carried is assumed to be constant although in r e a l i t y economies of scale exist in favour of larger vessels.  Charter rates from H.P. Drewery, Shipping Consultants L t d . , Shipping S t a t i s t i c s and Economics. London: HPD Shipping Publications, May 1979.  20. to Brazil and wishes to u t i l i z e a 60,000 dwt vessel which w i l l carry approximately 56,000 tons of cargo.  The exporter w i l l be seeking an addi-  tional 26,000 tons of cargo to B r a z i l .  If these can be found, the r e a l i t y  of using the larger vessel w i l l reduce the sulphur exporter's  shipping  costs to B r a z i l . The a b i l i t y of one party to a contract, either s e l l e r or buyer, to consolidate cargoes and reduce shipping costs by u t i l i z i n g a larger vessel strongly influences the control of shipping arrangements in Canadian dry bulk commodity trades.  Evidence from f i r s t hand information suggests  that this p r i n c i p l e is one of the dominant f a c t o r s , i f not the most important, in determining whether the s e l l e r or buyer w i l l exercise responsib i l i t y for shipping arrangements. The ocean trade in forest products from B r i t i s h Columbia is an excellent example of Canadian exporters consolidating cargoes to u t i l i z e larger, purpose b u i l t vessels.  It is the major factor which explains  the complete control of shipping of forest products by Canadian exporters. While forest products are not normally considered a bulk commodity, the nature of shipping practices in the Canadian forest products trade permits the designation to apply. The B r i t i s h Columbia-Western Canada ocean trade in forest products consists of sawn lumber, plywood, pulp and paper.  There are two major  exporters of sawn lumber products, each with a shipping subsidiary: MacMillan Bloedel (Canadian Transport) and Seaboard Lumber Sales (Seaboard Shipping).  Seaboard, in contrast to MacMillan Bloedel, is a consortium  of 26 forest products companies. lumber to overseas markets.  It was founded to s e l l and transport  The major markets which u t i l i z e ocean shipping 2  are the A t l a n t i c Coast of the United States, Western Europe and Japan.  21. The markets are characterized by multiple buyers, t y p i c a l l y lumber yards, who purchase small quantities.  An individual order w i l l rarely exceed  15 tons. The large base volume of cargoes generated by orders from multiple small buyers in a geographic region enables the Canadian lumber exporters to consolidate cargoes.  The opportunity for Canadian exporters to com-  bine shipments and reduce freight charges by u t i l i z i n g large, purpose b u i l t vessels i s the key to t h e i r marketing strategy of s e l l i n g delivered in off-shore and eastern U.S.A. markets.  More than anything e l s e , c o n s o l i -  dation explains the control of shipping in the Canadian forest products trade. Canadian Transport and Seaboard Shipping each employ a mix of vessels on long term charters and voyage charters.  Aside from consolidat-  ing t h e i r own cargoes to u t i l i z e t h e i r f l e e t s of vessels, each actively seeks out other cargoes to supplement "in-house" cargoes.  These include  forest products for other firms and mineral concentrates.  Copper concen-  trates make ideal cargoes,because of t h e i r small l o t s , generally 5,000 tons, and t h e i r s u i t a b i l i t y as bottom cargoes. Canadian grain traders s e l l i n g non-Board grains and assorted grain p e l l e t s to Japan exercise control over shipping as a result of their opportunity to consolidate small l o t orders. rapeseea  Non-Board grain, rye,  and flaxseed, are grown and marketed without the involvement  of the Canadian Wheat Board.  Sales are made by three Canadian grain  trading firms to many small Japanese crushing m i l l s through Japanese trading houses who act as importing agents.  Sales to individual customers  3 in Japan are in the 300-2,000 ton range.  The consensus of exporters is  that the a b i l i t y of Canadian exporters to consolidate cargoes and obtain a lower freight charge is the reason for C&F sales and hence, the  22. Canadian control of shipping. Table 4.2 l i s t s the multiple seeds and pellets and their ports of discharge, though not individual buyers and l o t s , in a shipment by C a r g i l l Grain Co. (Canada) to Japan on the vessel "Ogden Tiber" in February 1979. It i l l u s t r a t e s the consolidation necessary to u t i l i z e a vessel of 30,000 dwt in the non Board grains trade.  Table 2.3 MULTIPLE SEEDS AND PELLETS SHIPMENT LIST TO JAPAN LOADED ON VESSEL "OGDEN TIBER" IN VANCOUVER, FEBRUARY 1979 Commodity  Tons  Canada Rapeseed Rye Grain Screening Pellets Dehydrated Pellets Suncured Pellets Source:  10,336 5,786 1,197 7,979 2,667  Ports of Discharge Hakata, Hakata, Hakata, Hakata, Hakata,  Kobe, Nagoya Kobe, Nagoya Kobe Kobe, Nagoya Nagoya  C a r g i l l Grain Canada L t d . , Vancouver, January-1979.  Canada  ranks among the world's largest exporters in both sulphur  and potash.  In 1978, 3.967 m i l l i o n metric tonnes of sulphur and 2.744 4  m i l l i o n tonnes of potash were exported through the port of Vancouver. A foreign buyer w i l l often purchase both sulphur and potash from Canadian exporters.  This is due to the fact that both commodities are  used in f e r t i l i z e r production and a single purchasing agent is  responsible  for purchasing both commodities.  specify  These foreign buyers usually  f . o . b . terms of shipment so that they can combine the two commodities on a single vessel. and India.  This is often obne by buyers in A u s t r a l i a , South Africa  23. Cost Savings Through Reductions in Vessel Port Time A reduction in the time a vessel w i l l spend in port means that  it  w i l l have more opportunity days in which to haul cargo and generate revenue.  Every shipowner would i d e a l l y seek to have his vessel  and at sea a l l of the time.  loaded  While this may not be r e a l i s t i c , owners do  seek to ensure t h e i r vessels are employed to the maximum extent possible. Vessels which are chartered under voyage or single tripcharters and contract of affreightment terms are allowed a certain number of days to load and unload.  Port days allowed is influenced by the type of cargo,  loading gear both on the vessel and on shore and the general conditions with respect to congestion and e f f i c i e n c y at the ports of c a l l . influence the charter terms and costs.  This w i l l  However, there is l i t t l e an i n d i -  vidual charterer can do to reduce port time and thus reduce the cost of shipping. The longer term timecharters and bareboat charters offer the charterer greater potential to undertake action to reduce port time.  This is because  the charterer is responsible for making as e f f i c i e n t use of the vessel as possible and can undertake action by which to do so. There are two possible ways of reducing a vessel's port time.  The  f i r s t i s to employ specialized vessels which w i l l permit reduction in loading and unloading times for a given cargo.  This is especially r e l e -  vant i f the vessel's loading gear w i l l handle the cargo.  If shore based  f a c i l i t i e s are used to load and unload the cargo, ash's the normal case in the loading of the export dry bulk commodity trade, then the vessel's gear is not a factor in loading time. The B r i t i s h Columbia forest products trade is a good i l l u s t r a t i o n of the use of specialized vessels to achieve reductions in vessel port time.  24. The introduction of modern purpose b u i l t vessels for the B.C. products trades has lead to cost savings through s i g n i f i c a n t increases in loading and discharging.  forest productivity  In the 1950's, Liberty ships  were the standard vessel in the B.C. ocean trade.  Lumber was hand stowed  and pulp and newsprint were handled four bales at a time.  The loading  5  time for a 10,000 ton vessel was about two weeks. The modern forest products vessel is now in the 35,000 to 50,000 dwt range.  Improvements have been made in cargo, gear, hold layout and cargo  packaging to permit vastly reduced loading and discharging times with far fewer labourers.  This has enabled modern vessels to be loaded or  discharged in three to f i v e days. The second way of reducing a vessel's port time is to reduce the number of ports at which the vessel w i l l c a l l .  This can be.accomplished  by making a conscious e f f o r t , on the part of the s e l l e r , into a limited number of ports.  to deliver  The buyer, i f he i s responsible for  arranging the shipping, can arrange for his vessel to c a l l at a smaller number of ports.  In either case, time w i l l be saved as a r e s u l t of  the reduction in ports of c a l l and in shipping, time is money.  In today's  charter market, a vessel's time i s worth between $4,000 to $15,000 per g day based on current charter rates. In making an e f f o r t to reduce the number of ports of c a l l ,  it  is  necessary to consider the implications placed upon the other party to the contract who may be forced to change t h e i r pattern of exporting or delivery. For example, w i l l a European customer of Canadian copper concentrates take delivery in Bremen rather than in Hamburg so that the vessel w i l l not have to make an additional port c a l l  in Hamburg?  This entails  look-  ing at the d i s t r i b u t i o n system within West Germany to see how the buyers '0  25. w i l l respond to the possible change in port of discharge. In the recent past, Seaboard Lumber Sales redesigned i t s delivery system in the United Kingdom. tion was to enable ports of c a l l  inland  The major aim of the reorganiza-  in the U.K. to be reduced from 27 to 2.  In conjunction with this changeover, Seaboard undertook to s e l l on a delivered customer's door basis.  The savings in vessel costs more than  offset the higher costs of longer delivery distances by truck to a l l  parts  of the country from the ports of Tilbury and Liverpool.^ The reduction of shipping costs through port reduction is applicable mainly to shippers who ship on a longer term continuing basis and u t i l i z e some sort of long term vessel charter.  Savings in vessel port costs  serve to influence the control of shipping and is able to achieve them by c o n t r o l l i n g the shipping arrangements.  The p o s s i b i l i t y of doing so  largely is dependent upon the trade and shipping practices.  This factor  tends to complement other factors rather than of i t s e l f being the strongest influence on the control of shipping arrangements by one party to a trade contract. Cost Reduction in Shipping Through Backhauls Cost reduction in shipping costs through backhauls is applicable to charterers who have chartered the vessel on the basis that they are responsible for securing the return cargo as well as the front haul cargo. These are normally timecharters or bareboat charters. may enable fronthaul shipping- rates to be reduced.  Securing backhauls  It can also provide  p r o f i t to the charterer. If a f i r m , say a large exporter of a given commodity, has shipping requirements that require a certain number of s a i l i n g s per year, a vessel may be chartered for a period of time.  This provides the exporter with a  26.  certain amount of s t a b i l i t y in f r e i g h t rates. guarantee a cargo for every front haul.  The exporter is able to  However, once the vessel has been  unloaded of i t s primary cargo, i t has to be sailed to i t s port of o r i g i n . If the vessel s a i l s without a cargo in b a l l a s t , the front haul cargo must bear the cost of the round t r i p costs of operating the vessel.  How-  ever, i f a backhaul cargo can be secured, the fronthaul cargo may only have to bear the front haul costs. In a c t u a l i t y , the securing of backhaul cargoes and the rates assigned to each cargo is very complicated.  Suffice i t to say that i f a backhaul  cargo can be secured, roughly identical  vessel operating costs can be  distributed over twice the tonnage. The a b i l i t y to secure backhaul cargoes is dependent upon the trading pattern in which the vessel is employed in as well as the type of the •vessel.  It also depends on the trading structure of countries in which  the vessel w i l l be serving. Japan is one of the world's leading trading nations.  Japan imports  huge amounts of raw materials, processes them and exports manufactured goods.  The shipping requirements of the raw materials i s primarily for  bulk c a r r i e r s while manufactured goods are shipped on container ships. Bulk c a r r i e r s are not able to secure backhauls from Japan because they are not suited to do so. for dry bulk c a r r i e r s .  Japan is the largest destination in the world It accounts for 35 per cent of the tonnage of the Q  world's major bulk trades.  This means there is an enormous amount of  tonnage which s a i l away from Japan in b a l l a s t . In the spring of 1979, Seaboard Shipping put into service the f i r s t of two Roll-on R o l l - o f f (RoRo) vessels of-43,000 dwt on the B.C. to Japan forests products trade.  Seaboard introduced the special purpose c a r r i e r s  27. for two reasons.  The Ro-Ro concept enables lumber and forest products to  be loaded in a shorter time with less handling. 50 percent compared with conventional vessels.  Port time is reduced by A d d i t i o n a l l y , the vessels  are suitable to carry Japanese manufactured products on the backhaul to B.C. and the West Coast of the U.S.A.  Each ship can backhaul the equiva9  lent of 1,000 20-foot containers or 3,500 cars.  The savings on out-  bound freight rates for forest products are estimated to be 10-20%, in spite of the higher cost of chartering the specialized v e s s e l . ^  This  is  due to the backhaul cargo and revenues which Seaboard has generated. Seaboard's vessels on the B.C. to U.S. East Coast route also make extensive use of backhauls to reduce the freighting costs on the outbound forests products t r a f f i c . following manners.^ B.C. to U.S.E.C. USEC to Japan Japan to B.C. or USEC to B.C.  The vessels are employed in either of the Forest Products Coal, Grain, Scrap in ballast phosphate rock  Seaboard gains considerable f l e x i b i l i t y to display i t s long term chartered vessels on routes where backhauls w i l l be obtained by virtue of the fact the company observes a rule of thumb that 65% of i t s needs should be met by long term charters.  shipping  When backhauls are not a v a i l -  able out of a region, Seaboard w i l l spot charter ships chartered for single voyages, thus r e l i e v i n g the need to service the trade with i t s vessels which are under long term charter.  This minimizes ballast voyages  for i t s ships under long term charter. The control of shipping by one party to a trade may enable that party to obtain backhaul cargoes.  In the event backhaul cargoes are c a r r i e d ,  the party may be able to reduce the freight charges of the outbound cargo or make a p r o f i t from i t s involvement in shipping.  The strategy developed  28. by a party depends on trade patterns and the charter term of vessel. Given the proper circumstances, backhauls can have a very favorable effect on the party which seeks them out. The opportunity to secure backhauls is a pertinent factor  influenc-  ing the desire to control shipping arrangements on the outbound cargo movements.  While most of the examples in Canadian dry bulk commodity trades  center on the forests products trade, where the pattern has been established for some time, new and changing markets present new opportunities. One example was an e f f o r t by Kaiser Resources to s e l l coking coal on a c . i . f .  