The shipping industry is majorly responsible for the carriage of around 90% of world trade. Without it, the bulk transport of raw materials, the import as well as the export of food and manufactured goods, and finally the intercontinental trade would simply not be possible. It is, therefore, only right to say that shipping is the backbone of international trade, as it connects countries, markets, businesses, products as well as people across the globe.
How does the shipping industry work?
In the shipping industry, there are main factors which are responsible for the import/export process. Hence first we will discuss about these factors and then we will see in detail how the shipping industry actually functions.
Main players in the shipping process
- Importer: The importer is the buyer. He identifies the need for a product at a specific location, searches for the best supplier globally, and places a bulk order for the purchase of that product. There are three types of importers, the actual user, who utilizes the imported goods for himself. Then the established importer, who is granted a quota to import a product on the basis of past imports, and lastly there is the registered importer, who imports under the government’s import promotion schemes.
- Exporter: The exporter is the seller. He manufactures or fabricates the product required by the buyer. The various types of exporters are the merchant exporter, who gets the product from the market or manufacturer and exports under his name. Then is the manufacturer exporter, who gets the raw material, manufactures the goods, and exports the finished product. Service exporter, who exports services like software or consultancy services. The third-party exporter, who exports goods and services on behalf of the manufacturer exporter, he is basically the middle man, who does the transaction of good from the manufacturer to the buyer. Project exporter, who provides goods and services on a contract and earns foreign exchange. Lastly, there is the deemed exporter, who supplies goods that don’t leave the country still this kind of a transaction is an export because the goods are meant for specific projects.
- Shipping Company: The company that owns the carrier that transports the goods from the port of loading to the port of destination.
- Insurance Company: The maritime industry comes with a lot of risks, which is not only limited to lost or damaged cargo but also delays, and additional costs due to factors such as natural disasters, human error, theft, piracy, and more. This is why there is a need for insurance companies to help cover up all these risks.
- Bank: Banks play multiple vital roles in international trade. They act as financiers by providing loans and trade finance products such as Letters of Credit and Documentary Collections. In addition to providing loans, the banks negotiate trade contracts and are custodians of goods and documents.
- Freight Forwarder: A freight forwarder is an agent who, on behalf of the importer or exporter, works with all the other players in the ocean freight business. His main responsibilities are the negotiation of better routes taken by the cargo, the rates given by the shipping industry, management of paperwork, and other formalities such as organizing land transportation, and lastly being the advisor to the importer/exporter.
- Customs: The Customs House Agents commonly know as the CHA assist the exporters and importers in getting clearance for the cargo from customs authorities. In international trade, the customs authorities of a minimum of two countries are involved they include the country of export and country of import. Like customs authorities, there are the port authorities of at least two countries that are involved in the shipping process. In the exporting country, they provide the clearance of goods which are loaded onto the ship, and in the importing country, they provide clearance for goods to enter that country.
- Intermodal Transport Providers: Rail, road, and air transport providers ensure the movement of goods from the factory or warehouse to the port of loading and from the port of destination to the final destination.
Working process of the shipping industry
The overall process of import/export of good takes place in five main steps, as shown in the below image:
This includes the transportation of the goods from the shipper’s premises to the forwarder’s origin warehouse. The duration of the transportation roughly takes about some days or weeks depending on geographic location and the distance. This is done through the means of trains, trucks or the combination of both.
The freight forwarder does not handle this transportation of good from the factory to the warehouse hence one has to make their own arrangement of the transfer of good to reach the warehouse. One can either send it through a local train service or personally delivery it to the warehouse.
The origin handling is taken care by the freight forwarder and his agents. This begins from the unloading of the goods from the truck and its shifting to the warehouse. After that all the packages taken to the stage are where they are counted and inspected. Documentation of the cargo is done. In this the freight forwarder validates the cargo listing to the booking list and also makes the receipt for the same.
Few days before the shipping the loading of the cargo into the containers is also managed by the freight forwarder. The payment for the origin handling, however, can either be by the shipper or the consignee depending on what has been agreed between them. A bill of lading is issued by the ocean carrier after the goods are loaded onto the vessel. It serves as an important document in this entire process as a contract between the shipper and the carrier which holds all important details of the transaction and also serves as the title of the goods.
The transportation of the cargo through the sea from the export port to the import port takes place now. The containers could be loaded on the same ship or different ship, as it all depends on the destination of the cargo. The duration of this transaction might take 20-45 days depending on the sea route taken. The payment of the duties and workers is either done by the shipping industry or the forward freight, it depends on the deal made.
Once the ship reaches its destination, it goes through customs and once it is cleared , the documents of the origin end forward freight is received by the the destination end forward freight. He and his agents are completely responsible for the destination handling. He alone is the one who has to receive the containers from the port. He does the documentation and crosse checks the received cargo with the listing given by the other forward freight.
From the destination warehouse, either the goods are loaded to the local truck industry which transports them to the respective distributor or buyer. If this is not possible the cargo goes to the local market where is sales are done.
How does the shipping industry make money?
Shipping companies normally lease their vessels to customers on a per-day basis, charging them day rates. They are either based on the market price or they are a part of a long-term agreement. Some segments of the shipping industry, mainly dry bulk vessels and oil tankers, lease their ships to customers at the going market rate which is called a spot market. This tends to fluctuate with conditions in the shipping market. If the global economy is expanding, then worldwide trade should be on the upswing, which tends to drive up demand for shipping vessels, and hence there is an increase in the spot market day rates. On the other hand, if market conditions start deteriorating, these day rates can decrease. When shipping companies lease their vessels to customers under agreements this is known as time charters, these contracts can last from less than a year to more than a decade.
The shipowner pays the entire operating expense which normally is fixed. This includes the wages of the crew, repairs, insurance premiums, dry docking charges, lubricants as well as the special survey charges. The shipowner does not need to pay the fuel expense and the port charges these charges come under the section of voyage expenses and the head of the charterer.
A shipowner uses the TCE till its maximum limit, this is measured in USD which is calculated after we subtract the voyage expenses from the freight revenue. During good times for the industry when the freight rates are trending north then EBITDA margins go as high to about 55%, but even in a downfall, when freight rates are not so high, EBITDA margins are in the 40 % range, thus proving that the shipping business, in general, is a high margin business.
Who controls the shipping industry?
Regulations that are related to shipping are developed at a global level. Because shipping is international, it is important to have standard regulations on matters such as navigational rules and standards of the crew.
The shipping industry is regulated by the International Maritime Organization (IMO), which is the London based United Nations agency. This organization is mainly responsible for the safety of life at sea as well as the protection of the marine environment. With the IMO, the International Labour Organisation (ILO) is also responsible for the development of labor standards which is applicable to seafarers worldwide.
The IMO has adopted a comprehensive framework of detailed technical regulations that govern the safety of ships and protection of the marine environment. National governments, which are under the membership of IMO, are required to implement and enforce all these international rules and ensure that the ships which are registered under their national flags do the same.
Flag states enforce IMO requirements through the inspections of ships conducted by the Port State Control. They have the power to suspend the functioning of foreign ships in the port if they do not comply with international standards.
In the end we can conclude that the working of the shipping industry is not just the transportation of cargo from one port to another port but it consists of so many processes which not only include ships but also other modes of transportation and how there are so many different key factors which play a major role in the working of shipping industry. We understood the money flow in the maritime industry and also who makes sure that this industry functions smoothly.