2023 JPJC J2 H2 EC Prelim P1 Suggested Answers

JPJC 2023 J2 H2 P1 Prelim Question 1: A Balancing Act in the Container Shipping Industries (a) With reference to Figure 1, compare the trend in global ship ping freight rates before Sep tember 2021 and after Sep tember 2021 . [2] Suggested Answer: 1st difference: Global shipping freight rates increased before September 2021 wher eas there is a drop in global shipping freight rates after September 2021. 2nd difference: There is a larger extent of change in global shipping freight rates after September 2021. (b) (i) Using evidence from Extract 1, justify the likely value of price elasticity supply of container shipping services. [2] Suggested Answer: Price elasticity of supply (PES) measures the responsiveness of the quantity supplied of a good or service to changes in the price of the good itself. The PES for container shipping services is expected to be less than 1, indicating that the supply for cont ainer shipping services is likely to be price inelastic. The container shipping industry faces significant geographical factor immobilit y, as evidenced in Extract 1. The disruption in the maritime supply chain l eads to a situation where containers cannot be easily moved to the ports that urgently require them. As a result, the quantity supplied of container shipping services increases at a rate that is less than proportionate to the rise in global shipping freight rates caused by increased demand. (b) (ii) Using a demand and supply diagram, explain the causes of the change in global shipping freight rates during Covid-19 pandemic March 2020 to September 2021 . [4] Suggested Answer: Global shipping freight rates increased sharply during the Covid-19 pandemic March 2020 to September 2021. The onset of the Covid-19 pandemic prompted a notable shift in consumer behaviour, with consumers increasingly opting for electronic commerce platforms to acquir e imported manufactured consumer goods. This change in consumer’s tastes and preferences has manifested as a notable shift in consumption patterns towards imports. Consequent ly, as the demand for imported products surged, the necessity for container shipping services to facilitate the transportation of goods via sea routes experienced a significant upswing. This, in turn, resulted in an increase in derived demand for container shipping serv ices which is illustrated by the shift from the initial demand curve (D 0) to the new demand curve (D 1). However, the supply of container shipping services (S i) remained relatively inelastic, unable to quickly adapt to the sudden surge in demand as explained in part (bi). The combination of an inelastic supply and a substantial increase in demand resulted in a sharp increase in global shipping freight rates, represented by the rise from the initial pric e level (P 0) to the new higher price level (P 1).

(c) Explain which market structure best describes the c haracteristics of the container shipping industry. [4] Suggested Answer: The container shipping industry is characterised as an oligopolistic market, where a small number of major container shipping companies hold s ignificant control over the market share. This is evident from Table 2, where the top five container shipping companies collectively command around 63.9% of the market share, highlighting a high concentration ratio. The presence of high natural barriers to entry furt her reinforces the dominance of these established players. Operating container carriers w ithin these large shipping companies requires substantial capital investment and specialised expertise. Additionally, the container shipping industry faces the challenge of complying with stringent environmental regulations due to increased scrutiny of its significant negati ve impact on the environment. The considerable costs associated with acquiring and ma intaining the carriers, and complying with these regulations act as deterrents for potential new entrants. (d) Considering the possible advantages and disadvantages of the formation of alliances in the container shipping industry, assess whether it is likely to be of overall benefits to container shipping companies and shippers. [8] Suggested Answer: Introduction The formation of alliances within the container shi pping industry entails the collaborative efforts of container shipping companies to forge strategic partnerships. These alliances aim to elevate operational effectiveness, streamline re source allocation, and enhance overall efficiency in the realm of container shipping services. The outcomes of these alliances can yield various advantages and disadvantages for both container shipping companies and shippers. The net overall benefits arising from suc h alliances in the container shipping industry hinge upon the regulatory and competitive oversight exercised by relevant authorities. Requirement 1: Claim & Support Point: The formation of alliances benefits both container shipping companies and shippers. Explain with Economic Analysis and Elaborate with Application Advantages to container shipping companies Advantages to shippers Global shipping freight rates Si P1 P0 D1 D0 Quantity of container shipping services 0 Se (for comparison)

1. Through alliances, container shipping companies can pool their resources and capacities, leading to enhanced service offerings and expanded coverage in various trade routes. This increased market presence allows them to attract more customers and secure a larger market share. With a broader customer base, these companies can experience higher revenue due to increased demand for their container shipping services. 2. Alliances enable container shipping companies to combine their financial strength, allowing them to invest in technological upgrades and innovations such as upgrading their fleet to implement digital solutions and adopting advanced logistics technologies. These can further enhance their non-price competitiveness, resulting in higher demand and revenue. 3. With the establishment of alliances, container shipping companies can reap internal economies of scale, leading to a reduction in their average costs as a result of an increase in size, which facilitates more efficient fleet utilisation. Additionally, companies can benefit from external economies of scale by sharing resources and networks. 1. As alliances in the container shipping industry experienced lower cost of production, they may pass on these cost savings to shippers in the form of lower shipping freight rates. As such, there may be a reduction in the fluctuation of shipping freight rates, providing shippers with more stability and predictability in their transportation costs. This stability allows shippers to make forward-looking business plans with greater confidence, as they can anticipate and budget for shipping expenses more effectively. 2 Alliances allow container shipping companies to offer more efficient and extensive services to shippers. By pooling their resources and capacities, they can provide better coverage of various trade routes and more frequent sailings. This improved service network translates to faster transit times and better connectivity, enabling shippers to transport their goods more quickly and reliably. Moreover, the coordination of operations within alliances enhances overall service quality, such as better handling of cargo and improved customer support, resulting in a positive impact on the overall shipping experience for shippers. Link to Answering the Question Thus, the formation of alliances can lead to increased profitability for container shipping companies due to the advantages gained in terms of both revenue and cost benefits. Hence, the formation of alliances contributes to the achievement of more consistent and redu