basis to B r a z i l .  Kaiser planned to charter a vessel which  would enable i t to backhaul B r a z i l i a n iron ore to a C a l i f o r n i a mill.  steel  This pattern would have enabled Kaiser to land i t s coking coal  in  Brazil at a very a t t r a c t i v e delivered price and perhaps make a p r o f i t on the return iron ore cargo.  However, B r a z i l i a n interests were aware of  this opportunity as well and used the B r a z i l i a n government's f l a g d i s crimination policy to supply the shipping on Kaiser's coking coal contract.^  COST REDUCTION IN INLAND DISTRIBUTION The opportunity to control.and reduce costs in the inland d i s t r i b u tion stages of international deep sea bulk commodity trades is affected by the decision as to whether buyer or s e l l e r undertakes for securing the shipping arrangements.  responsibility  It is normal for both buyer and  s e l l e r to arrange for the inland d i s t r i b u t i o n arrangements in their home countries because of f a m i l i a r i t y with local conditions.  However, inland  d i s t r i b u t i o n must interface with shipping and the control of shipping arrangements may give the party the opportunity to coordinate this face better.  inter-  29. This section w i l l analyze the potential advantages that accrue to buyer or s e l l e r to better coordinate the inland distribution-shipping interface in t h e i r home country through the control of the shipping arrangements. The Opportunities for Cost Reduction in Canadian Inland Distribution The inland d i s t r i b u t i o n process for Canadian bulk commodity exporters begins at the point of production and stretches to the port of loading. The control of shipping arrangements by Canadian exporters gives the opportunity for them to better coordinate t h e i r inland d i s t r i b u t i o n system to interface with shipping. If the foreign buyer is responsible for shipping arrangements, n o t i f i c a t i o n of the date of a r r i v a l and loading period of the vessel is given to the Canadian s e l l e r .  F i r s t n o t i f i c a t i o n is usually at the time of  sale or, in the case of a contract where delivery i s spread out over time, a month in advance of the proposed s a i l i n g date.  Subsequent n o t i f i c a t i o n  is usually made 15 days prior to vessel a r r i v a l .  Because the vessel  a r r i v a l and loading time i s within a range, the Canadian s e l l e r must have the shipment available at the port of loading to meet the vessel's earliest arrival  date.  If the Canadian s e l l e r i s responsible for shipping, there is  sufficient  f l e x i b i l i t y to better coordinate the movement of the goods to meet the vessel's loading days.  Because the s e l l e r is in f u l l control of the  shipping, up-to-the-minute information i s available on the inward progress of the vessel.  As the a r r i v a l date becomes more precise, the s e l l e r can  firm up his inland d i s t r i b u t i o n delivery date.  Having this  can mean s i g n i f i c a n t cost savings in inland d i s t r i b u t i o n .  flexibility These cost  savings can be achieved from the production to storage aspects.  30. An outstanding example of the coordination of the inland d i s t r i b u tion-shipping interface i s a large Canadian pulp exporter.  The i n i t i a l  f l e x i b i l i t y and cost savings are achieved in the production process. There are nearly one dozen v a r i t i e s of pulp produced. only two grades at a time.  The plant produces  Since the company s e l l s on a c . i . f .  basis  and is responsible for shipping, i t is able to coordinate the production runs  to produce the quantity needed to f u l f i l l  p a r t i c u l a r vessel loading days.  export contracts for  This results in longer production runs  13 and cost savings through economies of scale in production. F l e x i b i l i t y is also gained to position inventory for shipment where storage space is cheaper.  Because of the increased coordination made  possible by the control of shipping, the opportunity exists to plan i n land shipment dates to minimize the use of higher cost storage  facilities  These are usually located in the port of shipment. The control of shipping also provides the s e l l e r with more f l e x i b i l i to deal with disruptive events in i t s inland production and d i s t r i b u t i o n stage.  A copper concentrate exporter was shut down by a s t r i k e .  As a  r e s u l t , i t was unable to supply the contracted tonnage requirement to meet the proposed shipping date.  However, because i t was c o n t r o l l i n g  f r e i g h t i n g , i t could maintain f l e x i b i l i t y with regards to the ship i t would use until the exact vessel loading date was established.  The a n t i -  cipation of s t r i k e settlement and mining resumption also influenced the expected shipping tonnage.  The foreign buyer, i f he controlled shipping,  would have been in a much less favorable position to deal with this  sit-  uation because of being in a foreign country and the lack of inside infor mation.  31 . The Opportunities for Cost Reduction - Foreign Inland Distribution Foreign consumers of Canadian bulk commodities may desire to control shipping arrangements because of the opportunity for cost reduction in their inland d i s t r i b u t i o n system.  However, the opportunity for better  coordination of the shipping-inland d i s t r i b u t i o n interface afforded a foreign buyer by the control of shipping is reduced when compared with the opportunities made available to the Canadian exporter and t h e i r inland distribution-shipping interface.  This is because the a r r i v a l date  of the vessel in the port of destination is f a i r l y well ascertained once the vessel has sailed regardless of which party has arranged for the shipping. This does not mean that foreign buyers do not desire to control freighting because of the opportunities to better control their inland d i s t r i b u t i o n systems.  The largest Japanese steel companies provide an  outstanding example that this can be an important reason. have multiple m i l l s .  These companies  Nippon Steel has nine m i l l s , the others two or  14 three.  In addition, the steel making process requires multiple grades  of iron ore and coking c o a l .  There may be as many as f i v e grades of  iron ore and twice that number of coking coal used in the steelmaking process.  One major reason why the Japanese are so adamant about c o n t r o l l -  ing the shipping of these iron ore and coking coal imports is to be able to closely coordinate the import program with respect to mill  requirements  and inventory l e v e l s . Nippon S t e e l ' s nine m i l l s are a l l located on the coast.  Since  Nippon S t e e l ' s purchases are almost exclusively f . o . b . , they- have the f l e x i b i l i t y to position a r r i v i n g vessels containing d i f f e r e n t grades of iron ore and coking coal to the m i l l s which require them.  In contacts  32. with Japanese trading houses, i t is evident that vessels carrying iron 15 ore and coking coal s a i l to Japan without a named port of destination. The vessel is given a port of discharge only one or two days away from Japan.  The steel company thus has f l e x i b i l i t y to monitor inventory  levels and production requirements at a l l m i l l s . RISK AND THE FIRM'S SHIPPING POLICY Risk is a v i t a l consideration which strongly influences the policy a firm adopts with respect to the control of shipping in their trades. This is because participation in ocean shipping may be risky for a f i r m . In f . o . b . s a l e s , the exporter is relieved of the risk for providing shipping service and the safe a r r i v a l of the cargo is a foreign port. Under c . i . f .  terms, the exporter takes increased r e s p o n s i b i l i t y for the  safe delivery of the product to a foreign port.  This involves the risk  of shipping, an unknown to many firms. Risks in Controlling Shipping There are several d i f f e r e n t types of risks in shipping. is that the price may fluctuate.  The f i r s t  Shipping markets, e s p e c i a l l y those for  chartered vessels, have been known to exhibit v o l a t i l e movements, especially in times of c r i s i s .  Even in times of r e l a t i v e calm, shipping  prices move. The exporter who has quoted or is quoting a c . i . f .  price may be in a  vulnerable position i f shipping prices move upward and the margin for shipping is exceeded.  This is p a r t i c u l a r l y true i f the contract has been  agreed upon and the exporter is short f r e i g h t ,  i.e. s t i l l  has to charter  shipping space. The exporter also bears a shipping r i s k in s e l l i n g c . i . f .  i f a vessel  33.  or shipping space is simply not available within the time period agreed to on the sales contract.  The delay in shipping may force the s e l l e r to  pay a penalty. A risk p a r t i c u l a r l y relevant to bulk shipping is demurrage.  Demurrage  is a payment made by the charterer to the shipowner when the vessel  is  delayed beyond i t s contracted loading or unloading period.  The charterer,  may seek payment from the.party which was responsible, i . e .  port,  or consignee.  terminal  However, collections to cover demurrage may be tedious,  especially in foreign countries and a firm may go to considerable expense and e f f o r t to r e c t i f y the s i t u a t i o n .  This is true in Canadian trades  to several regions in the Third World and influences Canadian traders to s e l l on f . o . b . terms to importers in these, regions. Summary The a b i l i t y of one party to reduce the delivered cost through economics in international physical d i s t r i b u t i o n is v i t a l shipping.  to the control of  O v e r a l l , i t appears that the a b i l i t y to consolidate cargoes  and increase shipment lots and u t i l i z e larger vessels has the greatest cost reduction p o t e n t i a l .  Furthermore, depending upon the trade pattern  and the contractual basis by which the vessel i s employed, the opportuni t i e s for backhauls may reduce fronthaul freighting costs. While individual components of the d i s t r i b u t i o n system offer the p o s s i b i l i t y of larger cost reduction potential than others, i t should be stressed that the delivered price encompasses an accumulation of a l l components of the d i s t r i b u t i o n system. of the system.  Ocean shipping is an integral  part  In the f i n a l a n a l y s i s , i f cost reduction is of para-  mount importance, the control of shipping w i l l rest with the party able to reduce costs by the greatest amount.  34. Chapter 2 Footnotes: 1.  B.N. Metaxas, The Economics of Tramp Shipping, London: Press, 1971, p. 184.  Athlone  2.  Mark Wilson, "Seaboard Readying for Ro-Ro's," Harbour and Shipping, December 1978, p. 20.  3.  Personal interview with Mr. Paul Ericson, Vice-President, Grain Company (Canada) L t d . , January 1979.  4.  National Harbours Board, Port of Vancouver S t a t i s t i c s 1978, Vancouver, National Harbours Board, 1979.  5.  Personal interview with Mr. Dudley Darling, General Manager, D i s t r i bution, Seaboard Shipping, October, 1978.  6.  H.P. Drewry (Shipping Consultants) L t d . , Shipping S t a t i s t i c s and Economics, London: HRD Shipping Publications, December 1979.  7.  Personal interview with Mr. Dudley Darling, General Manager, D i s t r i b u t i o n , Seaboard Shipping Co., June 1978.  8.  H.P. Drewry (Shipping Consultants) L t d . , Trends in Japanese Dry Bulk Shipping and Trade, An Economic Study #69. London: HPD Shipping Publications, December 1978, p. 1.  9.  Mark Wilson, "Seaboard Readying for Ro-Ro's," Harbour and Shipping, December 1978, p. 19.  10.  "Forest Ships Try New Tack," Vancouver Province, November 23, 1977, p. C7.  11.  Peter J . Raven, Considerations in Selecting a Ro/Ro Forest Products Ship, Vancouver: Seaboard Shipping, September 1978.  12.  Personal interview with Mr. Jack Cunningham, President, Cunningham Transportation, August 1978.  13.  Personal interview with Mr. Chris Gale, Shipping and Distribution Manager, Prince George Pulp and Paper Co., July 1978.  14.  The Tex Report, 1977 Iron.Ore Manual. Tokyo: "The Tex Report LtdV, 1978, p. 225. -  15.  Personal interview with Mr. Yoshi Ogata, Manager, Metals Department, Marubeni Canada, July 1978.  Cargill  35. Chapter 3 MARKETING INFLUENCES ON THE CONTROL OF SHIPPING Ocean shipping i s one part of international  physical  distribution.  Physical d i s t r i b u t i o n , in turn, plays a supporting role to the marketing function of a f i r m .  Marketing plays a v i t a l  part in attaining the goals  which firms have set out to accomplish; namely p r o f i t s , survival and growth and market satisfaction.'''  The strategy a firm employs  in market-  ing is shaped by the c h a r a c t e r i s t i c s of the products i t is s e l l i n g , the markets into which it. is s e l l i n g and the goals of the f i r m . This chapter w i l l examine the factors which motivate Canadian firms to undertake r e s p o n s i b i l i t y for the control of ocean shipping as part of i t s marketing strategy. EXPORT PRICING Export pricing refers to the financial terms of a trade contract. The four aspects of export pricing which a trading firm can vary to make the sales offer more a t t r a c t i v e to a potential buyer are: 1) 2) 3)  choice of currency in which to quote price terms of shipment, i . e . , f . o . b . , c . i . f . , etc. method of payment offered, i . e . , open account or l e t t e r of credit  4)  credit^  The second aspect of export p r i c i n g , the terms of shipment, can make an apprecible impact upon the opportunity for making a sale i f cost economies are realized in ocean shipping by one party.  The opportunities  for achieving cost economies in ocean shipping were discussed in the previous chapter.  Because physical d i s t r i b u t i o n , of which ocean shipping  comprises a major component, is one of the largest cost elements in the delivered price of dry bulk commodities, a«firm's international marketing  36. goals may be achieved through cost reductions in physical  distribution.  Product Pricing and International Marketing Goals The pricing of a product in a market is d i f f i c u l t because i t  is  dependent upon a complex web of cost, demand and competitive factors which are unique in various marketing regions.  Cost reduction in physical  dis-  t r i b u t i o n enables a firm to re-evaluate i t s product pricing with the purpose of furthering the attainment of the marketing goals the firm has set out to achieve in international marketing, commonly p r o f i t s and/or growth.  Based upon the factors which influence pricing into a certain  market, the firm must decice to keep prices unchanged or to lower them as a r e s u l t of cost reductions in physical  distribution.  When a Canadian exporter s e l l s c . i . f . , cost reduction in physical d i s t r i b u t i o n lower the costs of delivering a product into a market.  By  keeping the s e l l i n g price unchanged, the exporter w i l l r e a l i z e a larger p r o f i t margin. demanded w i l l  If the firm elects to lower the s e l l i n g p r i c e , the quantity increase.  A lower s e l l i n g price may open new markets or  expand sales in existing markets.  