OCEAN FREIGHT RATES 1. Why ocean freight rates are cheap.—Ocean transportation is cheap compared with transportation by land. Before the war a shipment of shoes from Chicago for London paid $1.20 freight from Chicago to New York, a distance of 912 miles, and $1.30 from New York to London, a distance of 3,222 miles, or more than three and one half times as far. It costs less to ship coal from Cardiff to Port Said (3,072 miles) than from the mines to London (170 miles).
The reasons for the relative cheapness of ocean freight lie in the comparatively small first cost of the carrier and its comparatively low cost of operating. Nature furnishes the roadbed, and the first cost and upkeep of seacraft is less than that of locomotives and rolling stock. A vessel of 3,000 net tons, capable of carrying 6,000 tons of cargo and travelling at a speed of 10 nautical miles an hour, could be bought before the war for about $300,000. The general overhead on such a vessel, including the wages of the crew, provisions, repairs and insurance, would hardly exceed $150 a day; the fuel consumption might aver age 30 tons per day.
2. The competition among carriers.—The price charged for any service must necessarily bear a defi nite relation' to both the value and the cost of the service. No vessel would ever agree to carry freight at less than cost plus a fair profit, if the investment could be shifted to a better paying business when the freight market is weakened. But this is impossible. Accordingly, when the demand for transportation service is small, owners of vessels bid each other down to the lowest possible figure, if necessary taking a small temporary loss to escape a larger one.
When rates are high it is easy to enter the shipping business. No knowledge of shipping or of naviga tion is necessary. A little capital and a well se lected broker are the only necessary elements. The broker will buy a ship for the investor and will keep it supplied with freight, as far as possible. A new and presumably more efficient ship finds it easier to obtain a full cargo than does a less modern vessel.
The insurance rate is lower on it. There is there fore a premium on the building of new ships. Ship building often goes on when freight rates are de creasing, thereby emphasizing the depression.
On the other hand, as the experience of the war has shown, the process is so slow that even an extra ordinary demand for tonnage will not produce new shipping enough to bring down the rates for many months.
3. Local the general fluctua tions in rates, local fluctuations occur. The following table made. up from figures prepared by the National Foreign Trade Council gives some instances, the quotations being in shillings and pence, as is the custom thruout the shipping world: To make the situation perfectly plain, suppose that the Argentine wheat harvest is waiting to be trans ported. This will mean an active demand for cargo space and an increase in the rate. The necessity for tonnage from west to east will at the same time, however, influence the rates from east to west, for if a vessel had to travel in ballast to South America., the westward voyage would be a large expense which would ultimately have to be paid by the freight charges on the wheat. Such steamers will therefore undertake to carry westward, freight at a low rate.
Any event which tends to concentrate tonnage in any one part of the world affects the freight rates in every other part. During the European War mil lions of tons of shipping were diverted to war uses, causing freight rates all over the world to rise to abnormal heights. The following table, taken from figures prepared by the National Foreign Trade Council, indicates by quotations at various times how freight rates rose. (Quotations in shillings and pence.) 4. Cost of service has little effect.—It is, therefore, clear that the cost of the specific service has little effect in determining the rate which will be charged for it. Nevertheless, the increased efficiency of ocean transportation and the resulting decrease in operating cost must needs in the long run reduce freight rates.