A Study on long-term shipping contract in Korean Steel Industry

Abstract

The long-term shipping contracts in steel industry represent the cooperative and coexisting relationships between the shipping and steel industries. The long-term shipping contract aims to minimize the risk from unpredictable changes in market conditions, which can result in unpredictable charter rates, freight, and unexpected limited vessel supply at the time of shipping. The contracts for iron ore and steel products share a common concept and purpose in long-term shipping contracts-namely, the longer duration. Yet, despite the long-term shipping contracts, differences between the contract forms for iron ore and steel products have emerged. Specifically, the proportion of consecutive voyage charters (CVC) is higher in iron ore shipping contracts than other contract types, and the contract of affreightment (COA) is proportionally higher for shipping steel products. Existing research on long-term shipping contracts is limited, and many studies discuss these contracts only partially, to assert their importance for securing competitiveness in tramp shipping companies. It is not therefore possible to analyze why the iron ore trade has a larger CVC proportion and the steel industry a larger COA proportion. This study aims first to determine the factors that contribute to the preferences for different contract types in the two markets studied, by analyzing each market’s structure and shipping characteristics. Second, the study aims to determine why CVCs and COAs, which are both represented as long-term shipping contracts, are contracted with such large time frame gaps. Finally, this study seeks to find ways to extend the COA’s duration for the benefit of the shipping company and the steel company, as some shipping companies find it difficult to maintain or expand their business due to short contract duration. The literature review and in-depth interviews in this study identify through the research model, the characteristics of the market structure and shipping in both markets have significant effects on the form of shipping contract. In the iron ore trade, the small number of suitable vessels in the market, the single fixed load/discharge ports, the long-distance voyages, and the potential risk for fatal accidents due to cargo liquefaction have a significant effect on types of long-term shipping contracts. Given these factors, the CVC contract is inevitable in the iron ore trade. Moreover, the market structure, which is a mutual oligopoly due to the small number of iron ore consignors and shipowners, affects the types of long-term shipping contracts. If the market structure were a consignor oligopoly, it would be more profitable for consignors to sign COA or spot contracts, as there would be more suitable vessels operated by experienced carriers in the market to secure on the spot. In a mutual oligopoly market, the consignors could secure a stable iron ore supply by signing a CVC contract to ensure that they could nominate the vessels at the time needed. In the steel product trade, the COA contract is more appropriate because of its specific shipping characteristics—namely, the greater number of suitable vessels available in the market, the variation in ports, the cargo quantity per shipment, the various load/discharge ports, and the need for experienced carriers for steel product loading. Furthermore, the market structure, which is a consignor oligopoly market, provides the consignors with superiority over shipowners, resulting in favorable contract types and conditions for the consignors. In conclusion, due to each type’s market structure and shipping characteristics, the CVC contract is more applicable for iron ore, whereas COA is more applicable for steel products. The interview results also indicate that the COA contract duration for the steel product trade should be at least two to three years to enable carriers to offer lower freight rates, as they could build up and expand new business sectors while maintaining a stable income from the COA. In markets that fluctuate frequently with a large gap, the longer duration of COA would provide advantages to consignors by hedging potential losses due to fluctuations in the market. Although the consignors may not benefit in the short term from doing so, shipowners would be able to strengthen their competitiveness by having a larger fleet to provide stable and satisfactory services over the long term.