Overall p r o f i t s may also increase  even i f the s e l l i n g price i s reduced because of a larger volume of sales. To do so, the contribution margin at the new s e l l i n g price multiplied by the quantity sold must exceed the contribution margin at the old s e l l i n g price multiplied by the quantity previously sold. When a Canadian exporter s e l l s f . o . b . , cost reductions in ocean shipping are achieved and realized by the foreign buyer.  The Canadian  exporter can react to this situation in two ways i f the extent of the cost savings which the buyer is r e a l i z i n g can be determined.  In p r a c t i c e ,  this is easier said than done. F i r s t , the exporter has the option to raise the f . o . b . price to o f f -  37. set any cost reduction the buyer may achieve i n ocean shipping. delivered cost to the buyer w i l l remain unchanged.  The  I f t h i s cost reduc-  t i o n i s not a v a i l a b l e to other exporting firms i n Canada and abroad, the quantity the buyer purchases w i l l remain constant but the Canadian exporter w i l l r e a l i z e a higher p r o f i t margin on sales as a r e s u l t of a higher f.o.b. price. Secondly, the exporter can keep his f.o.b. p r i c e unchanged.  Since  the d e l i v e r e d cost to the buyer has been reduced, i t follows that the quantity demanded w i l l increase.  The p r o f i t s which the Canadian exporters  w i l l achieve again are l a r g e r because the quantity s o l d , at the same prof i t margin, i s l a r g e r . In r e a l i t y , this theory may not be p r a c t i c a l to implement.  A  number of constraints may prevent the Canadian exporter from adjusting ,prices i n response to cost reductions i n ocean shipping and other components of physical d i s t r i b u t i o n i n the short run. Foremost, the sales contract, and the shipping contract may d i f f e r e n t time horizons.  The sales contract may  be of  be of one or two years  duration while shipping services are contracted f o r on a s i n g l e voyage basis.  During t h i s time, the cost of shipping may  market conditions.  f l u c t u a t e due to  In t h i s s i t u a t i o n , the Canadian exporter may not have  the opportunity to adjust prices i n response to short run f l u c t u a t i o n s in the shipping market. Secondly, even i f sales and shipping contracts were of s i m i l a r durat i o n , competitive conditions i n markets may  remove the option f o r Canadian  exporters to p r i c e i n response to cost reduction i n ocean shipping and physical d i s t r i b u t i o n .  Canadian exporters may  be under pressure to reduce  prices i n a; market and reductions i n shipping costs may on to the foreign buyer.  have to be passed  38. F i n a l l y , the cost reduction achieved in shipping and other aspects of physical d i s t r i b u t i o n may be required to offset price increases other areas in order to maintain the existing s e l l i n g p r i c e .  in  If not, a  higher s e l l i n g price may make the product uncompetitive in certain markets. THE SERVICE ASPECT OF THE CONTROL OF SHIPPING IN SALES PROMOTION Many aspects of marketing other than price are important.  Product  quality and service provided by the s e l l e r to the buyer can be as important as price in making a sale.  In international marketing, one such  service which the s e l l e r can provide i s the r e s p o n s i b i l i t y for the arrangement of ocean shipping. One reason why Canadian exporting firms may desire to control  shipping  arrangements in certain trades and markets may be this service aspect. If by assuming r e s p o n s i b i l i t y for ocean shipping, the Canadian exporter can make l i f e easier for the potential customer, the chances of achieving and maintaining sales may be enhanced. In order to gain a better understanding of the marketing situations in which the control of shipping by Canadian exporting firms can be a service advantage, is is desirable to develop a p r o f i l e of the markets and the importer-buyers where delivered sales are applicable.  Market P r o f i l e Where c . i . f . Terms are Advantageous Markets for commodities d i f f e r around the world.  In what markets  and to what type of importer-buyer is the control of shipping by the s e l l e r a marketing service advantage?  This assumes that the importer-buyers  are free from p o l i t i c a l constraints which would otherwise l i m i t the freedom of choice over terms of shipment.  39. Firm s i z e .  The f i r s t and key c h a r a c t e r i s t i c is the size of the importer-  buyer in a market.  Size must take into account both the volume of pur-  chases carried by ocean shipping as well as the overall size of the importer-buyer.  There is considerable advantage for firms importing sub-  stantial volumes of goods which u t i l i z e ocean shipping to have in-house shipping expertise.  For those importer-buyers who import only small  tonnages, the expense of acquiring and maintaining in-house shipping expert i s e may be unwarranted.  The use of shipping agents and brokers is a  partial substitute but cannot f u l l y offset the lack of in-house expertise. To these smaller size importer-buyers lacking in-house shipping expertise, a sales contract where the s e l l e r assumes r e s p o n s i b i l i t y the shipping is preferred.  for  Thus, a .Canadian exporting firm can grasp a  marketing service advantage by s e l l i n g delivered.  This applies whether  the purchase i s one time, long term or a series of continuous spot purchases. To i l l u s t r a t e , consider the market for Canadian lumber exporters in the United Kingdom and Western Europe. normally lumber yards.  The importer-buyers of lumber are  These lumber yards vary in size but t h e i r average  3 purchase does not usually exceed f i f t e e n tons.  These lumber yards do  not, as a general r u l e , have expertise in ocean shipping.  A vital  part  of the marketing strategy of Canadian lumber exporters is to s e l l on a delivered basis.  Indeed, at least one.of the largest Canadian firms,  Seaboard, is going one step further in the U.K. market by establishing an  4 inland d i s t r i b u t i o n system and s e l l i n g on a delivered-buyer basis. Competitors' sales terms.  A second c h a r a c t e r i s t i c  is the s e l l i n g prac-  t i s e with respect to other exporters into a region.  This may or may not  be related to the f i r s t point.  If competing exporters are s e l l i n g  c.i.f.,  40. then a firm which i s not may be compelled to do soh'n order to remain competitive in a market.  If the firm chooses not to s e l l  delivered,  importer-buyers w i l l find i t convenient to purchase from those s e l l e r s who do. This c h a r a c t e r i s t i c has prompted several firms to control the shipping arrangements and s e l l c . i . f . . "Seaboard switched to a c . i . f .  basis when  other lumber brokers became involved in the shipping aspect and appeared 5  as competitors to Seaboard's sales.  Over time, this policy evolved into  a control of vessels as well through voyage and time charters. Price compatibility for foreign buyers.  A t h i r d factor about the market  which influences s e l l e r s to control shipping from a marketing service viewpoint is the d e s i r a b i l i t y of the importer-buyer to have a common cost basis to compare prices which are offered by competing s e l l e r s . competing s e l l e r s a l l quote c . i . f .  If  prices to a port suggested by the  importer-buyer, price comparison is f a c i l i t a t e d because a l l prices have a common basis.  If, on the other hand, an importer-buyer receives  price quotations from various s e l l e r s in d i f f e r e n t l o c a t i o n s ,  f.o.b.  considerable  time, e f f o r t and money must be expended to convert the quotes into a common c . i . f .  or delivered basis for comparison.  This factor seems to  be more relevant i f a p a r t i c u l a r commodity or range of commidities can be supplied by a large or difusely spread number of producers, i . e . products.  forest  It i s also particuarly applicable to smaller size importer-  buyers . A major chemical company in eastern Canada markets p l a s t i c s , chemicals and explosives around the world on a f.d.m. (free delivery to m i l l )  basis.  The firm competes against other overseas suppliers as well as local pro* docers in some markets.  A l l suppliers quote prices on the same f.d.m.  41.  basis.  Commonality of sales terms for comparison purposes is important  to prospective overseas importer-buyers and the decision to market on a f.d.m. basis r e f l e c t s  this.  Specialized vessels.  A fourth market c h a r a c t e r i s t i c which can encourage  the control of shipping as a marketing service advantage is the a b i l i t y of the s e l l e r to provide for a higher level of shipping service.  This may  take the form of frequency or of improved shipping methods, i . e .  the use  of specialized vessels. Depending on the individual trade, the exporting firm may have vessels under employment which provide frequencies and specialized stowage and/or handling c h a r a c t e r i s t i c s over and above what the importer-buyer could provide.based on his individual requirements.  Improved delivery  frequencies permit the importer-buyer to reduce the shipment lot s i z e . This in turn, reduces the level of inventory which must be c a r r i e d . Specialized vessels are.necessary in certain bulk trades to ensure proper handling df the commodities involved.  The a b i l i t y of the exporting firm  to provide the frequencies and/or specialized vessels may be an importing marketing service advantage to a potential  importer-buyer.  The export of molten sulphur by U.S. producers in the Gulf of Mexico is an outstanding example of the control of shipping by the exporting firms.  European customers prefer sulphur in the molten form.  molten sulphur requires specialized vessels.  To ship  The control of shipping by  the exporting firms and t h e i r use of specialized tankers is a marketing service f a c i l i t a t i n g the sale of molten sulphur in the European market. It i s unlikely that individual importer-buyers in Europe could arrange for ocean transport because molten sulphur tankers are scarce and a f u l l tanker load would carry more tonnage than required by the. individual  42. customer.  Ocean shipping arrangements are best provided f o r by the  U.S.  exporting firms. The vessels which transport Canadian f o r e s t products to overseas markets are good i l l u s t r a t i o n s of s p e c i a l i z e d ships which give Canadian exporters a service advantage i n respect to both frequency and  handling.  The 35,000-50,000 dwt f o r e s t products bulk c a r r i e r s have been b u i l t to s p e c i f i c a t i o n set out by the large Canadian f o r e s t products exporters. The vessels are then employed by the firm under a long term charter. These vessels are equipped with advanced cargo handling gear designed only to reduce loading costs but also to improve cargo handling.  not  Loading  and unloading i s f a c i l i t a t e d by j i b or gantry cranes which, spot load cargoes d i r e c t l y into large holds with extra large f u l l s i z e hatch covers. One advantage accruing to customers i s a much lower damage rate i n handlin The use 'Of vessels c o n t r o l l e d by the f o r e s t products exporting firm provide customers i n overseas markets greater frequencies of d e l i v e r y . The major exporters, MacMillan-Bloedel  and Seaboard, each have a f l e e t  of ships which s a i l into t h e i r major markets on a regular basis.  Four  benefits which occur, both to the customer and the exporting f i r m , due to increased frequency 1) 2) 3) 4)  are:  reduction i n the s i z e o f minimum order reduction i n inventory requirements reduction i n c a p i t a l t i e d up i n inventory g broadens customer base because of f i r s t three advantages  SALES TERMS AND PAYMENT The p a r t i c u l a r shipment terms included i n any trading contract are determined i n order to f i x the r e s p o n s i b i l i t y f o r the costs and r i s k s of carriage c l e a r l y between buyer and s e l l e r .  Shipment terms state  e x p l i c i t l y which party w i l l pay the transport charges (and  normally  43. undertake transport arrangements), where delivery takes place and when property and r i s k passes from s e l l e r to buyer. The terms of shipment do not speTl out e x p l i c i t l y when payment is made by the buyer to the s e l l e r .  In both f . o . b . and c . i . f .  s a l e s , i t 'is  common for payment to be made upon presentation of documents once the cargo is loaded aboard the vessel at the port of loading.  However, timing  of payment is decided according to contractual negotiations between buyer and s e l l e r .  Payment can be made prior to shipment, upon loading,  upon delivery, 30 days after d e l i v e r y , etc.  This suggests that the timing  of payment is not determined by the terms of shipment and the control of shipping in Canadian bulk trade. ENSURING DELIVERY THROUGH THE CONTROL OF SHIPPING The control of shipping can be an e f f e c t i v e means of guaranteeing delivery of the commodity traded.  In a f . o . b . contract, the foreign  importer-buyer must supply .the vessel to l i f t the tonnage.  If the importer-  buyer should desire to break the contract, one convenient way in which to do so is to f a i l to supply a vessel.  This leaves the Canadian exporter  in a p a r t i c u l a r l y vulnerable position since the commodity has already been delivered to tidewater and is in storage awaiting the a r r i v a l of the vessel.  While the sales contract would no doubt provide for some compen-  sation for the exporter due to cancellation in this manner, the sale has f a l l e n through because the control of shipping exercised by the foreign importer-buyer provided the means by which to break the contract. This is not to say that i f the contract was on a c . i . f .  basis, that the  foreign importer-buyer could not have found another way out of i t . According to several sources involved in Canadian bulk commodity trades, this situation has occurred in the recent past.  A particular  44. Japanese buyer of copper concentrate experienced r i s i n g raw material inventories following the worldwide recession sparked o f f by a quadrupling of o i l prices in 1973-74.  The Japanese buyer had a sales contract  with a Canadian exporter on f . o . b . terms.  In order to avoid increasing  their inventories further, the Japanese party f a i l e d to produce a ship to l i f t the contracted amount.  In this s i t u a t i o n , a c . i . f .  contract with  shipping controlled by the Canadian firm would have averted this occurance.  While this example i s an unusual occurance, i t may be a factor  which motivates Canadian firms to s e l l c . i . f .  and control the shipping  arrangements. The control of shipping arrangements can also ensure that a sale is delivered into the market i t was intended f o r .  If a contract i s f . o . b . ,  the foreign importer-buyer has the opportunity to arbitrage by cross trading the commodity and shipping d i r e c t l y to the new customer from the original port of loading.  This may reduce the opportunity for a Canadian  exporter to price discriminate into various markets.  The control of  shipping i s an e f f e c t i v e means to allow firms to price discriminate in separate markets because any importer-buyer wishing to cross trade the commodity must take delivery and then ship to the new market. tional shipping leg w i l l  The addi-  in most cases eliminate the p r o f i t s to be made  from cross trading. A Canadian firm exporting metals provides an interesting example of this s i t u a t i o n . potential buyer.  