Jan 20, 1988

SHIPPING: FREIGHT RATE BURDENS STILL HIGH AN THIRD WORLD EXPORTS

GENEVA JANUARY (IFDA/CHAKRAVARTHI RAGHAVAN)— Ocean freight rates have been falling in recent years, but this has not benefited third world countries, according to the UN Conference on Trade and Development.

In a report (UNCTAD/ST/SHIP/11), the UNCTAD Secretariat suggests measures to counteract negative impact of freight rates on exports remain an important priority.

Ocean freight rates, UNCTAD notes, tend to show large fluctuations over time in accordance with relative changes in supply/demand of shipping tonnage. In recent years freight rates have tended to decline because of a prolonged tonnage oversupply.

However, the prices of primary commodities exported by third world countries also declined during this period, and this reduced the income gains that could have accrued to exporters by fall in freight rates.

Overall, in spite of fall "in freight rates, burden of freight costs on exporters has not generally decreased, and in some cases it has increased", UNCTAD ads.

Earlier studies have shown that ocean freight rates may constitute a large share of landed prices of many primary commodities exported by the third world, and that for such exports freight costs are largely borne by the exporters.

Also, exports from third world countries to given markets tend to bear higher freight charges than corresponding exports of industrialised countries.

On average, the level of protection to national industries provided by transport costs would appear to be larger than that provided by import tariffs. But the studies have not been conclusive whether ocean freight rates escalate with level of fabrication.

All past studies, using nominal or ad valorem freight charges, to estimate the freight factors or nominal and effective rates of protection, while easy of computation have difficulties of interpretation in assessing their impact on trade.

The present UNCTAD study has sought to estimate changes in import demand caused by changes in ocean freight rates in respect of major commodities exported by third world countries (bananas, bauxite, cocoa beans, coconut oil, coffee, copper, iron are, palm oil, natural rubber and tea).

The study deals with exports of primary commodities in south-north trade. But costs of ocean transport in south-south trade are generally considered to be higher than in south-north.

Thus, UNCTAD says, the effect of ocean freight rate on third world exports of manufactured goods and on south-south trade may be greater than on south-north exports studied in the report.

The impact of ocean freight on manufactured exports and on south-south trade need to be studied, the report suggests.

Freight rates as percentage of import prices (freight factors) show large variations between trades - ranging from an average of 3.52 percent for copper to the U.S. to 29.85 percent for iron ore to Japan. Individual annual freight factors are substantially high for some of the trades - 45.48 percent for iron ore to Japan.

On the whole freight factors are quite high: half of the 16 trades studied have average freight factors larger than ten percent, and of the remainder only three (coffee to U.S. and to EEC and copper to U.S.) have average freight factors of less than six percent.

For its analysis, the UNCTAD study has taken a sample of important exporting countries. But it notes that this conceals extreme changes that can affect third world exporting countries with smaller export shares. Such countries would face substantially higher elasticities of demand for their exports and hence much greater changes in import demand resulting from changes in ocean freight rates.

There are also non-price factors that influence exports in some third world trades, and these distort the influence of ocean freight rate differentials, UNCTAD notes.

Some commodities like phosphate rock, bauxite and other mineral ores are produced and exported by a relatively small number of countries, and trade flows in these are well established.

In view of the limited number of exporters, variations in freight rates are unlikely to have much impact on import demand.

There are also a number of vertically integrated operations controlled by TNCS, especially in mining but also in agriculture (as in bananas). In some cases the TNCS also own shipping interests.

In such cases, the TNCS might continue to buy production of wholly owned or affiliated companies, even if freight costs are relatively higher.

A third non-price factor relates to trading arrangements, which are determined or influenced by a variety of political, strategic or commercial considerations (including quality considerations and reliability of suppliers).

Overall, UNCTAD notes that import demand for exports of third world countries taken together had a low response to price changes in impart prices and ocean freight costs.

But demand for the same commodities when examined with respect to individual exporting countries was substantially responsive to variations in ocean freight casts.

This UNCTAD says is largely explained by the existing structure of primary commodity markets.

The international markets in which third world countries are main suppliers generally include, on the supply side a large number of producers of individual commodities who represent small shares of the market and generally play no role in setting prices.

On the demand side however there are large oligopolistic organisations that control the purchase and marketing of these commodities, and influence considerably the price-setting and in a position to switch sources of supply.

Under existing competitive supply conditions, in am effort to remain markets or remain competitive (in CIF price terms), individual countries may accept lower FOB or export prices if changes in ocean freight rates raise CIF prices for their exports above the levels of their competing suppliers.

Exporters who can ship at relatively lower freight rates can obtain higher export prices.

Thus FOB prices paid to competing exporters may tend to differ on basis of differences in freight costs, though not necessarily by the same amount as the difference.

The situation on primary commodity markets is further complicated by efforts of governments to increase export volumes to offset revenue losses caused by lower prices.

Such policies tend to enhance competition among suppliers and encourage absorption of ocean freight costs by the exporters.

Countries have resorted to increase domestic producer prices, subsidies to stimulate production, and devaluation of currencies to encourage production for export.

These phenomenon, UNCTAD notes, have gained in importance in recent years as a result of adjustment programmes aimed at servicing debt.

TNCS also control vertically integrated processes of production, marketing and distribution for many products exported by the third world, and this enables them to use transfer prices that have little or no impact on import demand.

Many commodities are traded in commodity exchanges located in centres in industrial countries, notably New York and London, and operated by commercial interests, which do not include exporters or producers from the third world.

Their structures and practices enable importers and traders to protect themselves from adverse price variations through hedging.

But such practices are geared to suit the interests of importers and traders, but not necessarily of exporters or producers of third world countries who are not participants in such exchanges.

Overall, UNCTAD says ocean freight rates constitute a large share of CIF costs for a large number of third world country exports, and changes in ocean freight rates may exert a substantial influence on demand for exports from individual countries.

Individual exporting countries compete against each other and importers are usually able to control markets to a significant extent and substitute between competing sources of supplies.

As a result, exporting countries either experience losses in markets or absorb increases in ocean freight rates through reduction in export prices.

To counteract the possible losses arising from high ocean freight rates and reduce fluctuations in export demand arising from changes in such rates, UNCTAD suggests that exporting countries need to take measures to reduce or stabilise ocean freight rates in their trades.

To a large extent the factors contributing to high ocean freight rates and appropriate measures to deal with them, could be done through shippers' councils or shipping investigation units.

But many third world countries still appear to lack the institutional framework and adequate expertise to carry out such work for analysing ocean freight rates and identifying suitable measures for stabilising or reducing them.

Furthermore, negotiations between shippers' councils and conferences or shipping lines still do not produce results satisfactory to shippers.

Third world countries disadvantaged by high freight costs should also consider use of suitable forms of financial and other promotional support measures to exporters to overcome their lack of competitiveness, UNCTAD suggests.

In addition, there is need to examine certain aspects of primary commodity markets.

Policy measures pursued in UNCTAD in commodity trade have so far focussed largely on fostering exports of the third world a s a whole.

But in dealing with specific problems posed by ocean freight costs, greater emphasis would need to be placed on measures to deal with problems of individual exporting countries disadvantaged by the high ocean freight costs.