A company salesman was in Taiwan on a sales t r i p to a At the buyer's factory, the salesman noticed metal  ingots produced by his firm.  Knowing that the company had not previously  sold to this buyer, the salesman traded.  The original  suspected the ingots had been cross  buyer was traced through, the s e r i a l numbers stamped  45. on the ingots.  As the original buyer purchased the ingots on f . o . b .  terms, i t was speculated that the ingots were resold to the Taiwan buyer at a price lower than the Canadian company was quoting.  The Canadian  firm took further precautions to avoid a repetition of the situation' by making further sales to the original buyer on c . i . f .  terms only.  KNOWLEDGE OF SHIPPING MARKETS AS A SALES AID Although a Canadian exporting firm may not desire to control by s e l l i n g on c . i . f .  shipping  terms, a knowledge of shipping costs w i l l help the  exporter r e a l i z e a better f . o . b . p r i c e .  In making an e f f o r t to p a r t i c i -  pate in shipping, the Canadian exporter w i l l gather information concerning shipping costs to prepare a c . i . f .  offer.  The knowledge gained w i l l  enable the exporter to understand better the costs of shipping and the shipping margins which the importer-buyer has b u i l t into his f . o . b . offer.  This w i l l prevent the foreign party from obtaining a better price  from the Canadian exporter in sales negotiation through a padding of the shipping costs. SUMMARY This chapter has analyzed marketing considerations motivating the control of shipping by Canadian firms exporting dry bulk commodities. The control of shipping may enable the exporting firm to achieve s p e c i f i c marketing advantages in respect to p r i c e , service and d e l i v e r y . Price advantages resulting from the control of shipping are obtained largely through economies realized in the various phases of transport and d i s t r i b u t i o n .  These were discussed in detail  in the preceding chapter.  The focal point of potential marketing service advantages is the opportuni t y to make l i f e easier for a potential customer through the control of  46. shipping by the exporter.  The control of shipping is an e f f e c t i v e means  to ensure delivery to a p a r t i c u l a r customer or market. The control of shipping may be an integral part of an exporting firm's marketing strategy.  The marketing strategy, in turn, i s crucial  to the achievement of the firm's goals of p r o f i t s and growth.  47. Chapter 3 Footnotes: 1.  Vern Terpstra, International Marketing, and Winston, 1972, p. 163.  New York:  Holt, Rinehart  2.  Ibid.  3.  Personal interview with Mr. Tony Loxton, Canadian Transport Company, July 1978.  4.  Personal interview with Mr. Dudley Darling, General Manager, D i s t r i bution, Seaboard Shipping Company, June 1978.  5.  Ibid.  6.  Personal interview conducted by Chan Heng Toong with Mr. 'A. MacKenzie, Manager of Transportation and D i s t r i b u t i o n , DuDont of Canada, July 1978'.  7.  "Star Quality", Norwegian Shipping News, No. 16, 1978, pps. 13-14.  8.  Personal interview with Mr. Dudley Darling, General Manager, D i s t r i bution, Seaboard Shipping Company, June 1978.  V  48. Chapter 4 THE EFFECT OF POLITICAL CONSTRAINTS ON THE'CONTROL OF SHIPPING Deep sea shipping has come under increasing attention by governments. Open negotiation of the control of shipping between buyer and s e l l e r is not always possible due to constraints imposed by governments. This chapter considers the effects that p o l i t i c a l  constraints have  on the control of shipping in Canadian oceanborne dry bulk trades. Generally, the S o c i a l i s t and developing countries are where p o l i t i c a l constraints have been the strongest.  Government involvement has been more  limited in the developed market economy countries.  In these countries,  the terms of shipment are usually agreed upon during the sale negotiations without p o l i t i c a l constraints affecting the choice. This topic has become increasingly important to Canada because the country does not possess a merchant marine.  Canada's maritime policy  since the late 1940's has been to rely on the international market to provide the shipping servides for Canadian trade. has served Canada well up to the present time.  shipping This policy  Canada ranks tenth in  the world in terms of seaborne trade by tonnageJ  The a b i l i t y to secure  e f f i c i e n t shipping is of v i t a l importance to Canadian traders.  Reasons for Larger Participation in Bulk Trades by Developing Countries In the past, the developing countries have been r e l a t i v e l y by the level of service and rates in bulk shipping.  satisfied  In part, this was  due to bulk shipping requirements being contracted for on the free world market.  The i n i t i a l  was l i n e r shipping.  area of f l e e t development in most developing countries It was f e l t that l i n e r shipping offered the greatest  opportunity for developing countries to r e c t i f y t h e i r real or perceived  49. shipping grievances.  This was due to the fact that l i n e r shipping is a  r e l a t i v e l y expensive operation with rates determined by price setting c a r t e l s , the conferences.  The developing countries f e l t that i f they  were able to participate in l i n e r shipping they would either be able to reduce rates or bring home a share of p r o f i t s from t h e i r participation the conferences.  The high level of freight rates prevailing for  in  liner  shipping also gave many countries the expectation of foreign exchange savings and gains by participating in l i n e r shipping. As the l i n e r f l e e t s of developing countries grew and acquired a portion of their l i n e r trades - the proportion varies widely between countries - attention has shifted to bulk shipping. Developing countries have two reasons for developing their bulk shipping f l e e t s .  F i r s t , developing countries export 90 per cent of tanker  cargoes and over a third of the main dry bulk cargoes.  Yet they own less  than 6 per cent of tbe world f l e e t of tankers and bulk c a r r i e r s .  World  bulk trades, including o i l , account for 80 per cent of world seaborne cargoes.  Second, developing countries claim they can operate bulk  shipping services more economically than the t r a d i t i o n a l maritime nations can under t h e i r own f l a g s .  Traditional maritime nations have increasingly  turned to flags of convenience to lower their costs and remain competitive.  This has occurred almost e n t i r e l y for bulk, and not l i n e r ,  vessels.  Nearly a third of the world f l e e t is now registered under flags of con3 vemence. FLAG DISCRIMINATION As developing and S o c i a l i s t countries have b u i l t up their merchant f l e e t s , i t has been common for respective governments to impose requirements on trade to ensure that national f l a g ships are u t i l i z e d .  Most of  50. the r e s t r i c t i v e trade practices come under the term ' f l a g d i s c r i m i n a t i o n ' . It should be mentioned that f l a g discrimination is not a recent phenomenon.  The t r a d i t i o n a l maritime nations made use of f l a g discrimination  when their merchant f l e e t s were growing in the 18th and early 19th century. Flag discrimination can be applied either b i l a t e r a l l y or u n i l a t e r ally.  B i l a t e r a l shipping agreements are normally developed by governments  and apportion the.seaborne trade between two countries to national f l a g ships, usually on an even percentage.  Bilateral  shipping agreements  containing 50:50 cargo sharing clauses are popular between Latin American countries.^  India has s.imilar agreements with the U.S.S.R. and other  developing and S o c i a l i s t countries. Unilateral  flag discrimination by countries can be summarised as  follows: (1)  direct l e g i s l a t i o n can reserve a certain proportion of trade or type of cargo for national  (2)  carriers;  preference can also be practiced by manipulating exchange control or finance for trade, in order to give national c a r r i e r s advantageous rates;  (3)  import and export licences can be c o n t r o l l e d ;  (4)  various harbour fees and dues can be adjusted;  (5)  domestic shippers can be pressured by o f f i c i a l  sources  5 to ship their cargoes on national  carriers.  The most common form of flag discrimination is the reservation of a certain proportion or type of cargo for national UNCTAD l i n e r code.  ships.  In 1974, concerted action by the developing countries  - the so c a l l e d Group of 77 - led to a proposal known as the Convention on a Code of Conduct for Liner Conferences by the United Nations Confer-  51. ence on Trade and Development (UNCTAD).  The dominant feature of this Code  is the d i s t r i b u t i o n of l i n e r freight between two countries on the 40-40-20 basis.  This reserves for each country 40 per cent of the sea-  borne trade for their national or designated c a r r i e r s with the remaining 20 per cent allocated to cross traders. shipping.  The Code applies only to l i n e r  It has yet to be r a t i f i e d because less than 25 per cent of the  world's l i n e r cargo tonnage, by country of r e g i s t r y , has acceded to the Code.  The t r a d i t i o n a l maritime nations have been opposed to the Code  because they own the majority of the world's l i n e r cargo tonnage.  Their  participation in many trades would decrease i f they were only allowed to participate as cross traders limited to a 20 per cent share. Recently, at the UNCTAD V Conference in Manila in the spring of 1979, the developing countries proposed that a cargo sharing system similar to the 40-40-20 agreement for l i n e r trades be implemented for bulk trades. The adoption of such an agreement seems even more remote than for the l i n e r code but is another indication of the determination of developing countries to participate in bulk shipping through, the mechanism of flag discrimination.  CANADIAN EXPERIENCE WITH COUNTRIES PRACTICING FLAG DISCRIMINATION Canada has been affected by flag discrimination to a s i g n i f i c a n t degree in i t s trade with the developing and S o c i a l i s t countries.  To  i l l u s t r a t e t h i s , Canadian trade and shipping with B r a z i l , China, India and South Korea w i l l be examined. reasons.  These countries were chosen for two  F i r s t , they have rapidly expanded t h e i r merchant f l e e t s in the  l a s t decade and possess the largest f l e e t s in the Third World.  Second,  Canadian exports of sulphur and potash are common to a l l four and move in substantial tonnages.  The effect of flag discrimination upon the control  52. of shipping and the choice of vessel in Canadian trade can be seen from the following  illustrations.  Brazil B r a z i l ' s merchant f l e e t has grown spectacularly.  In 1960 i t amounted  to only 1.3 m i l l i o n dwt; by 1980 i t w i l l top the 10 m i l l i o n dwt mark. Brazil has achieved this remarkable growth through a policy of cargo reservation and b i l a t e r a l i s m and by government provision of soft loans for the nation's ship owners. A unique feature of B r a z i l i a n shipping policy for bulk imports is that a l l major tonnages, t o t a l l i n g over 20 m i l l i o n tons, are required to move on vessels owned or chartered by B r a z i l i a n shipping companies.^ This is in effect regardless of the terms of shipment.  Between 1967 and  1976, B r a z i l ' s flag share of imports, including chartered vessels, rose from 45 to 70 per cent of a l l  tonnage.  In contrast, only some 25 per  cent of export tonnage moved in B r a z i l i a n owned and chartered vessels in 1976.  8  Canadian sulphur and potash sales to Brazil have each fluctuated between 200,000 to 400,000 tons annually. c. & f.  basis.  The majority of sales are on a  This is due to the multitude of small private  companies in Brazil which import less than shipload volumes.  fertilizer The Canadian  exporting firms each consolidate their orders to u t i l i z e larger vessels and reduce the freighting costs to B r a z i l .  However, Canadian exporters  are subject to B r a z i l i a n government regulations which stipulate that shipping be handled by a B r a z i l i a n shipping company. As a r e s u l t , sources in the various Canadian sulphur and potash exporting firms state that the current practice is to ask the various B r a z i l i a n shipping lines for bids to move a certain amount of tonnage  53. from Vancouver to Brazil over the period of one year on a Contract of Affreightment (COA).  The c a r r i e r submitting the lowest bid i s contracted.  Despite the rapid growth of B r a z i l i a n shipping and the addition of many new dry bulk c a r r i e r s , the B r a z i l i a n shipping companies have normally chartered tonnage off the world market rather than use f l a g vessels to fulfill  their COA's with Canadian sulphur and potash exporters.  This is  in part due to the abundance of dry bulk c a r r i e r s which have unloaded in Japan and seek employment.  The B r a z i l i a n owners normally time-charter a  vessel to move from Japan to Vancouver in b a l l a s t , Vancouver to Brazil with cargo, and then either release the vessel or use i t to move B r a z i l i a n export cargo. B r a z i l i a n shipping companies are also responsible for transporting the sizeable Canadian wheat exports to Brazil which have been over 1 m i l l i o n tons annually.  The Canadian Wheat Board s e l l s on a f . o . b .  to a government" buying agency.  basis  The agency then contracts with local ship-  owners to move the tonnage. China China has the potential to become one of the largest maritime nations. One of China's national goals i s to develop i t s merchant f l e e t .  At the  end of 1978 China's merchant f l e e t t o t a l l e d over 5 m i l l i o n grt with another 1 m i l l i o n grt under flags of convenience through Hong Kong and 9 Macao based companies.  China s t i l l  has large requirements for chartered  tonnage - primarily due to the enormous variation in import and export demand.  In 1978 China had over 150 vessels of 3.5 m i l l i o n dwt chartered  on the time charter market.^ China has used a policy of buying f . o . b . and s e l l i n g c . i . f . u t i l i z e and build i t s merchant f l e e t . ^  to  The implementation of this policy  54. i s straight forward because a l l of China's trade is handled by state trading agencies, as i s the shipping sector.  The state agencies request  during trade negotiations that control of shipping be placed in t h e i r hands.  Tonnage requirements are then forwarded to the China Foreign Trade  Transportation Corporation, a branch of the Ministry of Foreign Trade. All seaborne t r a f f i c Corporation, Zhongzu.  is then directed to the China National  Chartering  Zhongzu, in e f f e c t , i s China's shipper represent-  ing a l l cargo i n t e r e s t s .  Tonnage requirements are then met by vessels  from the China Ocean Shipping Company (COSCO), the state owned shipping company, one of three Hong Kong based, Chinese owned shipping l i n e s , or 12 vessels chartered d i r e c t l y by Zhongzu from the world market. Canadian exports of sulphur and potash to China are currently around 13 300,000 tons a year each.  The two major Canadian exporters of these  commodities, Cansulex and Campotex, are i n d i f f e r e n t to Chinese demands for the control of shipping.  F i r s t and foremost, these firms are i n t e r -  ested in making sales to the Chinese and regard Chinese demands for control of shipping as acceptable and incidental to doing business with China. Similarily,  China is responsible for providing vessels to l i f t  3.5 m i l l i o n tons of Canadian wheat purchased annually.  the  Sales are made  by the Canadian Wheat Board (CWB) with the China National Foods and Cereals Agency.  The Chinese agency requests f . o . b . terms of shipment.  This is readily acceptable to the Wheat Board as i t is t h e i r policy not to be involved in ocean transportation.  To date, the CWB has been s a t i s -  fied by the shipping performance of the Chinese. Canadian forest products exporters have given China a concession to control shipping in order to penetrate the Chinese market.  Since the  Second World War, the Canadian forest products trade has moved on an almost exclusive c . i . f .  or c. and f.  basis.  A buyer's market for pulp  and Chinese insistence on f . o . b . terms of shipment has upset the t r a d i tional pattern.  Canadian forest products exporters no doubt have accepted  Chinese demands also because the volume involved is rather small and the movement did not f i t well into existing shipping patterns using the forest products exporters' chartered vessels.  India India's merchant marine has grown steadily since Independance.  At  the end of 1978, total operative tonnage was 5.2 m i l l i o n grt with another 0.8 m i l l i o n grt on order. The Indian government has a goal for Indian flag ships to transport 50 per cent of the country's foreign trade.  Presently,  Indian ships  carry 41 per cent of the country's foreign trade although in bulk cargoes 14 t h e i r share i s only 23 per cent. India has negotiated a few b i l a t e r a l 50:50 pact with the U.S.S.R.  shipping agreements; one i s a  By and large, the shipping business in  India has remained free from the extensive flag discrimination t a c t i c s found elsewhere which protect developing merchant marines.  Stated owned  agencies involved in foreign trade are required to use the services of the 1  1  state shipping agency, Transchart, to arrange their shipping requirements. Canada's major dry bulk exports to India are sulphur and potash, both of which exceed 300,000 tons annually.  An Indian state agency,  Minerals and Metals Trading Corporation (.MMTC')' is the sole buyer. exporters offer sales contracts on both a c . i . f . and f . o . b . bases. invariably disregards the c . i . f .  quotation and accepts the f . o . b .  Canadian MMTC basis.  Freighting is then arranged through Transchart and Indian vessels are  56. u t i l i z e d i f possible. Despite government encouragement to private traders to export  c.i.f.  and import f . o . b . and thus u t i l i z e Indian shipping, there are instances where Canadian exporters have sold on a c . i . f . seeds have commonly moved on c . i . f .  basis.  Exports of o i l -  terms of shipment.  South Korea The percentage of overseas cargoes being transported by domestic flag ships has steadily increased and in 1977 attained i t s highest level ever, 42 per cent. was 3.4 m i l l i o n g r t .  The South Korean merchant f l e e t at the end of 1977 1g Many small operators are engaged on the Japan  service, South Korea's main trading partner.  The Korean Shipping Corpor-  ation has most of the larger vessels, over 10,000 g r t , and serves the country's longer trade routes. The South Korean government requires a l l importers to use national flag ships where possible.  Official  per cent of a l l imports into Korea.  agencies control an estimted 80-90 Foreign p a r t i c i p a t i o n i s limited to  the container trades and other s p e c i f i c exceptions designated by the government.  In addition, foreign exchange controls e f f e c t i v e l y prevent a  Korean company from placing any written guarantee with a foreign'shipping company.^  However, due to the capacity limitations of the country's  f l e e t , dispensation to use foreign vessels is possible to obtain. South Korea's major dry bulk imports from Canada are sulphur and potash.  Imports are handled by three importing companies.  Due to the  government policy of requiring Korean ships to service the import trade and the d i f f i c u l t y of obtaining a waiver because suitable vessels usually are a v a i l a b l e , Canadian exporters; of sulphur and potash normally offer sales contracts only on f . o . b . terms of shipment.  Ships of the Korean  57.  Shipping Corporation usually l i f t the cargoes from Vancouver. The trade in forest products to South Korea is on c . i . f .  terms.  Canadian exporters are able to bargain from a position of strength due to their extensive expertise in shipping and their chartered tonnage.  A  forest products vessel serving Japan can extend i t s voyage to South Korea at a low incremental cost.  Also, the tonnage involved is not large.  For a combination of these reasons, Canadian exporters of forest products are successful in obtaining f l a g waivers and are able to serve the South Korean market with t h e i r controlled tonnage. COST IMPLICATIONS OF FLAG DISCRIMINATION Canadian exporters are r i g h t l y concerned about f l a g discrimination p o l i c i e s which require the use of national flag ships in certain trades. The required use of national flag ships may r e s u l t in higher cost shipping. In bulk trades, where the proportion of shipping costs r e l a t i v e to the final "landed cost of a commodity may be as high at 50 per cent, the extra cost of shipping may result in making a commodity uncompetitive in a market or force the Canadian trader to accept a lower netback or pay a higher price.  The l a s t point is especially relevant in those trades where  Canadian traders bear the majority of f r e i g h t costs. Why is i t possible that increasing flag discrimination and the required use of national merchant f l e e t s could lead to higher priced shipping?  There are three areas of concern which can r e s u l t in higher  cost shipping. 1) 2) 3)  higher cost vessels delay costs reduced competitive market for third flag c a r r i e r s  58. Higher Cost Shipping Conventional wisdom would suggest that vessels of developing and S o c i a l i s t countries are less expensive to operate than ships owned by the t r a d i t i o n a l maritime countries, including those registered under flags of convenience.  It is asserted that lower crewing and administrative  expenses in developing countries result in lower cost shipping. This is not always the case.  Crew's salaries in Brazil are similar  to the pay scales in competing countries because of union pressure.  Addi-  t i o n a l l y , owners are obliged to employ more seamen than necessary because 1g of a high rate of national unemployment.  As a r e s u l t , B r a z i l i a n ships  are more expensive to operate than those which trade in the free world market. Flag discrimination may protect national f l e e t s from competition by outside c a r r i e r s .  Higher costs may result because the incentive to  reduce costs and i n e f f i c i e n c i e s  i s lessened.  The level of vessel u t i l i z a t i o n is crucial of shipping on a p a r t i c u l a r vessel or l i n e .  in determining the cost  Shipowners, whose vessels  are contracted on the international charter market, seek employment for their vessels on voyage patterns to minimize the amount the vessel has to s a i l in b a l l a s t .  This requires use of triangular and cross trade  routings. To i l l u s t r a t e , assume that the owner of a Panamax size dry bulk c a r r i e r is able to secure the following hypothetical routing: Hampton Roads to Japan Coal Japan to B r i t i s h . Columbia in b a l l a s t B r i t i s h Columbia to Brazil Sulphur/Potash. Brazil to U.S. East Coast Iron Ore This vessel would achieve a u t i l i z a t i o n ratio of over 80 per cent. H.D. Drewry Shipping Consultants estimate that the level of u t i l i z a -  59.  tion of bulk c a r r i e r s is very high.  19  The r a t i o of laden s a i l i n g days •  to total s a i l i n g days - assuming a l l port days are used for loading or. discharge - is as follows: 15,000 dwt 25,000 dwt 60,000 dwt  81% 77% 72%  Current world dry bulk shipping rates r e f l e c t these high levels of utilization.  Given lower levels of u t i l i z a t i o n , rates must necessarily  increase because a smaller amount of tonnage carried in a year would be avaiIable to cover similar costs and capital  charges.  It is complicated to achieve high levels of vessel u t i l i z a t i o n when services are being contracted on the international charter market.  The  necessary expertise and know how of the shipping companies may not be as high in the developing countries.  As a r e s u l t , they may not be able to  achieve as high a level of vessel u t i l i z a t i o n as shipping companies in the traditional maritime nations.  To the extent they cannot, their costs  w i l l r i s e and higher freight rates w i l l be passed on to the shippers or absorbed by the home government. Lower levels of vessel u t i l i z a t i o n may also result from the deliberate maritime policy of a country.  China's bulk c a r r i e r s on the Canadian  wheat commonly trade ply on.a shuttle basis, due to a lack of bulk exports from China, and are not trading i n . a more complex fashion to achieve higher levels of u t i l i z a t i o n .  This e f f e c t i v e l y l i m i t s t h e i r  utilization  ratio to only 50 per cent.  Delay Costs Flag discrimination p o l i c i e s require Canadian traders to u t i l i z e the national flag vessels of the trading partner's country.  Canadian traders  may incur cost penalities due to the scheduling of the vessel from the  60. f l a g required as a result of flag discrimination.  Without any r e s t r i c t i o n  on the vessel which w i l l be used to transport the trade tonnage, the f i r s t available and suitable vessel could be chartered.  In normal circum-  stances, there are bulk vessels steaming near Canadian waters which are actively seeking additional cargoes.  These vessels are chartered on the  world market and charterers benefit from the large number of vessels contending for cargoes, not only in terms of p r i c e , but in terms of vessel a v a i l a b i l i t y and scheduling. If Canadian traders are required to use the national f l a g vessels of a p a r t i c u l a r country, they face a number of constraints.  Due to the  f i n i t e f l e e t sizes of many countries, a suitable vessel may not be a v a i l able before a vessel which could have been chartered o f f the world market. Unless the contract takes this into account, Canadian firms may incur cost penalties because shipment i s delayed. For example, a 20,000 ton shipment of sulphur to a developing country may be delayed by two weeks because of vessel a v a i l a b i l i t y . $40/ton FOB Vancouver, the contract is worth $800,000. carrying cost is $800,000 x 14/365 x 14% = $3,648.  At  The inventory  In addition, there  are costs incurred for storage space either at the point of production or at tidewater. These delay costs may be further exacerbated i f the vessel which has been designated is delayed en route.  While this may occur for any  vessel regardless of o r i g i n , Canadian exports have had some poor experiences with countries which, i n s i s t on the use of t h e i r f l a g vessels.  One  Canadian firm exporting pulp to Cuba r e c a l l s rushing production of a s p e c i f i c grade of pulp and domestic transportation to meet a deadline imposed by the Cuban importing company.  While the pulp was being unloaded  61. at the wharf in Vancouver, the Cubans advised the firm that the vessel would be delayed by at least two weeks.  Depending on the compensation pro-  visions in the contract, the Canadian firm may have accrued sizeable delay costs on the transaction. Reduced Competitive Market for Third Flag Carriers Flag discrimination p o l i c i e s , as applied to Canadian traders, the use of the other country's vessels.  require  Because of the protection which  many countries extend to their developing merchant f l e e t s , the use of third flag c a r r i e r s is reduced.  The removal of competitive pressure  which is exerted by third flag c a r r i e r s seeking additional cargoes may affect the costs of shipment via national f l a g vessels of discriminating countries. iencies.  This may result in much l i g h t e r scrutiny of costs and e f f i c As a r e s u l t , costs may r i s e .  Another cost which may be imposed by flag discrimination  restrictions  results from the use of a vessel which i s not suited to handle a p a r t i c u lar cargo. question  The costs of this are very d i f f i c u l t to access, as is the of which party bears the cost.  This is p a r t i c u l a r l y relevant  to Canadian bulk trades with developing countries because.these countries have i n i t i a l l y developed their l i n e r f l e e t s .  The lack of suitable bulk  c a r r i e r s may require the use of l i n e r type vessels, commonly 'tween deckers', which are i l l  suited to handle bulk cargoes in the same e f f i c i e n t  manner as a bulk c a r r i e r .  SUMMARY This chapter has examined flag discrimination and i t s  implications  on the control of shipping for the major Canadian dry bulk trades.  Flag  discrimination is used by the S o c i a l i s t and developing countries as a  62.  means to ensure the u t i l i z a t i o n of growing national flag f l e e t s .  One  effect of f l a g discrimination i s to remove the opportunity for Canadian traders to participate in the r e s p o n s i b i l i t y of securing shipping arrangements through the terms of shipment. Sales of Canadian g r a i n , sulphur and potash to countries which practice f l a g discrimination are normally imported through agencies with some degree of government involvement.  Government flag discrimination  p o l i c i e s are channeled through the importer.  The insistence of the  importer for f . o . b . terms of shipment ensures that national flag vessels w i l l be u t i l i z e d i f a v a i l a b l e .  Canadian exporters normally have l i t t l e  leverage with the state-related importers regarding the terms of shipment.The majority of Canadian dry bulk trade is with countries which practice l i t t l e f l a g discrimination.  However, Canadian trade in dry bulk  commodities is growing the most rapidly with those countries which practice f l a g discrimination.  Canadian traders are r i g h t l y concerned  with the effect f l a g discrimination has on the provision of e f f i c i e n t shipping services.  Shipping costs account for a high percentage of the  landed cost of bulk commodities.  High cost shipping services may affect  the competitiveness of Canadian dry bulk exports.  It is in the s e l f  interest of Canadian traders to participate in the negotiations concerning the terms of shipment.  This w i l l give the Canadian trader the opportunity  to secure e f f i c i e n t shipping services, free from f l a g discrimination, on the international charter market.  In doing so, the effect upon the  competitiveness of Canadian dry bulk commodities by shipping p o l i c i e s foreign countries w i l l be lessened.  in  63. Chapter 4 Footnotes: 1.  Transport Canada, A Shipping Policy for Canada, Canada, 1979, p. 4.  2.  UNCTAD Secretariat, Merchant Fleet Development. New York: Nations, 23 October 1978, UNCTAD/SHIP/127, p. 2.  3.  Ibid, p. 7.  4.  Christopher Hayman, "What i t Takes to Build a Merchant Fleet", Seatrade, December 1974, p. 113.  5.  H.P. Drewry (Shipping Consultants), The Rise of National Fleets. An Economic Study, No. 16, London: HPD Shipping Publications, August 1973, p. 14.  6.  Christopher Hayman, B r a z i l , A Seatrade Study. Publications, 1977, p. 3.  7.  Nick Seward, "The Unctad Bulk Shuttle - Is i t a Ghost Train?", Seatrade, April 1979, p. 29.  8.  S.R. H i l l , " S t u d y of Measures to Promote or Protect National Fleets Affecting Canadian Trading and Shipping, Ottawa:" Economix international , 1978.  9.  Ottawa:  London:  Transport United  Seatrade  ....".'I ." ...  George Lauriat, "China Puts the Jigsaw Together", Seatrade, December 1978, p. 4.  10.  George Lauriat, "State Shipping and the Third World Squeeze", Far Eastern Economic Review, February 9, 1979, p. 41.  11.  George Lauriat, "Shipping", China Trade Report, Hong Kong: Eastern Economic Review Publication, March 1978, p. 7.  12.  Ian Middeton, e d . , China, A Seatrade Study, l i c a t i o n s , 1979, p. 9.  13.  George Froehlick, "Potash. Shipments to Rise 15 Per Cent", B.C. Business Week, Feb. 20, 1979, p. 13.  14.  Jayanta Sarkar, "Times are Hard, Even More So For Small Operators", Far Eastern Economic Review, February. 9, 1979, p. 66.  15.  H.P. Drewry (Shipping Consultants), The Movement of Minerals by Sea. An Economic Study, No. 14, London: HPD Shipping Publications, April 1973, p. 14.  16.  Kim Sam-o, "Home-built Ships Only", Far Eastern Economic Review February 10, 1978, p. 48.  17.  Nick Seaward, "Far East Report", Seatrade, December 1979, p. 157.  London:  Far  Seatrade Pub-  64.  18.  Nick Seaward, "The Unctad Bulk Shuttle - Is It a Ghost T r a i n ? " , Seatrade,. April 1979, p. 29.  19.  H.P. Drewry (Shipping Consultants), The Operation of Dry Bulk Shipping, An Economic Study, No. 71, London: HPD Shipping Publicat i o n s , January 1979, p. 29.  65. Chapter 5 THE CONTROL OF SHIPPING AND INSTITUTIONAL POLICY: TWO CASE STUDIES Firms engaged in Canadian oceanborne trades have different  policies  with respect to the control of shipping in their individual trades.  This  is logical given the d i v e r s i t y of trades and markets, d i f f e r i n g shipping considerations and the number of firms involved.  The purpose of this  chapter is to i l l u s t r a t e through two case studies the reasoning which influences policy formation, in respect to the control of shipping, for two firms involved in Canadian oceanborne bulk commodity trades. B r i e f l y , the important foundations on which a firm bases i t s  policy  in respect to controlling shipment are the size of the firm and the size and character of trades and markets in which i t is involved. is then set in response to l o g i s t i c a l , marketing and p o l i t i c a l  The policy factors.  In some s i t u a t i o n s , a s e l l i n g t r a d i t i o n in a p a r t i c u l a r trade or market is maintained.  O v e r a l l , firms determine t h e i r policy in order to further  t h e i r own s e l f - i n t e r e s t .  What this s e l f - i n t e r e s t w i l l be varies for  firms according to t h e i r objectives.  CASE STUDIES The two case studies analyze the p o l i c i e s of the Canadian Wheat Board and the Japanese steel companies.  There are six major steel com-  panies in Japan but they are examined together because of t h e i r similar behavior in the shipping of their imported raw materials.  These organ-  izations were selected because of t h e i r importance in Canadian oceanborne bulk commodity trades.  J o i n t l y , they are responsible for nearly  one-third of Canada's oceanborne bulk commodity exports. Their p o l i c i e s in respect to the control of shipping are well defined.  66.  Their behavior sheds l i g h t on a wide variety of factors which are important when examining the control of shipping in Canadian trade. THE CANADIAN WHEAT BOARD The Canadian Wheat Board (CWB) is an agency of the Government of Canada established under the Canadian Wheat Board Act of 1935. function, in general terms, is to market in interprovincial trade, grain growth in Western Canada.  Its  and export  The grains for which the CWB is  responsible, referred to as Board Grains, are wheat, barley and oats. Other grains and oilseeds are marketed by the private grain traders. Canada, a country with one-half of one percent of the world's popul a t i o n , produces six per cent of the world's grain.  In the 1977-78  crop year, grain production t o t a l l e d 36.8 m i l l i o n tonnesJ  The Canadian  2 share of global grain exports i s 22 per cent.  The United States and 3  Canada together account for 70 per cent of the world grain trade. Table 5.1 l i s t s the export tonnages of Canada's principal grain products in 1977-78.  Table 5.2 shows the major customers of Canadian wheat and  barley in 1977-78. TABLE 5.1 EXPORTS OF CANADIAN GRAIN PRODUCTS IN 1977-78 Commodi ty Wheat Flour Oats & Products Barley & Products Rye Flaxseed Rapeseed Source:  Tonnage Exported 15,246,000 757,000 90,000 3,590,000 271 ,000 272,000 1,476,000  Canadian Wheat Board Annual Report, 1977-78  67.  TABLE 5.2 MAJOR CUSTOMERS OF CANADIAN WHEAT AND BARLEY IN 1977-78 BARLEY  WHEAT Customer  Tonnage Exported 3,469,000 2,146,000 1,526,000 1,419,000 894,000 782,000 686,000  China USSR UK Japan Italy Brazil Poland Source:  Customer  Tonnage Exported  Japan Italy Poland W. Germany Iran USSR  841,000 630,000 595,000 206,000 184,000 166,000  Canadian Wheat Board Annual Report 1977-78  The CWB is b a s i c a l l y a marketing co-op for nearly 160,000 p r a i r i e farmers.  The CWB does not own or operate f a c i l i t i e s of any kind for the  storage or handling of grain.  It does, however, d i r e c t the movement of  producers' grain, in the domestic and export markets, through the established private grain traders who act as agents of the CWB. CWB Shipping Pol icy The CWB's marketing policy i s to s e l l on an in-store terminal  basis.  The CWB does not undertake r e s p o n s i b i l i t y for supplying ocean shipping in any of i t s sales.  The primary objective of the CWB is to co-ordinate  and market the three major Canadian grains.  In spite of the importance of  shipping,, the CWB does not desire to become involved in supplying shipping for i t s sales and market on a delivered basis.  There are four basic  reasons for t h i s : 1) 2) 3) 4)  buyers' preference for f . o . b . terms need for extensive shipping expertise risk p o l i t i c a l pressure to use Canadian f l a g ships  68. Buyers preference.  The preference of many buyers to purchase grain on  f . o . b . terms is an important factor influencing the CWB's shipping p o l i c y . Many of the largest customers of Canadian grains are countries where the government is involved in grain purchases through state buying agencies. These agencies usually i n s i s t on f . o . b . terms which allow them to control the freighting arrangements and nominate the vessel to be used.  In these  countries, the government encourages the use of national f l a g ships. The tonnages of grain imported annually provide an important cargo on which to base a f l e e t development plan.  In addition, these customers  are conscious of keeping shipping costs to a minimum and feel that they are better able to achieve this by undertaking r e s p o n s i b i l i t y for shipping. Because many of the major customers desire to provide for their own shipping, the CWB does not have any real incentive to s e l l on a delivered basis.  In situations where a buyer would prefer to purchase from the CWB  on a c . i . f .  basis, the private Canadian grain trade may be contracted  to provide the shipping.  This w i l l be elaborated on in a subsequent  section of this chapter.  Need for Shipping Expertise A c.-i.f. sales policy would require the CWB to develop extensive shipping expertise.  In recent years, annual sales by the CWB have  approached 20 m i l l i o n tons of grain.  If the CWB was responsible for a l l  the shipping of i t s sales, 1,000 vessel movements would be required to transport this volume i f the average vessel employed were assumed to be in the 20,000 dwt category.  At an average of 6 complete voyages a  year per vessel, 166 vessels would be employed in continuous service.  To  charter, coordinate and manage this number of vessels would require a large shipping department by anyone's standards.  There are only a handful  69. of shipping companies or agencies in the world that have r e s p o n s i b i l i t i e s of this magnitude. Risk The CWB would be exposed to r i s k by supplying shipping for i t s sales. To eliminate the r i s k in supplying shipping, i t would be necessary for the CWB to know exactly what the shipping costs would be at the time the sales contract was negotiated.  This is not always possible because  shipping costs may not always be known over the period of the sales contract. If vessel requirements were met by voyage or t r i p charters, the CWB would be exposed to risk on longer term sales contracts because of possible price fluctuations in the shipping markets.  Losses would be incurred  i f shipping costs rose above the margin the CWB had b u i l t into i t s price.  c.i.f.  Conversely, the CWB would p r o f i t i f shipping prices dropped.  There is considerable risk in being exposed to shipping markets in this manner as markets have fluctuated wildly in the past. Alternatively,  i f the CWB employed vessels on long term charters,  it  would have to ensure that the vessels were u t i l i z e d on back hauls to keep transport costs for grain products on the front haul to a minimum.  To  achieve a high level of u t i l i z a t i o n requires extensive shipping expertise as well as favorable trading conditions.  The CWB would be exposed to  risk i f a high level of u t i l i z a t i o n could not be achieved because higher charges would have to be allocated to front haul grain products.  These  higher shipping costs may exceed the margin the CWB has b u i l t into longer term c . i . f .  contracts and result in trading losses.  CWB would be under pressure to keep spot c . i . f . keep these prices at competitive l e v e l s .  A d d i t i o n a l l y , the  prices down in order to  This would require the CWB to  70. absorb the higher shipping charges. The .magnitude of the r i s k is grasped by r e a l i z i n g that a $1 r i s e in shipping costs per ton would cost the CWB $20 m i l l i o n a year i f app.lied to the annual sales of 20 m i l l i o n tons. over the course of a year.  A $1 r i s e in shipping charges is common  In v o l a t i l e market conditions, shipping rates  per ton have risen by over $10 in the space of a few months. sold on a c . i . f .  If the CWB  basis only, there is the r i s k that the CWB would be at  the mercy of freight charterers who would know that they needed the ships to f u l f i l l  t h e i r contracts.  This could result in the CWB paying a higher  price for shipping than i f the buyer were to arrange for the shipping of his purchase.  Most vessels are chartered through the London or New York  shipping markets where a high degree of professional conduct e x i s t s . S t i l l , shipowners would be able to figure out that the CWB was in the market for vessels and could possibly discriminate against the CWB. The risk of this occurring depends on the a b i l i t y of shipowners to collude and the state of the shipping markets.  Political  Pressure  F i n a l l y , the CWB would undoubtedly be subjected to p o l i t i c a l from proponents of the Canadian merchant marine. have a deep sea merchant f l e e t .  pressure  Canada does not presently  .If the CWB was responsible for the  shipping of i t s 20 m i l l i o n tons of grain sales, i t would come under pressure to u t i l i z e Canadian flag ships.  The substantial tonnages would  provide continuous employment for over 150 vessels.  It is a widely known  fact that Canadian vessels would be more costly to operate than ships chartered from the world market because of higher crewing costs, ship construction costs and taxes.  In the interest of keeping delivered prices  competitive, the CWB would very l i k e l y react unfavorably to being pressured  71.  into using Canadian flag vessels. Canadian Participation in Grain Shipping In spite of the policy of the CWB with respect to shipping, there can be Canadian p a r t i c i p a t i o n in the shipping of CWB grains.  Private  grain trading companies, who act as agents of the CWB, may undertake r e s p o n s i b i l i t y for the shipping of Board grains.  The opportunity for them  to do so depends upon the sales method employed by the CWB to d i f f e r e n t customers. The CWB markets grain in three manners. 1) 2) 3)  They are:  central buying system commercial buying system combination buying system  In the following sections, these marketing methods w i l l be examined to shed l i g h t on the opportunities each, present for Canadian p a r t i c i p a tion in shipping. Central buying system In a central buying system, a single agency usually a government organization, is responsible for purchasing a l l grain imported into the country.  This situation exists with several of Canada's largest customers,  including China, USSR, Poland and B r a z i l .  Purchases are made on the  basis of direct negotiation with the CWB or through periodic tenders offered by buying missions.  In 1973-74, about 75 per cent of the CWB's  Board grain sales were purchased by government buying agencies acting on 4 behalf of individual  countries.  The policy of the CWB to s e l l  in-store is agreeable to countries  which u t i l i z e a central buying system.  This i s because their governments  usually have a shipping policy which encourages the use of national  flag  72. shipping.  The shipping policy of the government is simple to implement  through the purchases made by a government grain buying agency.  The  policy of the CWB, in e f f e c t , gives these foreign buyers the control of shipping without any negotiation on the subject. It can be argued that the policy of the CWB makes no difference. These central buying agencies buy from private merchants under similar terms for the identical reasons.  Private traders in the U.S.A. acquiesce  to these demands even though they often s e l l on c . i . f . terms to customers around the world.  Thus, for the majority of CWB sales, the shipping  policy of the CWB does not d i f f e r from that of private firms in determining where the control of shipping r e s t s . The Canadian agents of the CWB are normally involved in these sales through fobbing contracts.  These contracts, which are given by the  buyer, provide for the agent to undertake r e s p o n s i b i l i t y for coordinating the outward elevation and loading of the grain onto the buyer's vessel. In e f f e c t , the agent is responsible for the a c t i v i t y between the CWB's in-store sale and a f . o . b .  position.  Commercial buying system Under a commercial system, a country's grain needs are bought by individual private companies, each buying for i t s own needs.  These buyers  normally purchase in smaller quantities than central government buying agencies because they account for only a portion of the market in their country.  The commercial buying system is prevalent in the United Kingdom  and Western Europe. The private grain trading companies that are agents of the CWB play an important role to markets which purchase on a commercial basis.  This is  because the agents have a superior over-all market i n t e l l i g e n c e network in  73. those countries with a complex commercially oriented grain trading industry. The agents are normally Canadian subsidiaries of U.S. grain trading companies.  The parent organizations have offices in most countries and are  well acquainted with local market conditions. Under the commercial buying system, i t is more common for sales of CWB grains to be negotiated by the agents rather than the CWB. sense, the agent acts as a merchandiser.  In a  The agent w i l l buy grain from  the CWB in a forward position and then seek to market the grain on a commercial basis in countries with a commercial buying system.  Agents  also s e l l to central government buying agencies - this has been reported in the case of Brazil and Poland.  Price and a v a i l a b i l i t y are important  factors influencing the decision of the buyer to use this channel. The agent can market their Board grains on a f . o . b . or c . i . f . In practise, i t is more common for sales to be on c . i . f .  basis.  terms because  the agents are often in a position to consolidate cargoes and secure lower ocean freighting rates.  The agents may also possess more expertise  in shipping than the buyer. Private grain trading companies may also become involved in grain shipping by assuming r e s p o n s i b i l i t y for the shipping of grain sold by the CWB to customers on a f . o . b . or in-store basis.  Certain customers may  purchase d i r e c t l y from the CWB but do not wish to undertake r e s p o n s i b i l i t y for the shipping of their purchase.  At the request of the buyer, the  CWB can select an agent or tender for bids from several agents to provide the shipping.  The resulting contract whereby an agent of the CWB,  normally a private grain trader, provide the shipping is known as a c i f up contract. The U.K. market provides a good example of how a c i f - u p system func-  74. tions.  Three large buyers negotiate d i r e c t l y with the CWB and commit  themselves to a purchase a t a n i n - s t o r e p r i c e .  Agents of the CWB are  invited to tender for a c i f - u p contract to provide the shipping for the sale.  The agent takes into consideration a l l the a c t i v i t i e s necessary to  transform the in-store price to a c i i . f .  price.  The buyer then selects  the lowest cif-up o f f e r and the agent submitting i t is contracted to undertake the loading and ocean freighting for that contract. The commercial buying system provides the opportunity for Canadian participation in the shipping of CWB grains.  Private grain traders may  become involved in shipping either by merchandizing grains they have purchased from the CWB or through cif-up contracts. Combination buying system The sale of Board g r a i n , primarily wheat and barley, to Japan i s the sole example of the combination buying system.  The Japanese Food  Agency (JFA) and Zenkoren are government agencies responsible for importing wheat and barley.  CWB sales methods are similar for both agencies.  On wheat s a l e s , the overall quantity and price are negotiated d i r e c t l y between the CWB and JFA.  The sales are on a f . o . b . basis.  However, two  intermediaries are involved in the actual movement of the wheat: Canadian agent of the CWB and a Japanese trading company.  a  The agent  handles the documentation and converts the U.S. currency paid by JFA into Canadian currency for the CWB. the sale into a c . i . f .  The Japanese trading companies convert  basis for the JFA to evaluate.  The policy of the  JFA allows for only Japanese trading companies to make c . i . f . o f f e r s .  This  precludes the participation of any Canadian agents of the CWB from attempting to make a cif-up offer to the JFA.  It ensures that Japanese interests  are favoured in the shipping of wheat - over one m i l l i o n tons annually -  75.  from Canada to Japan. In contrast, non-Board grain sales to Japan are marketed by private grain trading companies without the involvement of the CWB. buyers are normally private traders and crushing houses.  The Japanese  Sales of non-  Board grains to Japan are characterized by small l o t sales to multiple buyers.  Although Japan trading companies act as the importers, the control  of shipping rests largely with Canadian i n t e r e s t s .  The control of shipping  is an integral part of the marketing strategy of the Canadian grain trading companies due to t h e i r a b i l i t y to secure lower freighting costs through the consolidation of cargoes. THE JAPANESE STEEL INDUSTRY AND THE CONTROL OF SHIPPING Japan is the largest importer of Canadian oceanborne bulk commodity exports.  Table 6.3 l i s t s the major Canadian bulk commodity exports and  tonnages shipped to Japan in 1977.  TABLE 5.3 CANADIAN BULK COMMODITY EXPORTS TO JAPAN IN 1977 10.8 m i l l i o n tons 3.6 2.3  Coal Iron Ore Grains Forest Products Potash Copper Concentrates Source:  1.4  0.6 0.2  H.P. Drewry (Shipping Consultants), Trends in Japanese Dry Bulk Shipping and Trade. An Economic Study, #69, London: HPH Shipping Publications, December 1979.  A p r o f i l e of the Japanese steel  industry  Japan's steel industry ranks third in the world behind the U.S.A. and U.S.S.R. in crude steel production.  Recent production levels have been in 5  excess of 100 m i l l i o n tons annually.  The industry in Japan is highly  76. concentrated with f i v e producers accounting for over three-quarters of the total output.  They are, in order of market share:  Nippon Steel  (32-34%), Nippon Kokan (14%), Sumitomo Metal (12-13%), Kawasaki Steel (12-13%), and Kobe Steel (6-7%).  6  The Japanese have a very advanced steelfnaking process which centers on the blast furnace/oxygen converter system. pig iron/raw steel r a t i o .  This sytem creates a high  In generating a large demand for pig iron in  the steelmaking process, large quantities of iron ore and coking coal are required.  Domestic producers in Japan can supply only 1 per cent of  the iron ore and 15 per cent of the coking coal requirements.'' This situation necessitates the importance of vast amounts of iron ore and coking c o a l .  In 1977, Japan imported 133 m i l l i o n tons of iron Q  ore and 61 m i l l i o n tons of coking c o a l .  Australia is the dominant  supplier to the Japanese providing 50 per cent of the iron ore and 43 per g cent of coking c o a l .  At the same time, because of their dependance on  imported resources, the Japanese have made an e f f o r t to d i v e r s i f y sources of supply.  their  Sizeable tonnages of iron ore and coking coal are  imported from over half a dozen countries, including Canada. An additional feature of this import pattern is the investment the Japanese have in t h e i r sources of supply.  The early 1970's witnessed a  boom in Japanese overseas resource investment.  The Japanese were annually  opening over one hundred resource oriented development projects abroad with an annual development cost in excess of half a b i l l i o n The investment in iron ore and coking coal production  dollars.^ facilities  is usually undertaken by the Japanese trading companies rather than the steel companies.  However, the major trading companies have close links  with Japanese industrial  i n t e r e s t s , including the steel companies.  This  77.  is often achieved through direct ownership of shareholdings which each have in the other.  The mutual interest of Sumitomo Steel and Sumitomo  Shoji Trading Company is one example. Contracts for iron ore and coking coal are negotiated d i r e c t l y between the steel companies and foreign suppliers.  The role of the trading  companies in the import process is primarily to provide documentation. The steel companies are responsible for the shipping although a trading company may be contacted to handle an occasional  charter.  The large tonnages imported and the backward integration into production f a c i l i t i e s by overseas d i r e c t investment provide an inducement to the steel companies to become d i r e c t l y involved in ocean shipping.  Not  only can the long term employment of vessels be guaranteed because of the large base cargoes, but exclusive use on a p a r t i c u l a r trade means that the optimum s i z e of c a r r i e r can be employed.  This enables freighting  costs to be closely checked by the steel companies.  This is v i t a l  because the shipping costs represent a large percentage of the landed value of both iron ore and coking c o a l . To i l l u s t r a t e , in 1978, f r e i g h t rates from Australia to Japan were $5.65 a ton for iron ore and s l i g h t l y higher for coking c o a l , say $7.65 a ton, due to the use of smaller vessels in the coking coal trade.  In 1o  that year, the f . o . b . price for Australian lump sized iron ore was $13.21 13 and $50.75  for Austrian Goonyella coking c o a l .  which can be regarded as typical  In these instances,  in Australian exports to Japan, shipping  costs accounted for approximately. 30% of the delivered value of iron ore and  13% for coking c o a l .  The Japanese steel companies are so cost conscious of the transportation costs of their imports that they have even bought on an f . o . r .  (free  78. on r a i l ) basis and brought their weight to bear in negotiating r a i l from mine to tidewater.  rates  This happened in Canada recently in the sale of  Kaiser Resources' coking coal to the Japanese.  It appears, however, that  the Japanese interests were no more successful than Kaiser Resources in negotiating r a i l rates with C P .  Rail.  At the same time, the costs of Japanese flag shipping have risen substantially since 1970 due primarily to the increase in personnel costs.  It i s estimated that between 1970 and 1977, the operating costs 14  of a Japanese flag vessel increased by 190 per cent in yen terms. substantial crews.  This  increase was attributed to a r i s e in the cost of Japanese  Japanese crews now rank among the most expensive in the world.  Personnel costs as a percentage of total operating costs are now higher for Japanese f l a g vessels, than for vessels from many of the traditional maritime countries including Norway, West Germany and Greece. The Japanese steel companies have for the most part gone along with the r i s e in Japanese flag shipping costs because most of the Japanese flag vessels which they u t i l i z e are chartered for long term periods; in most cases, for the l i f e of the vessel.  Between 1970 and 1977, Japanese  flag ships.:slightly increased t h e i r proportion of Japan's import trade from 15 44.6 to 46.8 per cent despite the r i s e in crewing costs. A d d i t i o n a l l y , and perhaps the most important factor which influences the Japanese steel industry to control i t s own shipping requirements the complexity of the import program.  is  Up to one-half dozen grades of iron  ore and a dozen grades of coking coal are used in the Japanese steel production process. monitored.  Inventory levels at the steel m i l l s must be c l o s e l y  For the larger companies, this is further complicated by  multiple m i l l s .  The Japanese steel companies desire to control  their  79.  shipping because economies can be achieved by closely c o n t r o l l i n g the scheduling of flows and inventory l e v e l s . The Japanese achieve a great deal of f l e x i b i l i t y by c o n t r o l l i n g their own shipping.  Nippon Steel has nine m i l l s .  Is is t h e i r common  practice to assign an inbound vessel a port of c a l l at the l a t e s t possible time, usually one or two s a i l i n g days out from Japan.  In this way,  they are able to control the inventory levels at the mill in a very e f f i c i e n t manner.  In addition, the steel m i l l s also have the option to  combine d i f f e r e n t grades of iron ore or coking c o a l , but usually not both, from one region on the same vessel. The Japanese steel m i l l s prefer long term stable arrangements for t h e i r shipping requirements.  The retaining of vessels by guaranteeing  cargoes for much or a l l of the vessel's working l i f e is probably the most favored.  The vessels are commonly purpose b u i l t by shipowners for  the steel companies.  The shipowners receive financial assistance from  the government through the Japan Development Bank.  A condition of these  loans is that the vessel which i s being financed must have secured employment to allow loan costs to be recovered in ten years. vessels b u i l t for use by steelmakers have lifetime contracts.  Hence, most In 1978,  the leading steel producers had at their disposal under cargo guarantees 1c some 112 bulk and combined c a r r i e r s t o t a l l i n g 11.85 m i l l i o n dwt. The oportunity for Canadian p a r t i c i p a t i o n in the shipping of Canadian iron ore and coking coal to Japan currently is very s l i g h t .  The  size of the Japanese steel companies, t h e i r retained shipping tonnage and the investment in Canadian sources of coking coal production by Japanese trading houses a l l combine to l i m i t the opportunities for Canadian participation in the shipping of these commodities.  80. Producing interests are beginning to participate in ocean shipping, though i t would be more accurate to say that this has occurred largely in situations where government pressure supporting the producing interests has been brought to bear on the Japanese.  In 1976, the Japanese steel  companies signed a long term contract with the B r a z i l i a n government cont r o l l e d company, Vale do Rio Doce SA, for 380 m i l l i o n tons of iron ore and 99 m i l l i o n tons of iron ore pellets over a period of 15 years.  The  Japanese agreed to l e t forty per cent of the tonnage be shipped in B r a z i l i a n f l a g Val Decenave ships.  The shipping revenue to be derived  from the contract by the Brazilians i s approximately $1 b i l l i o n . ^  81.  Chapter 5 Footnotes: 1.  Canadian Wheat Board, Annual Report 1977/78. Wheat Board, 1978, p. 22.  Winnipeg:  Canadian  2.  "Grain Exporting Outlook Bright", Vancouver Port News, December 1978, p. 1.  3.  H.P. Drewry (Shipping Consultants), Types and Sizes of Ships for Grain Trading. An Economic Study #34, London: HPD Shipping Publications, April 1975, p. 3.  4.  Canadian International Grain I n s t i t u t e , Grains and Oilseeds, Handling, Marketing, Processing. Winnipeg: Canadian International Grain I n s t i t u t e , 1975, p. 190.  5.  H.P. Drewry (Shipping Consultants), Trends in Japanese Dry Bulk Shipping and Trade. An Economic Study, #69, London: HPD Shipping Publications, December 1978, p. 7.  6.  Ibid, p. 9.  7.  Ibid.  8.  Ibid.  9.  Ibid, p. 17.  10.  Yoshi Tsurumi, The Japanese Are Coming. Publishing, 1976, p. 37.  Cambridge, Mass.: Ballinger  11.  "ANL Director Meehan to V i s i t Japan This Weekend", The Tex Report, Vol. 10, No. 2, 336, September 14, 1978, p. 11.  12.  The Tex .''Report* Iron.. Ore Manual 1977, Tokyo: L t d . , 1978, p. 109. •*.  13.  The Tex Report, „Cdking Coal Manual 1977,".Tokyo: L t d . , 1978, p. 107.  14.  H.P. Drewry (Shipping Consultants), Trends in Japanese Dry Bulk Shipping and Trade. An Economic Study, #69, London: HPD Shipping Publications, December 1978, p. 64.  The Tex Report The Tex Report  15. . Ibid, p. 63. 16.  Ibid, p. 59  17.  "Brazil Gets Her Ore In", Seatrade, October 1976, p. 31  82. Chapter 6 SUMMARY AND CONCLUSIONS The objective of this thesis was to describe the factors which i n fluence the decision of Canadian trading firms to exercise over the ocean shipping arrangements in their trades.  responsibility  From this a n a l y s i s ,  general principles were to be developed which would apply over the wide range of situations which apply to Canadian trading firms. The secondary aims of this thesis were to describe some of the advantages and disadvantages associated with the control of shipment by Canadian firms.  In addition, some indication was to be developed regarding the  extent of Canadian p a r t i c i p a t i o n in the control of shipping in Canadian oceanborne trade. The scope of the thesis is r e s t r i c t e d to dry bulk commodity trading u t i l i z i n g deep-sea shipping.  These commodities account for nearly 90 per  cent of Canadian exports and with crude petroleum account for nearly the same percentage of imports.  By r e s t r i c t i n g the thesis to deep-sea trades,  most waterborne trade with the United States was excluded.  As Canadian  trade in dry bulk commodities is heavily export oriented, the thesis was written primarily from the basis of the Canadian exporter being referred to as the s e l l e r . EVALUATION PROCEDURE OF THE THESIS The information from which this thesis was written was drawn from a wide range of sources.  The key source was the f i f t y  interviews held  with firms involved with the Canadian dry bulk commodity export trade. As the subject matter was c l a r i f i e d and developed, separate categories of factors which influence the control of shipping were created.  83. Within each category, an attempt was made to identify a set of principles which would apply to the control of shipping across the broad spectrum of Canadian dry bulk commodity trade and i t s shipping. FACTORS INFLUENCING CANADIAN CONTROL OF SHIPPING Many factors influencing the control of shipping in Canadian deep sea trades have been analyzed in this t h e s i s .  The aim of this concluding  section i s to draw together the various influencing f a c t o r s . Institutional  Constraints  The very f i r s t question which must be answered when considering the process by which a trading firm evaluates c o n t r o l l i n g the shipment of their trade i s whether o r not they have an option to do so.  The oppor-  tunity for the trading firm to control the shipping of t h e i r trade i s not always available. In a free market s i t u a t i o n , trade negotiations between two parties are on a commercial basis with l i t t l e or no interference from government authorities.  This applies to the control of shipping as well as to  other aspects of trade.  However, Canadians trade with many countries  where governments do exercise a considerable deal of influence in trading and shipping matters. There are a number of methods by which Canadian traders are prohibited from c o n t r o l l i n g shipping to these countries.  One i s to deal with govern-  ment buying agencies who purchase only on terms where they control the shipping.  As a matter of p o l i c y , these agencies are required to use  government shipping lines or chartering agencies to supply the tonnage to meet t h e i r trade requirements..  Since Canadian exporters do not have any  government backing, they can either accept the terms l a i d down by the  84.  foreign buyer or forego the trade.  The question over control of shipping  rarely assumes such importance so as to question the desire to conduct trade. Other methods of preventing Canadian control of shipping to certain countries include direct l e g i s l a t i o n which reserves a certain proportion of trade or type of cargo for national c a r r i e r s .  In addition, preference  for national c a r r i e r s can be achieved by manipulating exchange control or finance for the trade.  Import and export licences can also be controlled  to s u i t the terms of shipment.  The many methods which foreign governments  use to r e s t r i c t Canadian participation in the shipping of their trades is referred to as flag discrimination. Canadian trading firms may also not have the option to participate in the control of shipping in trade with firms conducted on a commercial basis.  The r e l a t i v e size and bargaining power of the other party may  be such that the Canadian exporter has no chance of pursuing the issue. These foreign firms may have considerable expertise in shipping which they wish to u t i l i z e in t h e i r trades.  They may also have a f l e e t of  vessels which they wish to employ in t h e i r trade as w e l l .  In any case,  the foreign firm is able to control the shipping of the trade with  little  or no negotiation on the matter. Available evidence from many Canadian trades suggest that i t  is  a very common occurence for Canadian exporters to accept the foreign buyers' terms of shipment with l i t t l e or no deliberation on the matter.  Factors Influencing Control i f Control is an Option If the control of shipping is a viable option for a Canadian exporter, the intensity with'which the opportunity i s pursued is b a s i c a l l y the tradeoff between benefits and risks:.  85. Cost Savings There are several ways for a firm to achieve cost reduction in shipping and d i s t r i b u t i o n . vessel is chartered.  The f i r s t is the charter terms on which the  Depending on the state of the world charter market,  the Canadian exporter may be able to transport the cargo at a lower cost than the buyer because of different vessel charter terms.  The exporter  may have a vessel under long term charter at very low rates while the buyer must resort to the spot market when rates are very high. The second method of reducing shipping costs is to increase the size of the individual  shipment.  Economies of scale in ship construction and  operation result in lower per ton costs as vessel tonnage increases.  The  charterer can benefit from these economies of scale i f a larger vessel can be u t i l i z e d in a trade.  This can be achieved by increasing the  size of the individual shipment, consolidating shipments on the same vessel or by consolidating other p a r t i e s ' cargoes on the vessel. A third method of reducing shipping costs is through an e f f o r t to reduce port time.  This can be achieved by consolidating ports of c a l l or  by u t i l i z i n g special loading gear to permit faster turnaround times. The f i n a l manner by which shipping costs may be reduced is applicable only to firms which charter vessels under long term contracts.  This is  done to u t i l i z e the vessel f u l l y in both directions by carrying backhaul cargoes as well as fronthauld.  By doing so, revenue from double the  tonnage can be used to cover roughly identical operating costs. The control of shipping also gives the firm the opportunity to reduce inland d i s t r i b u t i o n costs.  This is usually achieved through the improve-  ment in the shore-ship interface and better scheduling of domestic physical d i s t r i b u t i o n and production to meet a vessel's departure or a r r i v a l  86. date.  Improvements in inventory control and cost savings may also r e s u l t . What are the consequences for the firm of cost reduction in shipping  through the control of shipping? exporter has two options.  If shipping costs are reduced, the  The f i r s t is to lower his delivered  price to r e f l e c t the lower shipping costs. the demand for the product w i l l t i v e l y , the delivered c . i . f .  c.i.f.  Due to e l a s t i c i t i e s of demand,  increase and more w i l l be sold.  Alterna-  price could be kept unchanged and the exporter  could simply r e a l i z e a larger p r o f i t margin while the sales level remains unchanged.  Which decision the firm w i l l undertake depends on the p o l i c i e s  and goals of the firm. Marketing Factors The exporting firms may also r e a l i z e marketing advantages by cont r o l l i n g shipping.  These relate p r i n c i p a l l y to the service aspect.  The Canadian exporter may make l i f e easier for a potential buyer by s e l l i n g on a delivered basis.  In doing so, the opportunity for making a  sale may be increased. The service aspect may also centre on the type of vessel which the exporter is able to use to transport the commodity.  If the buyer does  not have access to a similar vessel, i t may be advantageous for him to buy on a delivered basis so that his cargo w i l l be transported in the specialized vessel. By c o n t r o l l i n g the shipping, the exporter develops his understanding of a c r u c i a l aspect of his trade, e s p e c i a l l y as i t relates to cost. may engage in some c . i . f .  Firms  s e l l i n g to ensure that they are kept aware of  the costs of ocean shipping.  This: knowledge w i l l enable them to better  evaluate the freight component potential buyers have b u i l t into f . o . b . offers.  87.  Risks From the Control of Shipping Risk is a v i t a l consideration which strongly influences the policy of a firm with respect to the control of shipping.  Ocean shipping may  be risky i f the firm becomes involved. In f . o . b . s a l e s , the exporter's r e s p o n s i b i l i t y ends when the cargo is safely loaded.  Under c . i . f .  terms, the exporter bears increased respon-  s i b i l i t y for the safe delivery of the cargo to the port of destination. This involves the risks associated with shipping. Common risks associated with shipping include rate f l u c t u a t i o n s , a v a i l a b i l i t y of shipping space and demurrage.  The l a t t e r is a problem to  be concerned with in many ports around the world where Canadian cargoes are destined to. The Control of Shipping in Canadian Deep-Sea Trades The negotiation of the terms of shipment is a v i t a l part of every trade contract.  The individual exporting firm must weigh in the balance  the benefits and risks of controlling shipment.  Evidence gathered in  the course of this thesis indicates that the position of most Canadian companies i s well thought out in regard to trade, markets and shipping. Where the option to control shipping is a v a i l a b l e , Canadian firms act in their own best commercial  interests.  In major Canadian dry bulk commodity trades, the forest products industry is the leader with regard to Canadian control of shipping.  The  major reason for this is the trade structure where large Canadian exporters are s e l l i n g to multiple smaller buyers in a geographical abroad.  region  This gives the exporter the opportunity to consolidate cargoes  to u t i l i z e a larger vessel and thereby reduce the shipping costs. Canadian exporters of iron  ore, coal and grain do not face a s i m i l a r  situation.  Indeed, some face the reverse.  buyers importing from a variety of regions.  They are exporting to large Institutional  factors  largely regulate the control of shipping by foreign interests in these trades.  Hence, l i t t l e Canadian control exists in these very large bulk  trades. However, i t is interesting to note that several companies involved in the export of Western Canadian coal are now becoming involved in the ocean shipping of t h e i r exports. new markets.  This applies p a r t i c u l a r l y in trade to  In at least one case, a new contract being drawn up with  the Japanese steel m i l l s allowed a Canadian coal exporter the option to control 50 per cent of the shipping at some future date in the mid eighties. An understanding of the factors underlying the control of shipping is v i t a l given the large volume of these bulk trades.  These bulk trades  form the basis on which many people suggest developing a-Canadian merchant marine.  Research into the control of shipping in these trades  permits a more r e a l i s t i c examination in regards to developing a f l a g f l e e t to service these trades.  89. BIBLIOGRAPHY "ANL Director Meehan to V i s i t Japan This Weekend." The Tex Report. Vol. 10, No. 2, 336. September 14, 1978, p. 11. "Brazil Gets Her Ore In." "Canada Report."  Seatrade.  Seatrade.  October 1976, p. 31.  August 1979, p. 105.  Canadian International Grain I n s t i t u t e . Grains and Oilseeds, Handling, Marketing, Processing. Winnipeg: Canadian International Grain I n s t i t u t e , 1975. Canadian Wheat Board. Board, 1978. Cunningham, Jack. August 1978.  Annual Report 1977/78.  Winnipeg:  Canadian Wheat  Cunningham Transportation, Vancouver, B.C.  Darling, Dudley. 1978.  Seaboard Shipping, Vancouver, B.C.  Interview,  Interview, October  Drewry, H.P. (Shipping Consultants). Ocean Trade in Forest Products. An Economic Study #36. London: HPD Shipping Publications, August 1975. . Shipping S t a t i s t i c s and Economics December 1979. HPD Shipping Publications, December 1979.  London:  . London:  The Movement of Minerals by Sea. An Economic Study #14. HPD Shipping Publications, A p r i l 1974.  . London:  The Operation of Dry Bulk Shipping. An Economic'-Study #71. HPD Shipping Publications, January 1979.  . The Rise of National Fleets. An Economic Study #16. HPD Shipping Publications, August 1973.  London:  . Trends in Japanese Dry Bulk Shipping and Trade. An Economic Study #69. London: HPD Shipping Publications, December 1978. . Types and Sizes of Ships for Grain Trading. An Economic Study #34. London: HPD Shipping Publications, April 1975. Erickson, Paul.  C a r g i l l Grain (Canada).  "Forest Ships Try New Tack." p. C7. Froehlick, George. Business Week.  Vancouver, B.C.  Vancouver Province.  January 1979.  November 23, 1977,  "Potash Shipments to Rise 15 Per Cent." February 20, 1979, p. 13.  B.C.  90. Gale, Chris. Prince George Pulp and Paper. August 1978. "Grain Exporting Outlook Bright." p. 1. Hayman, Christopher. cations, 1977.  Vancouver, B.C.  Vancouver Port News.  B r a z i l , A Seatrade Study.  Interview  December 1978,  London:  Seatrade P u b l i -  . "What It Takes to Build a Merchant F l e e t . " December 1974.  Seatrade.  H i l l , S.R. "Study of Measures to Promote or Protect National Fleets Affecting Canadian Trading and Shipping." Ottawa: Economix International, 1978. International Chamber of Commerce'., Chamber of Commerce, 1965.  Incoterms 1953.  Kim, Sam-o. "Home B u i l t Ships Only." February 10, 1978, p. 48.  Paris:  International  Far Eastern Economic Review.  Lauriat, George. "China Puts the Jigsaw Puzzle Together." December 1978, p. 4.  Seatrade.  . "Shipping." China Trade Report. Hong Kong-: Economic Review Publication, March 1978, p. 7.  Far Eastern  . "State Shipping and the Third World Squeeze." Economic Review, February 9, 1979, p. 41. Loxton, Tony. Canadian Transport Company. July 1978. MacKenzie, A.  Dupont of Canada.  Vancouver, B.C.  Montreal, Quebec.  Metaxas, B.N. The Economics of Tramp Shipping. Press, 1971. Middleton, Ian, ed. cations, 1979.  Far Eastern  China, A Seatrade Study.  Interview,  Interview, July 1978.  London: London:  Athlone Seatrade P u b l i -  Mining Association of Canada. Mining in Canada, Facts and Figures 1979. Montreal: Mining Association of Canada, 1979. National Harbours Board. Port of Vancouver S t a t i s t i c s 1978. National Harbours Board, 1979. Ogata, Yoshi.  Marubeni Canada.  Vancouver, B.C.  Vancouver:  Interview, July 1978.  Raven, Peter J . Considerations in Selecting a Ro/Ro Forest Products Ship. (Vancouver, B.C.: Seaboard Shipping, 1978 ).  91. Sakar, Jayanta. "Times Are Hard, Even More So For Small Operators .'" Far Eastern Economic Review. February 9, 1979, p. 66. 1  Seaward, Nick. Z  "Far East Report."  Seatrade.  December 1979, p. 157.  . "The Unctad Bulk Shuttle - Is i t a Ghost Train?" April 1979, p. 29.  "Star Quality."  Norwegian Shipping News.  Terpstra, Vern. International Marketing. and Winston, 1972. Tex Report, The. 1978. .  1977 Coking  Coal Manual.  1977 Iron Ore Manual.  Transport Canada. Canada, 1979.  Tokyo:  No. 16, 1978, pp. 13-14. New York: Tokyo:  Holt, Rinehart The Tex Report L t d . ,  The Tex Report L t d . , 1978.  A Shipping Policy for Canada.  Tsurumi, Yoshi. The Japanese Are Coming. Publishing, 1976.  Seatrade.  Ottawa:  Transport  Cambridge, Mass."  UNCTAD Secretariat. Merchant Fleet Development. York: United Nations, 1.978. Wilson, Mark. "Seaboard Readying for Ro-Ro's." December 1978, p. 20.  Ballinger  UNCTAD/SHIP/127.  New  Harbour and Shipping,  

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